April 11, 2019

Brazilian Congress Debates Repeal of the Kandir Law

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The Brazilian Congress recently held hearings on the possibility of repealing a law in Brazil called the Kandir Law. This law was established in 1996 and it exempted export products from paying the ICMS circulation tax. The ICMS is a tax that must be paid if a product is produced in one state but sold in another state. The Kandir Law was established in order to stimulate exports and it worked very well.

Today, many Brazilian states are in financial trouble and they contend that not being able to collect the ICMS tax on products exported from their state is one of the reasons for their financial difficulties and they want the Kandir Law repealed.

An economist from the Agriculture and Livestock Confederation of Brazil (CNA) testified at the hearing that if grain and meat exports were forced to pay the ICMS tax, they would lose their competitiveness in the world market and producers of those products would end up being paid less for their production.

He illustrated his point using Brazilian pork exports to Hong Kong and Singapore, which are two primary destinations for Brazilian pork exports. In 2018, a ton of pork destined for Hong Kong cost US$ 2,161 and for Singapore, it cost US$ 2,799. If the 17% ICMS tax was applied to pork exports, those prices would increase to US$ 2,528 and US$ 3,275 per ton respectively.

With the added tax, Brazilian pork exports to Hong Kong would then be more expensive than U.S. pork at US$ 2,255 per ton. Brazilian pork going to Singapore would also be more expensive then pork from Holland at US$ 3,119 per ton.

His analysis for three products including pork, cellulose, and fresh melons indicated that if exports were subject to the ICMS tax, the exports of those three products would decline R$ 6.2 billion per year, which would equate to 6.1% of Brazil's total exports.

The Center for Advanced Studies in Applied Economics (CEPEA) looked at Brazilian exports from April 2005 to March 2019 and concluded that if the Kandir Law was repealed, the price paid to soybean producers in Sorriso, Mato Grosso would decline 25% and in Cascavel, Parana, they would decline 23%.

The CNA economist also cited the example of neighboring Argentina as to what could happen to grain exports if taxes on exports were imposed. Argentina instituted an export tax on soybeans that ended up as high as 35%. As a result, Argentina's market share of soybean exports declined significantly. In 2005, Argentina had a 15% market share of soybean exports, but that declined to 13% in 2008 and 8% in 2015.