Brazil's Congress passes bill to reduce fuel prices, change state tax

Brazil's Congress has passed a much-anticipated bill aimed at reducing fuel prices in Latin America's largest economy by adjusting the way state manufacturing taxes are calculated, while a separate bill to create a controversial price-stabilization fund for diesel is still under consideration by the legislature.

The legislation was the latest attempt by President Jair Bolsonaro's administration and political leaders to contain soaring prices at the pump during an election year, with Brazilians scheduled to go to the polls in October. Domestic fuel prices have trended higher since early 2021, tracking rising international oil and refined-product prices as global demand bounced back more quickly than output. Price pressures have consolidated in 2022 on geopolitical tensions and ongoing supply concerns.

Brazil's Senate and Lower House both overwhelmingly approved the bill to freeze the ICMS state goods and services tax on refined products in separate votes March 10. Bolsonaro said in his weekly social media appearance that he would sign the bill into law and publish it in the country's Federal Register as soon as possible.

The new law changes the way the ICMS manufacturing tax is calculated, implementing a fixed value rather than a percentage of the pump price. At current pump prices, the ICMS accounts for about 14% of the price of a liter of diesel or a 13 kg LPG tank of the type typically used to power cooking stoves in communities not served by traditional natural gas distribution networks. The adjustment will cover the ICMS calculation for biodiesel, diesel, gasoline, hydrous ethanol and LPG.

Jet fuel, however, was removed from the new tax calculation to appease state governors, so the ICMS on jet fuel and other refined products will still be calculated as a percentage of the final price. That could have a chilling effect on air travel and jet fuel demand. Jet fuel and gasoline were among the hardest hit by social-distancing measures during the pandemic.

In addition, the Brazilian government is also expected to slash or zero out federal fuel taxes on biodiesel, diesel and LPG for both domestic production and imports through the end of 2022.

The moves were aimed at countering the surge in international crude oil and refined-product prices, which started to rebound from pandemic-related lows in early 2021. That led to a series of price hikes by state-led oil producer and refiner Petrobras based on the company's commitment to keep domestic fuel prices at parity with international imports.

Petrobras last raised wholesale diesel prices 24.9%, gasoline prices 18.8% and LPG prices 16.1% on March 11 to counter the recent upswing in international prices. That was the company's second price increase in 2022.

Petrobras, which first implemented its import-parity pricing policy in 2016, must continue to adhere to the policy under the terms of a 2019 antitrust agreement that ended an investigation into predatory pricing by the company.

While Bolsonaro and lawmakers would like to end the import-parity price policy, they are largely powerless to interfere at Petrobras because of the antitrust agreement and its impact on the government's goals of opening the downstream segment to greater competition. That has largely driven the search for alternative solutions.

Tax change resistance

The ICMS tax adjustment, however, still faces stiff resistance from state governors, who were concerned about giving up a strong source of revenue that could undercut public spending in an election year. Several states have also threatened to sue the government to block the change.

The tax change will likely cost states about $3.2 billion in revenue in 2022, according to Brazil's Economy Ministry.

Brazil's Lower House also needs to reconcile changes made to the bill that proposes a price-stabilization fund that would be used to reduce price volatility during temporary moments of market turbulence. The Senate was able to remove a controversial part of the bill that would have used a tax on crude oil exports to capitalize the stabilization fund. The fund will likely use dividends from the government's controlling stake in Petrobras or oil royalties for its initial resources.

In addition to the fund, the bill would create a $60 monthly fuel subsidy under a $600 million program for low-income families. The bill would also define long-term directives for refined-product pricing in Brazil.

Economy Minister Paulo Guedes, however, said that he remained against implementation of the fund, which he considers an outdated subsidy for fossil fuels that will lead to additional price distortions in the future. The stabilization fund would likely only be implemented should hostilities between Russia and Ukraine continue for an indefinite period, Guedes said after the vote.

In addition, Guedes wants the fund to only subsidize diesel, biodiesel and LPG prices. That would put the annual cost of the subsidy at about $3.8 billion, according to the minister.

No timetable has been set for the Lower House vote on the revised bill.