Subsidy is expected to reach R$30.3bn in 2023, and economists advocate gradual abandonment of the model

11/29/2022

---

With a drop in direct job generation in recent years, the departure of large companies from the region, and an increase in the tax cost to the federal government, the Manaus Free Trade Zone is going through one of the most sensitive moments since its creation in 1967. In recent years, the effectiveness of the free trade area has been placed at the center of the debate on a reform of tax laws.

Economists critical of the model say the Free Trade Zone is responsible for Brazil’s largest tax waiver, is ineffective, and has not fulfilled its role. They advocate a gradual migration towards the end of subsidies.

The Secretariat of Federal Revenue estimates that, by 2023, the tax waiver with the Free Trade Zone will be R$30.3 billion, a figure that has been growing in recent years. This year, the Federal Court of Accounts (TCU) said that the region will represent the largest tax waiver of the federal government next year – 16.1% of total tax expenditure.

Representatives of the local industry, academics, and members of the federal government in charge of supervising the region evaluate that despite the drop in job generation, Manaus Trade Zone is still key for the development of the Amazonas state and the consequent preservation of the forest.

With 41,773 registered companies — 18,054 of them only in the Amazonas state — today benefited from tax breaks, such as the Import Tax (II), Export Tax (IE), and Industrialized Products Tax (IPI), as well as social taxes PIS and Cofins breaks, the industrial hub, which represents 2.4% of the country’s industrial GDP, has been reporting a drop in the number of jobs in the last decades.

In 2012, for example, the benefited companies employed 120,000 people, according to the statistics agency IBGE, which represented 6.5% of the formal activity in the region. By the end of 2021, the number fell to 103,000, taking the index down to 4.59%. Since 2020, more than 80 companies departed from the region.

Business leaders of the region fear that a possible tax overhaul in the coming years that fails to preserve the free trade zone will result in the withdrawal of more companies. According to the Superintendence of the Manaus Free Trade Zone (Suframa), an agency linked to the Special Secretariat for Productivity and Competitiveness (Sepec) of the Ministry of Economy, more than 50% of the entire population of Manaus, or 2.25 million people, depends on the Free Trade Zone.

“The per capita income would be half of what it is today if there was no program,” said Márcio Holland, a professor at Fundação Getulio Vargas (FGV), coordinator of research on the region’s impacts, effectiveness, and opportunities.

According to Mr. Holland, a former Secretary of Economic Policy at the Ministry of Finance (2011-2014), the biggest challenge of the Manaus Free Trade Zone is how to sustain the attraction of investments to the region with less dependence on tax breaks.

“As an unfolding of this challenge, Brazil needs to promote a broad and deep tax overhaul that includes the adoption of VAT [value-added tax] in consumption taxation. A good VAT, however, because it is calculated at the destination, which overturns the structure of tax incentives that bring investments to the state of Amazonas,” he said. “How to conduct the necessary reform of the Brazilian tax system and preserve the existing investments in the region is a great challenge.”

Augusto Cesar Rocha — Foto: Fabiola Abess/Divulgação

On the other hand, academics say that it is possible to replace the high cost of the region. “The attempt to induce the industrialization of the Manaus region assumed that a few years of subsidy would be enough to create a new hub, with population growth and strong relations with the rest of the national economy and abroad. This did not happen,” said economist Marcos Mendes, an associate researcher at the business school Insper. “What we have is an enclave that depends on high subsidies to survive. The Free Trade Zone cannot be extinguished overnight, but a new model can replace it over the course of a decade.”

One who agrees is economic consultant Zeina Latif, a former Secretary of Economic Development in São Paulo. “It is important to discuss a transition of the program,” she said. “The ideal would be a discussion about how to help each region exploit its comparative advantages, which is not the case with the Free Trade Zone. Trying to develop artificially proves to be not very effective.”

This year, although the tax overhaul did not move forward, there was apprehension among companies in the region from the edition of decrees that reduced the IPI rates for products that were also manufactured in the Manaus Free Trade Zone. After an appeal to the Supreme Court, Justice Alexandre de Moraes suspended portions of the decrees, because the new rules could hinder the region.

“[The new rule] shows itself equally capable of impacting the regional development model that the Federal Constitution decided to maintain, whether in its economic aspect, by compromising the ‘unequalization’ of the region as a form of compensation for the higher costs arising from the challenges faced by the local industry,” Mr. Moraes wrote at the time.

Business leaders from the Free Trade Zone link the drop in jobs in recent years to legal tax insecurity in the region. “You can’t change the rule of the game after the game starts. We need to establish the rules and keep them. This is what afflicts the business activity in the Manaus Free Trade Zone,” said Luiz Augusto Rocha, head of the board of the Industrial Center of the State of Amazonas (CIEAM).

With the expectation that the Lula administration will proceed with a tax overhaul, the business leaders of the region are doing the math and negotiating with Congress a way to mitigate the impacts and preserve the activity in Amazonas. Today, the biggest concern is with the proposal to amend the constitution (PEC) 45, of the Chamber of Deputies, which is based on the assumption that there should be no tax breaks. “It would be the death of the Manaus Free Trade Zone,” said Mr. Rocha.

Senate PEC 110, on the other hand, has its own chapter for the Manaus Free Trade Zone. This text, according to the region’s businesspeople, is more favorable, but still needs improvements: the main fear in this proposal, for the region, is the regulation, by supplementary law, of the period for maintaining tax breaks in the region — currently guaranteed by the Constitution until 2073.

“A tax reform has to consider the region. There are 25 million inhabitants in the whole Amazon, and we need to think about it strategically,” said General Algacir Antonio Polsin, current head of Suframa, appointed to the position by President Jair Bolsonaro – and an advocate of the model. During his term in office, Suframa has sought to get closer to research institutes and universities in an attempt to boost the region. Today, there are three universities and 131 research institutes in the region.

Mr. Polsin evaluates that, besides the tax issues, there are two other main challenges for the future of the region: attracting investment and the maintenance of the labor force due to the advance of technology in the industry and the change in consumption standards. “We have to take advantage of what makes us stand out, which are the products of the land. We can’t depend on the sale of commodities,” he said.

As the Ministry of Economy may be split in Lula’s administration, it is expected that Suframa (in charge of inspecting companies in the region and stimulating development) will be linked again to the Ministry of Industry. This change could broaden the dialogue of the companies with the government, the general said.

Besides the tax issues, which are directly related to economic development and the maintenance of employment, there is still the logistical challenge because of the difficulty of local industry to transport products by other means, given the dependence on the river. In the view of Augusto Rocha, a professor at the Federal University of Amazonas (Ufam), the complexity of the issue involves building infrastructures that respect and protect the environment and the people of the region, “inducing economic activities that have the magnitude to justify such investments and, simultaneously, do not cause devastating effects.”

“The industrial hub of Manaus has a set of products. The best infrastructure will be the one suitable to the set of products produced there. It will not be railroads or trains, because these alternatives are suitable for mining or agriculture. It will not be waterways, for the same reason. Thus, for motorcycles — which will be distributed throughout the country — the most appropriate alternative would be the road,” said the professor.

The main demand from the infrastructure standpoint for the region is the completion of the BR 319 highway which, in the past, made possible the connection between Manaus and Porto Velho — today, this connection is entirely made by boat, which raises the cost for the industry. This is because today the so-called “middle stretch” of the road, about 400 kilometers long, is the most critical and is not paved, which prevents the transport of goods by land. According to government data, R$1.3 billion would be needed to complete the reconstruction of the highway.

Environmentalists, on the other hand, defend that, if the road is reactivated, it would favor and consequently facilitate the deforestation of the Amazon Forest. “The environmentalists’ argument is correct, and we need them to face the issue, so we can build a sustainable model for this highway,” the professor pointed out. “If we don’t, the forest will be destroyed to the guts.”

*By Guilherme Pimenta — Manaus

Source: Valor International

https://valorinternational.globo.com/