States increasingly resort to sales tax hikes

Governors raise general tax rate in an effort to recover revenue losses

02/03/2025

The movement to increase the general rate of the sales tax ICMS, Brazil’s main consumption tax, is not yet over. The average tax rate, which was 17.61% in 2022, is set to rise to 19.24% by 2025. This calculation includes all 26 states and the Federal District (Brasília), along with ICMS hikes approved in 2024 that will take effect by April this year in the states of Rio Grande do Norte, Piauí, and Maranhão. The trend of increasing rates began in 2022, and since then, at least 18 states and the Federal District have raised the ICMS rate at least once.

The highest standard ICMS rate, which was 18% in 2022, will increase to 23% starting February 23 of this year when the law raising the tax in Maranhão takes effect. With a five percentage point increase applied gradually since 2022, Maranhão’s ICMS has risen the most during this period, followed by Piauí’s tax, which will be 22.5% from April this year, up from 18% in 2022. States such as Amapá, Espírito Santo, Minas Gerais, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul, Santa Catarina, and São Paulo have not increased the standard ICMS rate since 2022.

In some cases, there have been attempts to raise the tax. For instance, the government of Rio Grande do Sul tried to pass a law in 2023 to ensure a higher rate in 2024 but withdrew the proposal. In the face of strong political opposition, Governor Eduardo Leite pulled back the proposal submitted to the Legislative Assembly of Rio Grande do Sul. The current modal ICMS rate for the state is 17%.

Due to the principle of annual anteriority, legislation to raise the ICMS rate must be approved in the preceding year. States also need a 90-day prior notice.

Carlos Eduardo Xavier, Secretary of Finance of Rio Grande do Norte, recalls that the state government attempted to raise the modal ICMS rate to 20% in 2023, to take effect in 2024. “The government faced a defeat in the Legislative Assembly. Last year, we managed to better organize our base and approved the 20% rate definitively.”

In 2022, the Rio Grande do Norte government increased the rate from 18% to 20%, effective for the following year, but the measure was temporary and only lasted until the end of 2023. Therefore, the modal ICMS returned to 18% last year. Among the “imperative issues” for reinstating the 20% rate, Mr. Xavier cites the need to restore revenue following the income losses since 2022.

In a statement, the Maranhão Department of Finance also said the restoration of lost revenue in 2022, when the federal government under Jair Bolsonaro imposed restrictions that reduced ICMS rates in key sectors such as electricity, fuels, and telecommunications for state revenue.

Until 2022, in most states, these activities paid ICMS above the standard or modal rate, which refers to the general rate set by states for the tax. The restrictions were introduced through Supplementary Laws 192 and 194, both in 2022. Rodrigo Spada, President of the National Association of State Tax Auditors (FEBRAFITE), said that these laws were based on precedents from the Supreme Court, which had already identified electricity and telecommunications as essential activities, exempting them from paying a higher-than-modal ICMS rate. He also said that fuels were included in the laws as well at a time when efforts were being made to combat inflation. At that time, gasoline and diesel prices followed the sharp rise in oil prices in 2022, shortly after Russia invaded Ukraine in the early months of that year.

This set of measures, Mr. Spada said, also resulted in a change in ICMS collection on fuels, shifting to the “ad rem” model, with a specific value per liter—for gasoline and diesel—and per kilogram for cooking gas, rather than applying the rate to prices.

According to the Maranhão Department of Finance, the restrictions on ICMS rates resulted in a monthly revenue reduction of approximately R$200 million. Despite cuts in costs and departmental budgets, a note from the state’s Finance Department said it was necessary to adjust ICMS rates to partially offset revenue deficits. The tax, which was 18% in 2022, rose to 20% during 2023, advanced to 22% in 2024, and will increase by another percentage point to 23% in February. “With the rate adjustment and improvements in the tax system, Maranhão’s revenue, when adjusted for inflation, will surpass the levels reached in 2022, allowing the state to make investments in infrastructure and finance public policies and social programs,” said the Maranhão Department of Finance.

Renata dos Santos, the Secretary of Finance for Alagoas, said that the state experienced “strong” revenue in 2023 and 2024 due to economic dynamism and law enforcement. In 2023, she recalls, a special tax installment program also boosted income. This performance, she said, contributed to the state not proceeding with rate increases. The Alagoas government raised the modal ICMS rate during 2023 from 17% to 19%, based on a 2022 law. Since then, there has been no increase in the modal rate. “There’s also a limit to taxing. When you tax too much, you end up increasing evasion,” she said. “Currently, there are no plans to raise the rate, but that depends on how ICMS revenue behaves this year. There are uncertainties about economic activity.”

Ms. Santos noted that the state, in addition to the 19% modal ICMS, has an additional 1% for the Poverty Eradication Fund (FECOEP). In Alagoas, she said, this additional charge has a broader base than in most states. For this reason, according to Ms. Santos, the state’s effective ICMS rate can be considered as 20%.

Helena Sayuri Roveri, a tax consultancy manager at Becomex, said that the additional FECOEP charge is levied by many states, but has a broader base in three of them: besides Alagoas with 1%, Rio de Janeiro with 2%, and Sergipe with 1%.

There are also other specific situations, Ms. Roveri noted. In Santa Catarina, she said, the general rate is 17%. However, internal operations in the state are taxed at 12% when conducted between taxpayers for goods intended for resale or manufacturing. This, she said, is a strategy to compete with the interstate ICMS rate of 12% and encourage companies to keep suppliers within the state.

According to the Secretary of Finance of Alagoas, even without an ICMS rate increase, the second half of the current term also comes with caution. A plan is being developed, she said, not only to boost revenue but also to cut expenses. “We’re studying contract revisions but without making blind cuts.” The idea, she said, is to analyze expenses “point by point,” evaluating travel and event costs, for example. “Expenses always need trimming,” she said. The aim is to ensure resources so that the government can fulfill investment promises made during the campaign.

According to Ms. Santos, ICMS revenue in Alagoas increased by 16% nominally in 2024, well above the 4.83% inflation rate measured by the IPCA. For 2025, she uses conservative projections and anticipates stability in real terms for federal transfers from the State Participation Fund (FPE). She projects a real increase of about 2% for ICMS revenue.

With the highest ICMS revenue in the country, São Paulo maintained the standard tax rate of 18%. Samuel Kinoshita, the São Paulo Secretary of Finance, said the government’s choice was to pursue other measures. He mentions the “Direção Certa” program, which includes cost containment, incentives for tax compliance, and a review of ICMS benefits. The state’s tax revenue grew by 8.2% in real terms in 2024 compared to the previous year, while there was an 8% decline in 2023.

*By Marta Watanabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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EDP puts two solar plants in São Paulo up for sale

Negotiations are in early stages, with assets valued at R$1.6bn to R$1.8bn

02/03/2025

Portuguese energy group EDP has put two major solar farms in São Paulo State up for sale, according to sources consulted by Valor. Negotiations are still in the early stages, and the assets are valued by the market at between R$1.6 billion and R$1.8 billion, based on their enterprise value—which includes both equity and net debt. BTG Pactual is advising on the transaction.

The assets on the market include the 252-megawatt Pereira Barreto Solar Complex, located in the municipality of the same name, and the 254.6 MW Novo Oriente Solar Complex, in Ilha Solteira.

EDP’s divestment strategy extends beyond solar power. The company is also negotiating the sale of the Santo Antônio do Jari (392.95 MW) and Cachoeira Caldeirão (219 MW) hydroelectric plants in Amapá, as previously reported by Valor. Bradesco BBI has been hired as a financial advisor for that transaction, which could generate around R$3 billion, according to market sources. Talks on these hydro assets are already at an advanced stage and could be finalized in the coming weeks.

When contacted, EDP declined to comment on the asset sales. BTG Pactual also did not provide a statement.

Market analysts caution that the sale of EDP’s solar assets could face hurdles in 2025. The growing use of curtailment—restrictions on wind and solar generation imposed by Brazil’s National Electric System Operator (ONS)—is increasing risk perceptions around renewable energy investments.

These regulatory constraints have already affected the market value of energy companies and made it more difficult for them to secure financing, according to banks and financial institutions.

The Pereira Barreto project received a R$750 million investment, while Novo Oriente was financed with R$805 million from the Brazilian Development Bank (BNDES), allocated to six special purpose entities under EDP. Given that these are standalone assets, potential buyers are likely to be either strategic investors or financial players with existing energy platforms.

Pereira Barreto was inaugurated in 2021 by EDP Renováveis, the renewable energy arm of the Portuguese group. Novo Oriente, in contrast, was developed through a 50/50 partnership between EDP Brasil and EDP Renováveis.

Mergers and acquisitions in Brazil’s solar energy sector surged 76% in 2024 compared to the previous year, according to consulting firm Greener. Despite tighter profit margins, the expectation is that M&A activity in the energy sector will remain strong in 2025.

In late December, João Marques da Cruz, EDP’s president for South America, stated that the company does not plan to invest in new power generation projects in the coming years, citing weak demand and low electricity prices. Instead, EDP will focus its investments in Brazil on electricity distribution and transmission, with planned spending of up to R$12 billion in these areas through 2030.

EDP has consistently communicated to investors that it follows an asset rotation strategy, selling projects to finance new investments. The company’s financial leverage, measured by net financial debt to EBITDA over the 12 months through September 30, 2024 (the latest available data), stood at 2.12 times, according to Valor Data.

EDP has already executed several major asset sales in Brazil. In late 2021, British fund Victory Hills and Paraty Energia acquired the Mascarenhas power plant from EDP for R$1.23 billion. In 2023, the company sold transmission lines to private equity firm Actis in a R$2.7 billion deal. Additionally, EDP agreed to sell an 80% stake in its coal-fired Pecém plant in Ceará to a group of Brazilian investors led by Mercurio Asset.

If the company successfully completes its latest divestments, the proceeds could help finance its transmission investments. In March 2024, EDP secured three lots in a transmission auction held by Brazil’s electricity regulator, ANEEL. The projects require an estimated R$3 billion in capital expenditures to build nearly 1,400 kilometers of transmission lines and two substations across four states.

*By Robson Rodrigues  e Fernanda Guimarães  — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Big banks profits to improve in Q4; outlook for 2025 concerns

Macroeconomic outlook for 2025 signals slowdown in loans and rising default rates

02/03/2025

The earnings season for Brazil’s major banks in the fourth quarter of 2024 is expected to reflect what analysts are calling “the last rays of sunset.” In other words, the numbers from October to December are likely to be positive, with rising profits and loan portfolios, while default rates remain stable. However, the forecasts presented by financial institutions and what their top executives say about 2025 in earnings calls are more important than the results themselves. With the Selic policy interest rate remaining high, credit is expected to lose momentum in 2025, and concerns over the country’s fiscal outlook loom large.

Together, Itaú Unibanco, Bradesco, Banco do Brasil, and Santander are expected to report combined profits of R$29.363 billion in the fourth quarter, up 1% from the previous quarter and 22.7% higher than the same period in 2023, according to the average projections of ten financial firms surveyed by Valor. For the year 2024, total profit is projected at R$112.4 billion, an increase of 16%.

In a report titled The Last Rays of Sunset, Itaú BBA noted that despite strong fourth-quarter results, a key factor will be the banks’ outlook for the year ahead. According to analysts, the combined profit of the four largest banks is still expected to rise around 10% in 2025 but growth will likely be concentrated in the first half of the year, making full-year guidance a challenge.

“Providing guidance is a tough task given the increasingly volatile and deteriorating scenario. Worsening macroeconomic indicators, such as interest rates and inflation, are raising barriers to credit, which tends to curb demand for new loans. We expect these concerns to be reflected in executives’ statements and guidance, with a forecast of moderate loan portfolio growth (below 10%) and stable financial margins,” Itaú BBA stated.

Bradesco BBI also highlighted that investor focus will be on 2025 guidance and pointed to the adoption of the new IFRS 9 accounting standard, which could impact banks’ bad debt provision levels. “Notably, we believe banks will factor in a more challenging macroeconomic scenario for 2025, which may result in slower loan portfolio growth. Additionally, as banks deal with the expected impact of IFRS 9, some may face higher provisioning requirements in 2025.”

Bank of America projects that the major banks’ loan portfolios will grow by 9% this year but net interest income should expand at a faster pace, driven by client margins—supported by higher interest rates—though partially offset by lower market margins. “We also expect asset quality to deteriorate and risk costs to increase. Finally, we believe fee revenue will rise in line with operational expense growth,” BofA analysts stated in a report.

Bernardo Guttmann, head of financial sector analysis at XP, pointed out that a snapshot of credit data published by the Central Bank for December does not indicate any slowdown in lending. However, he noted that recent conversations with bank executives suggest a more cautious stance. “It has become clear that banks’ sentiment regarding the economy is aligning more with that of financial markets, which have a more pessimistic outlook,” he said.

Mr. Guttmann added that no specific sector stands out as the most likely to increase default rates, except for agribusiness, where court-supervised reorganization cases are expected to peak between February and March.

XP also noted that IFRS 9 will lead to a raft of reclassifications beyond provisioning adjustments. Items previously recorded as fee income—such as real estate appraisal fees for mortgage applications—will now be accounted for as part of financial margins. Conversely, some expenses that were previously recorded as administrative costs, such as debt collection fees, will now be entered into bad debt provisions. Additionally, commissions paid to correspondent banking networks, which were previously paid upfront, will now be amortized over the contract term. “This will alter some balance sheet line items and complicate comparisons with previous periods,” said analyst Matheus Guimarães.

Another factor that could impact fourth-quarter results, particularly for some mid-sized banks, is payroll-deductible loans for Social Security (INSS) beneficiaries. Banks such as Banco do Brasil, Itaú, Santander, Pan, BMG, Mercantil, and Banrisul suspended these loans through correspondent banking networks late last year due to high operational costs relative to the 1.66% monthly interest rate cap.

In January, the National Social Security Council (CNPS) raised the cap to 1.80%, a level banks argue is still insufficient. The Brazilian Association of Banks (ABBC) has taken the matter to the Federal Supreme Court (STF), questioning whether the CNPS and the National Institute of Social Security (INSS), which are linked to the Ministry of Social Security, have the authority to set interest rate caps.

Analysts project that Itaú will post a record quarterly profit of R$10.831 billion. The bank is also expected to announce an extraordinary dividend payout of nearly R$20 billion.

According to analysts at Genial, Itaú’s highlights for the period should include loan portfolio expansion—continuing the pace of previous quarters and closing with 12.5% growth, at the top of its guidance range—higher financial margins, albeit at a slower rate than loan growth, and controlled provisioning expenses, reflecting stable asset quality and default rates. “It is the leader of the pack, with a return on equity (ROE) of 23% in 2025,” Genial analysts said.

Banco do Brasil is the only major bank expected to report a slight quarterly profit decline (-0.2%). Citi analysts believe its financial margin should remain resilient but do not foresee a turnaround in the agribusiness segment’s difficulties. “We expect loan portfolio growth of 11% in 2024, with persistent provisioning pressures slightly offset by strong treasury results. Agribusiness loan defaults should remain high compared to historical levels, although client margins should continue to rise steadily.”

Bradesco is expected to continue its turnaround trajectory, with profit surging 84.5% from the fourth quarter of 2023 when higher provisions and a leadership transition impacted the bank’s earnings (Marcelo Noronha replaced Octavio de Lazari Jr. as CEO). According to Santander analysts, client margins should improve and asset quality should remain stable, while market margins could be a downside risk. They estimate this line will total R$312 million in the fourth quarter “due to high volatility in the yield curve and a lack of hedging instruments to mitigate this impact.” Given the Selic outlook for 2025, some analysts are already forecasting a zero result for Bradesco’s market margin this year.

Santander is expected to report a R$3.702 billion profit, with financial margins growing in line with loan portfolio expansion and fee revenue standing out amid the bank’s efforts to engage customers and boost cross-selling. “Meanwhile, we expect operating expenses to grow at a similar pace to the third quarter but below inflation on an annual basis. We also anticipate the effective tax rate will continue rising to 16%, though likely still below sustainable levels,” Goldman Sachs stated.

Nubank, which is not included in Valor’s aggregate results, is expected to report a profit of approximately $565 million (around R$3.2 billion based on Friday’s exchange rate). Analysts believe the bank may be affected by currency fluctuations, and fourth-quarter figures will be a key indicator of the fintech’s risk appetite amid a tougher macroeconomic scenario. “We see 2025 as a challenging year for Nubank. Unsecured loans in Brazil may slow if credit conditions worsen due to inflation and higher interest rates, along with rising default rates. Although Nubank is gaining market share in secured lending, we believe returns on these products remain unattractive,” Citi analysts stated.

*By Álvaro Campos  — São Paulo

Source: Valor International

https://valorinternational.globo.com/b
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