Airlines step up push to mitigate Brazil tax reform impact

The international aviation industry has stepped up efforts in recent months to find ways to mitigate the impact of Brazil’s tax reform. The effort has received support from the Ministry of Ports and Airports, which has submitted a draft proposal with recommendations to the Finance Ministry and the Management Committee of the Tax on Goods and Services (CGIBS).

International airfares, which are currently tax-exempt, will be subject to half the standard rate under the new system, estimated at 26%. On domestic flights, the current rate of around 9% will rise to the full rate. The industry has been seeking an alternative for some time, so far without success.

Behind the scenes, sources say there is an expectation that parts of the tax reform could be postponed until after the election. That is because several sectors are facing major disagreements over the new rules. Airlines, meanwhile, have already begun selling tickets for the first months of next year without knowing exactly what tax rate they will have to pay.

According to the International Air Transport Association (IATA), if the reform takes effect as currently drafted, it would increase international airfares by 13.3%. That could reduce demand by 17.8%, equivalent to 5 million fewer passengers a year.

The National Civil Aviation Secretariat (SAC), part of the Ministry of Ports and Airports, prepared the recommendations sent to the Finance Ministry in an effort to find an alternative approach.

One proposal calls for a zero tax rate, based on the principle of reciprocity between countries. “International air transportation is governed by international agreements. And the vast majority of those countries, with a few exceptions, do not impose any type of tax on international air transportation services,” said Daniel Longo, head of the SAC.

The ministry proposed a special tax regime to the Finance Ministry, a model supported by provisions in the supplementary laws governing the tax reform. The proposals were submitted in August, but there has been no response so far. The Ministry of Finance did not respond to a request for comment.

Longo said the prospect of imposing a tax on international aviation is a concern for the ministry, particularly as tourism continues to grow. “Last year, we set a record for the number of tourists visiting Brazil. If we start adding costs, we could be reducing demand,” he said.

Another recommendation to the Finance Ministry, Longo said, involves regulations that would prioritize air operations with little or no environmental impact. Such operations would be exempt from the excise, known as the “sin tax,” which was created to impose higher taxes on activities that have negative effects on society or the environment. The tax also applies to aircraft and vessels, as well as products such as alcoholic and sugary drinks.

Chris Sununu, chairman and CEO of Airlines for America (A4A), expressed support for the SAC’s proposal for a zero VAT rate. “A lower tax burden and greater legal certainty show that Brazil is ready for further growth,” he said in a statement to Valor.

Another issue on the industry’s radar is a change to Brazil’s Electronic Air Transportation Ticket system (BP-eTA), which will begin requiring around 200 fields of passenger information. Today, the system collects only basic information, such as the passenger’s name and identification number.

Peter Cerdá, IATA’s regional vice president for the Americas, said the industry has submitted to the government a list of 15 to 25 fields that could be provided while complying with personal-data protection requirements under Brazil’s General Data Protection Law (LGPD) and international legislation.

According to IATA, the requirements currently proposed for BP-eTA would entail a level of detail significantly greater than that required in markets such as Colombia, Peru, Argentina, Spain, Portugal, and France.

“The impact is significant, both operationally and in terms of implementation,” said Cerdá, who is also president of the Latin American and Caribbean Air Transport Association (ALTA).

Cerdá said the association and executives from global airlines met with government representatives in Brasília in August. “The only people we weren’t able to speak with were officials at the Finance Ministry,” he said.

Cerdá also said the industry has asked for the new ticketing requirements to be postponed. The rules were originally scheduled to take effect in August but were pushed back to December 1. “We have 46 airlines operating in Brazil. What they [the government] are asking for is a solution that simply cannot be delivered,” he said.

Juliano Noman, president of ABEAR, said the industry views higher taxes on international airfares as a move that would hurt tourism. Just look at places like Bonito [in Mato Grosso do Sul state] and Jericoacoara [in Ceará],” he said.

One airline closely watching the changes is Portugal’s TAP, the international carrier serving the largest number of destinations in Brazil. Carlos Antunes, the airline’s head of the Americas, said TAP has put its Brazilian expansion plans on hold. “This change will mean many hundreds of thousands of euros in additional costs,” he said.

The group has no plans to launch new routes in 2027. This year, it added two routes from Curitiba and São Luís to Lisbon. TAP currently serves 15 cities in Brazil. The airline carried 2.2 million passengers in Brazil last year and aims to increase that figure by 5% this year.

CGIBS said it is reviewing thousands of contributions submitted by different sectors of the economy regarding the regulations for the IBS and that its representatives have met with SAC to discuss the aviation industry. “The committee has not yet taken a position on the proposals submitted, which are still undergoing technical review,” it said.

“Regardless of the merits of the proposals received, it is noteworthy that the committee has regulatory authority only over the IBS and cannot introduce new rules or go beyond what has been established in legislation approved by Congress,” the committee said, adding that expanding special tax regimes for certain sectors would tend to increase the burden borne by other parts of the economy.

*By Cristian Favaro — São Paulo

Source: Valor International