External scenario pressures Brazilian real to lowest level in 2 months

Chance of Republican victory in White House, Congress affects emerging markets

10/16/2024

Ricardo Cará Monteiro — Foto: Claudio Belli/Valor
Ricardo Cará Monteiro — Photo: Claudio Belli/Valor

The positive sentiment in local markets, buoyed by more favorable fiscal signals from the Brazilian government, was short-lived. External factors once again dominated the movements of domestic assets on Tuesday, with increased bets on a win by Republican Donald Trump in the U.S. presidential election significantly impacting emerging markets. The sharp drop in oil prices also played a role in the session, marked by a surge in the exchange rate and future interest rates.

The possibility of a “red wave,” with a Republican victory in both the White House and Congress, gained traction in betting markets. According to the betting site Polymarket, which compiles options involving both the presidential race winner and the majority in the Lower House and Senate, there is now a 40% chance of a “red wave,” which has rattled emerging markets.

In the Brazilian market, the real weakened to R$5.6565 to the dollar, the highest FX rate in two months. The interbank deposit (DI) rate for January 2029 futures soared from 12.635% to 12.77%, closing at the day’s high. The rate abandoned the morning decline when government signals about spending restraint had an impact. The benchmark stock indexIbovespa closed with a slight gain of 0.03%, at 131,043 points.

The government’s signaling was insufficient to support the real or the decline in future interest rates. The possibility of Mr. Trump’s victory became more prominent in business, especially affecting Latin American currencies. By late afternoon, the dollar was up 1.50% against the Mexican peso; 0.83% against the Colombian peso; and 1.42% against the Chilean peso.

“If Trump confirms what the betting markets are indicating, the dollar tends to strengthen initially,” said EQI Asset’s Chief Investment Officer (CIO) Ricardo Cará Monteiro. “The dynamics of our currency have a significant global component. We depend on foreign investors seeing a weaker dollar worldwide to allocate funds in Brazil.”

On Tuesday (15), Mr. Trump reiterated in an interview his proposal to radically increase tariffs on imports, further pressuring emerging currencies, which were already pressured by the oil price slump abroad, resulting from the removal of premia related to the Middle East conflict and weak demand prospects.

According to the EQI Asset executive, Mr. Trump’s tariff measures may not necessarily focus on Brazil, but impacting Mexico affects Latin American assets as a whole. “These measures are not very relevant to us, but when Mexico suffers, Brazil also suffers as they are in the same group of emerging markets. They are markets with two of the worst currencies of the year. If we had our finances more ‘in order,’ perhaps we wouldn’t be so affected,” Mr. Cará Monteiro said.

Among market players, possible explanations for the increased bets on a “red wave” include the increased tensions in the Middle East and the effects of Hurricane Milton. Additionally, some polls, albeit of lower quality, have shown a rise in Mr. Trump’s polling numbers in recent days.

“At the end of September, we were at a 50/50 probability. Today, the most one can say, considering some progress for Trump, is that he has a 52% chance of winning. That is very generous. Or rather, not yet sufficient to take a confident market position,” Quantitas’ Chief Economist Ivo Chermont wrote in an article published on Tuesday (15).

The economist, who has been closely monitoring the U.S. presidential elections, notes that the reliability of poll numbers continues to spark debate among market participants, as they failed to capture Mr. Trump’s voting intentions in 2016 or 2020.

Currently, Mr. Chermont maintains a forecast of a 50/50 outcome for the U.S. presidential election or 52/48 in favor of Trump, given the high uncertainty surrounding the scenario.

In Mr. Cará Monteiro’s assessment, a more positive internal environment would be required for domestic assets to navigate a more turbulent external scenario well. He notes that the real has struggled to take advantage of narratives that would benefit it, such as the prospect of an increased interest rate differential. “That’s because we lack a trigger on the fiscal front. In all my market experience, whenever fiscal issues arose as a concern, there was also fear that the interest rate would not be sufficient to control inflation and anchor the currency,” he said.

In the market, some start to speculate that Brazil may soon face a fiscal dominance scenario—described by the reduction or removal of monetary policy effects due to a high level of public debt. According to BB Asset Management’s chief economist, José Maurício Pimentel, there is no empirical evidence that Brazil is currently experiencing such a scenario, but this environment is plausible if market expectations deteriorate.

“The market is pricing the yield curve based on a fiscal outlook that deteriorates over time. Today, the market treats good fiscal news as neutral, neutral news as bad, and bad news as very bad,” Mr. Pimentel said. He emphasizes the negative impact of agents’ perceptions on the yield curve and exchange rate.

“If this trajectory continues, we could enter a fiscal dominance regime. When that happens, monetary policy loses its potency regarding its ability to anchor inflation expectations,” he explained.

(Eduardo Magossi, Maria Fernanda Salinet, and Cristiana Euclydes contributed reporting.)

*By Arthur Cagliari, Gabriel Caldeira, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Power outage challenges renewal of Enel SP, experts say

Amid government pressure, company risks losing concession; process would be slow and complex

10/15/2024

Alexandre Silveira — Foto: Fernando Frazão/Agência Brasil
Alexandre Silveira — Photo: Fernando Frazão/Agência Brasil

The crisis opened by the blackout in São Paulo is expected to complicate the renewal of Enel’s concession, which expires in June 2028, according to experts interviewed by Valor. The current perception is that the contract would head towards a bidding scenario at the end of the term. Faced with government threats, the company risks losing the operation even before that, although analysts point out that a forfeiture process would be complex, lengthy, and fraught with uncertainties about who would take over the service in such a case.

São Paulo’s power distribution company is under strong pressure from federal, state, and municipal governments since a storm hit the city last Friday (11) causing a power outage that affected 2.1 million people. By Monday (14), about 400,000 customers in Greater São Paulo were still without power.

The minister of Mines and Energy, Alexandre Silveira, set a three-day deadline, until Thursday (17) morning, for Enel to restore power to most of the city. “The company has the next three days to solve the major volume problems. After that, it can only present, if necessary, specific issues regarding locations that cannot be accessed due to unforeseen events,” the minister said in a press conference held on Monday (14).

The minister also criticized the Brazilian Electricity Regulatory Agency (ANEEL) for not yet opening a forfeiture process against Enel—which could strip the Italian company of the contract—and said the agency is promoting a “boycott” against the government.

Following the criticism, the regulatory body issued a statement reiterating its autonomy and saying it is taking all measures to resolve the crisis. “ANEEL informs that it is conducting a rigorous and technical investigation into Enel SP’s work during this critical period,” it said. “The agency will not hesitate to adopt the sanctioning measures provided for by law, which may include severe fines, administrative intervention in the company, and opening a forfeiture process of the company’s concession.”

The risk of Enel losing the contract due to forfeiture exists but it would not be simple, experts say. A lawyer experienced in the field said Enel is not expected to lose the concession in São Paulo for now, as there are other stages before, such as fines and warnings.

Diogo Lisbona, a researcher at the Center for Studies in Regulation and Infrastructure at Fundação Getulio Vargas (FGV Ceri), points out that the most recent contracts in the sector include an automatic trigger providing for forfeiture in cases of repeated failure to meet targets. However, the Enel SP concession is previous to that. The contract provides for forfeiture but within an administrative procedure following a series of steps. “We would have to wait for this procedure, and it is not a quick process.”

Lawyer Ligia Schlittler, a partner at TozziniFreire, points to another challenge—finding another company interested in the contract. “It’s a big headache. If the government penalizes the concessionaire, it must hand it over to a competent party.”

Another industry source, who requested anonymity, mentioned the case of Amazonas Energia, where, although the inability of the concessionaire is even more evident, the forfeiture process is hindered by the transfer to a new concessionaire.

While forfeiture is an unlikely scenario at the moment, the crisis is likely to complicate a possible renewal of Enel São Paulo’s concession, experts say. In June, the federal government published a decree with the rules for extending electricity distribution concessions for another 30 years, and ANEEL should open a public consultation with drafts of the amendments this week.

Bruna de Barros Correia, from BMA Advogados, said an option could be for the concessionaire to present ANEEL with a plan for transferring corporate control as an alternative to the termination of the grant, as long as it benefits the proper provision of public service.

Enel São Paulo could benefit from that but analysts see an adverse scenario for the company. In addition to the current crisis, São Paulo experienced a severe power outage in November 2023, which generated a dispute with ANEEL over the payment of large fines and enormous public opinion wear and tear.

“I’m not sure Enel would have the political and administrative conditions to continue, there were two serious occurrences in a very short period,” said former ANEEL director Edvaldo Santana. He notes that the refusal cannot be arbitrary and that conditions must be equitable. “The government can do everything to not renew but the rule has to be the same for everyone.”

Mr. Lisbona points out that, according to government rules, if a forfeiture process is opened, even if not concluded, it halts the progress of discussing a possible renewal. “The path [of renewal] is halted until a final decision in the administrative proceeding.”

If Enel is interested in renewing, it would have to apply at least 36 months in advance, meaning in 2025. An industry source points out that a possible renewal would require institutional alignment between the governments and ANEEL, a scenario far from the current reality.

Valor questioned Enel regarding the deadline for service resumption, the risk of forfeiture, and the possibility of contract renewal, but the company did not respond.

Without forfeiture or renewal, the path would be to let the concession reach its end and open a new bidding. Industry analysts claim it is difficult to foresee a scenario but doubts arise about the impact of the current crisis on a future bidding.

“Undeniably, it is a city with a high population density, dealing with its asset management issues, challenging to manage. There is a combination of challenges, and the intensification of climate change makes São Paulo an asset of greater operational complexity,” Ms. Schlittler pointed out.

A person close to distributing companies said that, behind the scenes, the topic of new bidding is already being discussed among companies. Experts point out that the area under Enel’s concession is too large for one single concessionaire and that some groups will likely seek to split the area. An industry analyst points out that if there are no arbitrary decisions by public authorities during the process, there will likely be interest. However, if the technical procedure is not followed, it could deter the market.

Enel acquired the São Paulo concession, previously controlled by AES, in 2018, after an intense dispute with Neoenergia, owned by Spanish company Iberdrola. In the competition, the Italian state-owned company paid R$ 5.55 billion for a 73.38% stake.

(Cristian Favaro contributed reporting from São Paulo.)

By Taís Hirata, Matheus Oliveira, Kariny Leal — São Paulo and Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Government prepares “significant” spending review package

Plan to be presented by December aims to establish measures as state policy, ensuring their continuity regardless of the administration in power

10/15/2024

A “significant package” of spending review measures is expected to be presented this year, an official of the economic team told Valor. The aim, the person explained, is to position these measures as state policy, meaning an effort that should continue regardless of which administration is in power.

Experts are considering announcing the measures after the municipal elections. While details of the proposed changes have not been disclosed, one criterion will be the alignment of a given expense with the fiscal framework. If the expense is incompatible, the government would face two options: change the fiscal rules or “do what needs to be done.” The Finance Ministry’s preference, the source said, is to uphold the framework.

To ensure the package’s approval, the plan is to appeal to both the legislative and judicial branches for a pact on the sustainability of public finances.

The measures, the person noted, are in line with a report by rating agency Moody’s, which earlier this month upgraded Brazil’s sovereign rating to just one notch below investment grade. The agency observed that the credibility of the fiscal framework is at a “moderate” level, reflected in relatively high debt costs. However, it believes that the potential for sustainable economic growth and the adoption of measures that support compliance with the fiscal framework justify the positive outlook.

The announcement of the spending review program was first mentioned by Finance Minister Fernando Haddad at an event hosted by Itaú Unibanco on Monday (14). When asked about changes to personal income tax (IRPF), he said the proposal was not yet ready and that before presenting it, he intended to submit a spending review program to Congress.

The importance of addressing spending adjustments was echoed by incoming Central Bank President Gabriel Galípolo at the same event.

The end of municipal elections is the target date for presenting these measures, as outlined by experts involved in the program’s development. Some believe the best window for approval is at the end of this year, during the final stretch of the current Lower House speaker and Senate president’s terms.

As reported by Valor on October 8, at least one spending review measure is expected to be sent to Congress before the end of 2024. The current trend suggests a more comprehensive package will be submitted.

The government’s spending review has three key pillars. The first is a detailed audit of programs such as Social Security, the Continued Payment Benefit (BPC), and unemployment insurance for fishermen. The second is the redesign of programs like the salary bonus and unemployment insurance. The third focuses on “modernizing” the indexation of expenses, ensuring their growth aligns with the fiscal framework.

“Submitting measures to curb mandatory expenses is a step toward normalizing the situation,” said Alexandre Manoel, chief economist at AZ Quest. It’s also an opportunity to reverse a negative trend. “We are heading towards a crisis via the credit channel.”

The financial market’s pessimism about public finances, which has driven future interest rates to around 13%, stems from doubts over President Lula’s support for the program proposed by the economic team, Mr. Manoel said.

The economic team’s strategy assumes that by 2025, fiscal policy will no longer be expansionary, as it has been until now with the injection of funds into the economy. At the same time, interest rates are expected to remain high, resulting in an economic slowdown, Mr. Manoel explained.

The most pessimistic view is that the government will not tolerate this scenario and will change the fiscal framework, he said. However, submitting the review measures would signal support for the current strategy.

There is an overreaction in the current wave of market pessimism regarding fiscal policy, said Fernando Montero, chief economist at Tullet Prebon Brasil. However, he noted similarities between the evolution of public finances under the current government and during the Dilma Rousseff administration.

The Brazilian real gained ground against the U.S. dollar after statements from Mr. Haddad and Mr. Galípolo. “The market is so bad right now that even narratives are affecting prices,” Mr. Montero joked. “At least it’s the right narrative.”

For Paulo Bijos, a budget consultant for the Lower House who led the Federal Budget Secretariat until mid-year, “the spending review is the most important agenda for Brazil right now.”

Alexandre Manoel — Foto: Rogerio Vieira/Valor
Alexandre Manoel — Photo: Rogerio Vieira/Valor

By Lu Aiko Otta, Guilherme Pimenta — Brasília

Source: Valor International

https://valorinternational.globo.com/
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With a long-term view, Mitsubishi’s Agrex invests R$700m in Brazil

Investment will drive expansion of input distribution, agricultural production, and strategic acquisitions

10/14/2024

Yoshihiro Enosawa — Foto: Gesival Nogueira Kebec/Valor
Yoshihiro Enosawa — Photo: Gesival Nogueira Kebec/Valor

Agrex do Brasil, a subsidiary of Mitsubishi Corporation, plans to invest R$700 million to expand its input distribution, agricultural production, and infrastructure operations. The funds will support new dealerships, increased soybean and corn production, an expanded seed business, and the construction of storage facilities, with acquisitions also part of the growth strategy.

This marks Agrex’s most significant investment since acquiring control of Los Grobo in 2013, transforming Ceagro Los Grobo into Agrex do Brasil.

“Mitsubishi Corporation is confident in further investing in Agrex do Brasil—a critical asset in ensuring international food security,” says Yoshihiro Enosawa, president and CEO of Agrex do Brasil.

Globally, Agrex operates in Brazil, the United States, and Australia, where it merged with Riverina in 2017. Its production primarily supplies Japan, China, and Singapore.

Mr. Enosawa, with experience leading Agrex’s operations in Australia and the U.S., identifies Brazil as the company’s most promising market. “In our long-term vision, Brazil’s potential for expansion is unmatched. Australia and the U.S. offer limited room for additional grain planting,” he explains.

Despite the challenges Brazilian farmers faced in the 2023/24 season—driven by lower production and commodity prices—Agrex remains optimistic about long-term growth. Mr. Enosawa is confident that future harvests will benefit from improved yields and technological advancements.

“Many producers are struggling with debt, and dealers are facing market difficulties,” says Kenji Akiyama, Agrex do Brasil’s strategy and planning director. “We believe our role is even more crucial now, helping customers grow through these challenges.”

For the 2024/25 harvest, Agrex do Brasil anticipates a more stable year, with productivity aligning with historical averages. “It should be a solid year for our clients’ finances. Prices won’t make it extraordinary, but it will certainly outperform the previous season,” says Rafael Villarroel, Agrex do Brasil’s operations director.

The company generates annual revenues of around R$5 billion and focuses on producing, sourcing, and selling soybeans, corn, and sorghum. Its operations are concentrated in Matopiba—the confluence of Maranhão, Tocantins, Piauí, and Bahia—as well as in Pará, Goiás, and Mato Grosso. Agrex also owns Dimatre, a soybean seed company, and holds a 50% stake in Fertgrow, a fertilizer firm. In June, the company spearheaded a R$68 million fundraising effort for Gênica, a biological inputs company based in Piracicaba, São Paulo.

According to Kenji Akiyama, strategy and planning director, the company’s acquisition strategy includes both familiar regions and emerging sectors, such as ethanol. “We are exploring opportunities in ethanol, with some acquisitions already in negotiation,” he notes.

While Agrex does not disclose its total grain sourcing volume, it reported 2 million tonnes sourced from Matopiba (bordering the states of Maranhão, Tocantins, Piauí, and Bahia) alone for the 2023/24 harvest. Some of this output comes from Agrex’s own farms, which span 24,000 hectares of soybeans and over 10,000 hectares of corn across Maranhão, Piauí, and Tocantins. “We plan to expand the planting area, though the exact scope is yet to be defined,” Mr. Akiyama adds, indicating that the expansion will be driven by leasing agreements. The company also aims to more than double its soybean seed production over the next five years, leveraging partnerships with “a few dozen” seed multipliers across Brazil.

Additionally, Agrex is expanding its retail footprint, currently operating 22 Agrex and Synagro stores, with plans to open two new branches soon and grow the network to 30 units by 2028.

“We are also investing in storage and transshipment infrastructure,” Mr. Villarroel notes. Agrex holds the concession for Lot 4 of the Porto Franco rail terminal (Maranhão) and manages transshipment operations at Porto Nacional (Tocantins). This rail network facilitates grain shipments to the port of Itaqui in São Luís (Maranhão), “providing cost efficiency and logistical flexibility,” adds Mr. Akiyama.

Reaffirming Mitsubishi Corporation’s long-term commitment to Agrex do Brasil, Yoshinori Nagata, general manager of Mitsubishi’s global grains, oilseeds, and feed materials department, visited the company’s headquarters in Goiânia last week alongside other senior executives. “With enhanced productivity and robust exports, Brazil is consolidating its role as a global leader in agricultural production, driving both world food security and national economic development,” says Mr. Nagata.

*By Cibelle Bouças, Globo Rural — Goiânia

Source: Valor International

https://valorinternational.globo.com/
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Lower House to debate changes in state representation in Congress

If the measure moves forward in Congress, seven state caucuses would gain seats, while seven others would lose

10/14/2024

Caroline de Toni — Foto: Vinicius Loures/Câmara dos Deputados
Caroline de Toni — Photo: Vinicius Loures/Câmara dos Deputados

Following the progression of measures aimed at curbing the powers of the Supreme Court and the anticipated approval of a bill granting amnesty to participants in January’s coup-mongering acts, the Lower House’s Constitution and Justice Committee (CCJ) has a new controversial topic on its agenda. The committee is considering a proposal to adjust the size of congressional caucuses based on the 2022 Census results.

If the proposal advances in Congress, seven state caucuses would increase in size, while another seven would see a reduction in their number of seats.

Speaking to Valor, CCJ Chair Caroline de Toni said the topic will be a priority for the committee in the coming months to prevent the Electoral Court from intervening due to legislative inaction. “It will be our priority. If we don’t regulate it, the TSE [Superior Electoral Court] will,” Ms. de Toni said.

In the proposed new composition of the Lower House, Santa Catarina, the state of the CCJ chair, and Pará would each gain four seats, bringing their totals to 20 and 21, respectively. Meanwhile, the caucus from Amazonas would increase to 10 from 8 legislators, and Ceará, Goiás, Minas Gerais, and Mato Grosso would each gain one additional lawmaker.

Conversely, Rio de Janeiro would lose four seats, dropping to 42 from 46, while the caucuses from Bahia, Paraíba, Piauí, and Rio Grande do Sul would each lose two seats. Alagoas and Pernambuco would each elect one fewer legislator.

Alagoas is the state of the current Lower House speaker, Arthur Lira. Bahia and Paraíba are home to the three main contenders to succeed Mr. Lira in 2025: Hugo Motta (Paraíba), Elmar Nascimento (Bahia), and Antonio Brito (Bahia), leaders of the Republicans, Brazil Union, and the Social Democratic Party (PSD) in the House, respectively.

Thirteen other states—Acre, Amapá, Federal District, Espírito Santo, Maranhão, Mato Grosso do Sul, Paraná, Rio Grande do Norte, Rondônia, Roraima, Sergipe, São Paulo, and Tocantins—would retain their current caucus sizes.

If the proposal progresses through both the Lower House and Senate, the new configuration will take effect starting in 2027, directly impacting the 2026 elections.

No adjustments have been made since 1993, and the Supreme Court has given Congress a deadline to redistribute seats.

The Constitution stipulates that each state must have between 8 and 70 congresspeople, based on its population size. The last adjustment was made in 1993.

The proposal also suggests that in the year preceding each election, the number of seats should be automatically adjusted according to the latest population data.

In August last year, the Supreme Court unanimously voted to require Congress to redistribute the seats each state holds in the Lower House by June 30, 2025. In his opinion, Justice Luiz Fux outlined that the Lower House should consider the maximum number of legislators, currently 513, along with the latest Census data.

The Court also decided that if Congress fails to pass the supplementary law by the stipulated deadline, the Superior Electoral Court (TSE) must determine the number of legislators for each state and the Federal District by October 1, 2025.

During a public hearing requested by rapporteur Danilo Forte, participants highlighted the necessity of revisiting the seat distribution but also noted potential challenges, such as the conflict between states losing and gaining seats, the lack of public support for increasing the overall number of legislators, and the need for compliance with constitutional principles in the distribution.

At the close of the hearing, Mr. Forte emphasized the need for the legislature to act decisively. “I urge [the congresspeople] to help me devise a solution to this issue before the TSE steps in for us.”

*By Marcelo Ribeiro, Raphael Di Cunto — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Brazil seeks to prevent abrupt taxation of multinationals

Government’s presumed 9% tax credit for industrial groups and global consolidation of foreign subsidiaries will expire by December

10/14/2024

Daniel Loria — Foto: Washington Costa/MF
Daniel Loria — Photo: Washington Costa/MF

The federal government is evaluating alternatives to prevent a sharp tax increase for Brazilian companies operating abroad starting in 2025. By December, the presumed 9% tax credit granted to Brazilian industrial companies with foreign operations and the global consolidation of foreign subsidiaries, which allows companies to offset profits with losses, will expire.

“We are considering whether to simply extend the benefit for another two years or make a more structural revision of these rules, taking advantage of the context of Pillar 2,” Daniel Loria, program director of the Special Secretariat for Tax Reform, told Valor. “We are looking into this issue and won’t just sit back.”

The presumed tax credit and global consolidation are part of the Universal Basis Taxation (UBT), which aims to prevent double taxation of Brazilian companies operating abroad.

For tax expert Breno Vasconcelos, a professor at Insper, extending the UBT “would be an important measure to ensure the competitiveness of Brazilian companies with investments abroad.”

“Currently, profits of foreign subsidiaries are taxed in Brazil at a nominal rate of 34%, well above the average rate applied by OECD countries (approximately 23.3% in 2022). This high rate creates a disadvantage for companies with overseas production activities,” he said. “The 9% presumed CSLL (Social Contribution on Net Profit) credit reduces this inequality, putting Brazilian multinationals on a more level playing field with those headquartered in OECD countries.”

Experts fear that these rules could somehow clash with Pillar 2, which establishes a minimum 15% tax on multinationals, announced by the government two weeks ago. However, Mr. Loria sees no conflict.

Pillar 2 is part of an international effort led by the Organization for Economic Co-operation and Development (OECD) to combat tax erosion through the relocation of companies to tax havens.

After a decade of studies, Brazil has begun aligning itself with this initiative by adopting the Global Anti-Base Erosion (GloBE) rules, under provisional presidential decree, or “MP”, No. 1,262/24. Another 36 countries have already done the same. GloBE rules are part of Pillar 2.

“The interaction between the UBT and the global minimum tax based on GloBE, developed within the OECD framework, is a highly relevant issue for Brazilian companies subject to both,” said tax expert Ana Lúcia Marra, a partner at Machado Associados.

One concern, she said, is whether the countries where Brazilian companies operate will consider the Corporate Income Tax (IRPJ) and the CSLL collected in Brazil due to the profits of foreign subsidiaries when verifying if the effective minimum tax rate has been reached.

Another key point in this discussion is whether Brazil’s UBT is equivalent to the Controlled Foreign Company (CFC) tax regimes referred to in the OECD’s GloBE rules. She explained that CFC rules are typically applied when there is evidence of abusive practices that may result in profit shifting to low-tax countries. In contrast, Brazil’s UBT applies more broadly. The treatment of profit differs under each rule.

“It will be necessary to verify whether other countries that have implemented GloBE will consider IRPJ and CSLL as taxes paid on the profits of subsidiaries in other countries, rather than on the profits of the parent company in Brazil, in order to avoid double taxation,” Ms. Marra said. “The conclusion on this matter will depend mainly on how other countries interpret Brazil’s universal basis taxation rules as being equivalent to CFC rules.”

The provisional presidential decree has sparked opposition from the Parliamentary Entrepreneurship Front (FPE), which called it the “Unfair Competition MP” and claimed that the government’s strategy of seeking fiscal adjustment through increased revenue has run its course.

The parliamentary group believes that the decree “favors the profits of foreign companies over domestic ones.” In their view, Brazilian companies will face a 34% tax burden from IRPJ and CSLL, while foreign companies will pay only 15%.

“The statement is incorrect in claiming there are different tax burdens for Brazilian and foreign companies,” Mr. Loria said.

What the decree does, he explained, is establish a minimum threshold for paying taxes on profits in Brazil. The nominal rate applied in the country is 34%, considering both the corporate income tax and the social contribution on net profit. This applies equally to both domestic and foreign companies.

The decree stipulates that if the effective tax payment, after deductions and special treatments, falls below 15%, an additional CSLL levy will be applied to bring it up to the minimum threshold.

Since the minimum taxation is likely to be adopted globally, the decree effectively ensures that any additional amount collected to meet the 15% will be retained in Brazil, rather than paid to another country.

“We are following the rules of an international agreement to which Brazil had already committed and on which we have been working for ten years,” Mr. Loria said. “There is no different treatment for domestic or foreign companies, no tax increase—just a 15% minimum threshold, which most companies already meet.”

The rule will apply to groups with annual revenues of at least €750 million. Data from Brazil’s Federal Revenue indicate that, out of the 7,980,287 active companies in the country in 2022, only 0.11% (8,704) meet this criterion. Of those, 957 belong to groups with low taxation.

The details of the decree’s implementation are currently open for public consultation, allowing stakeholders to suggest changes.

The minimum taxation will begin affecting revenue collection in 2025, when R$3.44 billion is expected. In the following year, this amount is projected to rise to R$7.28 billion, reaching R$7.69 billion in 2028. The government expects revenues to stabilize around R$8 billion per year.

*By Lu Aiko Otta, Guilherme Pimenta — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Small consumers could drive free power market to R$120bn by 2040

Nearly R$52bn may stem from low voltage migration, says strategy&; free supplier choice could capture 65% of the market

11/10/2024

The complete opening of Brazil’s electricity market to consumers on low voltage connections could generate an estimated R$120 billion by 2040. Of this total, R$52 billion would come from new consumers migrating to the free market, where they can choose their electricity supplier and contractual terms, according to projections by Strategy&, a PwC consultancy analysis arm.

If market liberalization occurs by 2030, Strategy& forecasts a significant increase in the volume of electricity traded in Brazil, potentially representing up to 65% of the total electricity market by 2040. Data from the Energy Research Company (EPE) reveals that the regulated market, managed by utility companies, currently includes over 90 million consumer units, half of which are residential.

There is anticipation within the energy sector that starting January 2026, the option to migrate will extend to industrial and commercial energy users on low voltage. Full liberalization, including residential and rural properties, is projected for January 2030, although this shift still requires studies and regulatory changes that have yet to be outlined.

Since the beginning of the year, the free market has allowed any energy consumer on high voltage networks over 2.3 kilovolts (kV) to migrate, typically involving customers with electricity bills exceeding R$10,000 monthly. For instance, a supermarket chain could have moved several stores to the free market. The latest data from the Electric Energy Commercialization Chamber (CCEE) indicates over 16,000 consumer units have transitioned to the free market.

The Brazilian Electric Energy Agency (ANEEL) reports that 31,400 energy consumers have notified their respective distribution companies about migrating to the free market this year and in 2025, averaging 2,500 migrations monthly.

Adriano Correia, a partner and leader of the energy and utilities sector at PwC Brazil, notes that it is crucial to see how market liberalization is structured within the Brazilian Congress. Technically, he believes it could be very beneficial for the energy market.

Mr. Correia sees potential for new investments to cater to a new consumer profile with a lower average ticket than currently observed. Future investments, he stated, are likely to involve initiatives like new types of energy consumption meters, specific marketing models, process automation, and establishing new commercial and communication channels with consumers.

He cites the example of a retail chain negotiating a migration to the free market, which required the installation of electric vehicle chargers in store parking lots as a condition for closing the deal. The commercializer agreed, he recalls.

“We can imagine, for instance, contracting energy efficiency services. Or, later on, combining the free market with distributed generation. There’s a vast field to explore for interesting solutions and, further down the line, to sophisticate the market,” Mr. Correia said.

One of the most anticipated regulatory measures is redesigning the role of power distribution companies. Currently, they purchase energy in auctions and manage distribution to regulated market clients through the transmission network. With the expected redesign, a regulated marketer will emerge, responsible for buying energy in auctions and negotiating it with distributors. These companies will then be compensated solely for delivering the energy to consumers.

Mr. Correia emphasizes that with this separation, distribution companies will be able to act more assertively to retain customers, maintaining scale and financial margins.

*By Fábio Couto — Rio de Janeiro

Source: Valor International

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Core retail sales drop 0.3% in August, below expectations, IBGE says

The median estimate from 26 consultancies and financial institutions surveyed by Valor Data expected a 0.6% decline in the period

11/10/2024

Core retail sales volumes dropped 0.3% in August compared to July, in seasonally adjusted terms, according to the Monthly Survey of Trade (PMC) released by the Brazilian Institute of Geography and Statistics (IBGE) on Thursday (10).

The decline was smaller than anticipated, as the median estimate of 26 consultancies and financial institutions polled by Valor Data was a 0.6% drop, with projections ranging from a 1.8% fall to a 0.2% rise. In July, core retail sales had advanced 0.6% compared to June.

Year-on-year, core retail grew 5.1% compared to August 2023. The sector has shows a 4% increase in the 12 months through August and a 5.1% rise in 2024.

The 5.1% gain year-on-year was higher than expected. The median forecast was a 4.1% rise, with projections ranging from a 2% to 5.7% increase.

Core retail’s nominal revenue remained stable in August compared to July. Year-on-year, it rose 9.8%.

Sales declined across most of the core retail sector in August, with seven of the eight activities surveyed by the PMC reporting drops compared to July.

PMC data also show that five out of eight activities saw year-on-year growth compared to August 2023. Overall, core retail grew 5.1% in this comparison.

From July to August, the following segments experienced declines: personal and household goods (-3.9%); books, newspapers, magazines, and stationery (-2.6%); office, IT, and communication equipment (-2%); furniture and appliances (-1.6%); textiles, clothing, and footwear (-0.4%); fuels and lubricants (-0.2%); and hypermarkets, supermarkets, food products, beverages, and tobacco (-0.1%).

The only positive outlier was the pharmaceuticals, medical, orthopedic products, and cosmetics segment, which grew 1.3% between July and August 2024.

Year-on-year, core retail grew 5.1% from August 2023, with a 4% increase in 12 months and a 5.1% rise in 2024 — Foto: Gabriel de Paiva/Agência O Globo
Year-on-year, core retail grew 5.1% from August 2023, with a 4% increase in 12 months and a 5.1% rise in 2024 — Photo: Gabriel de Paiva/Agência O Globo

*By Lucianne Carneiro, Valor — Rio de Janeiro

Source: Valor International

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Attorney General’s Office issues notice to YouTube, TikTok, Kwai, Meta

AGU is requesting information on measures taken to manage gambling and betting ads directed at minors

10/09/2024

Brazil’s Attorney General’s Office (AGU) has issued an extrajudicial notice to YouTube, TikTok, Kwai, and Meta (including Instagram and Facebook). The notice seeks information on the steps being taken to manage advertising related to gambling or betting that might be directed “by and for” minors.

The notice also inquires whether the platforms’ “terms of use” include specific rules for protecting minors and if there are designated channels for reporting inappropriate advertising on this issue. The AGU recalled that both the operation and advertising of these activities to individuals under 18 are prohibited by law.

“Considering specifically the advertising of games disseminated through digital platforms, there’s no doubt that those directed by and for minors are unequivocally abusive/illegal. This holds true whether the advertising comes from regulated companies or those in the process of regulation (fixed-odds betting firms) or from gambling (a criminal offense), as both the operation of these activities and their advertising are prohibited for children and adolescents, as evidenced by the following provisions of sports betting legislation, in addition to the entire protective legal framework for children and adolescents,” states the notification.

The notification further emphasizes the need to differentiate between fixed-odds betting firms, which are in the process of regulation in Brazil, and gambling, which is illegal and classified as a criminal offense.

According to the AGU, these notifications are part of an ongoing administrative process within the office, initiated following a request from the Ministry of Health regarding the topic of betting games and their impact on federal public policies, particularly those related to the mental health of the population.

The document notes that, according to the Department of Mental Health, Alcohol, and Other Drugs of the Ministry of Health, “Gambling Disorder” has been included in the International Classification of Diseases (ICD-11), showing similarities with disorders related to substance use.

When reached by Valor, YouTube , TikTok, Kwai, and Meta declined to comment.

According to a study by consultancy firm Kantar Ibope Media, online sports betting companies invested a total of R$2.3 billion in internet and TV advertising from January to August this year. Of this amount, R$960.3 million was spent on digital media advertising.

*By Mariana Assis — Brasília

Source: Valor International

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