ICMS increases and cuts in subsidies catch sellers by surprise

04/10/2024

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Felipe Tavares — Foto: Divulgação

A combination of adverse legal measures affecting retail chains has begun to impact consumers’ wallets, leading to price pressures in the market.

Unexpected changes in tax regulations by the government and the Supreme Federal Court (STF) approved at the end of 2023, along with the sales tax ICMS increase in 11 states in January, have led companies to pass on part or all of these costs to customers—and this trend also extends into 2024.

The federal government and the states need funds to offset revenue losses from 2023 and reduce the deficit in public accounts, passing on part of this bill to companies—which transfer some of it to consumers to preserve their margins.

According to a survey by CNC, the National Confederation of Commerce and Tourism, consumers already perceive the current moment as unfavorable for the purchase of durable goods, such as TVs and refrigerators, due to higher prices and expensive credit. March showed the lowest confidence level in this sector since October.

Two central changes in this discussion, both complex in legal terms and approved at the last minute in 2023, were the new interpretation of the payment of Difal (differential ICMS tax rate) and a change in the rules for tax incentives granted by states for investments.

This becomes a headache, especially for retailers, who are more exposed to these measures. The Difal change, specifically, started impacting online retailers last year.

According to Felipe Tavares, chief economist at CNC, “the issue lies in the fact that the retail sector is directly impacted. If retailers bear the brunt of these changes, it ultimately affects the end consumer in equal measure,” particularly if businesses cannot absorb the increased tax costs.

“I often say that when a company’s taxes increase, it’s the customer who pays,” said Carla Hamada, coordinator of the tax committee of ABAAS, the association of self-service wholesalers.

As for the subsidies, the Ministry of Finance projects an extra R$35 billion to be added to the federal government’s revenue in 2024. As for Difal, the total bill for the retailers ranged from R$9.5 billion to R$10 billion in 2022, the year marked by a legal dispute over outstanding amounts. These dues have already been settled with the states.

The increase in the ICMS rate transfers another R$9.2 billion annually to the coffers of 11 states. The change in the rate is effective from January to April, depending on the region of the country.

Companies such as Magazine Luiza, Casas Bahia, Arezzo, Mateus, and Assaí told analysts in recent conference calls they have already felt or passed on to consumers the effects of one of these three changes in recent months (ICMS increase, Difal revision, or investment limitation).

The change in law also impacted retailers. The government offers a subsidy by reducing or exempting companies from paying taxes as a counterpart to investments, such as the opening or expansion of factories, distribution centers, or machinery purchases.

Until last year, companies deducted these incentives from income tax payments, improving net profit. But the new law sanctioned by President Lula on December 29 excludes benefits linked to operating expenses, focusing on incentives that effectively promote productive investments.

It is a way to reduce distortions, which ultimately boosts the federal government’s cash reserves but affects the results of the groups.

In a report in December, XP analysts projected the need for up to a 3% price increase for retailers covered by the bank, on average, to offset an 8% to 15% decrease in net profit due to the new law. This would happen when considering a 50% to 100% decrease in the tax benefit.

As for Difal, it is used to split the ICMS collection between the state where the company is located and the state where the product is consumed.

Example: A product is sold from a state with a 15% ICMS to another with 18%. The credit related to the three-percentage-points difference is divided between the states. This practice is more common in online retail operations.

The question in the courts was whether companies should bear the Difal from April 2022 or after 2023, as companies argued before the Federal Supreme Court. In late November, the Supreme Court, in a surprising turn of votes, decided it would apply after 2022, catching the sector off guard.

Marcelo Roncaglia, a partner specializing in tax law at the Pinheiro Neto Advogados law firm, said that before the Supreme ruling, smaller retailers, facing significant legal uncertainty, complied with and paid the tax. In contrast, larger retailers sought injunctions and deposited the amount in a court-held account. However, with the final decision, all retailers are now obligated to pay the tax for 2022.

“The sad part is that the poorer population ends up being penalized because consumption taxes have a greater share in the budget of these classes than among the richer ones,” he said.

Some large companies had not provisioned the sum, requiring a write-down after the Supreme Court decision. Retailers Renner and Magazine Luiza are in this group. Price increases gained momentum after the second half of 2023.

In a highly competitive retail environment, these price hikes end up losing steam. Brazil is a country of fragmented commerce and high competition, which helps accommodate price increases. However, constant crises (such as from 2015 to 2016 and after 2020) weaken businesses across the board and the groups’ abilities to absorb increases. And this is the case at the moment.

“These changes without any foresight create tax confusion in a chaos already established by the legal madness that companies face in the country. This only generates uncertainty and higher costs,” said Mr. Tavares of CNC.

At Magazine Luiza, with the increase in taxes, especially with Difal, an additional R$3 billion was added to the company’s costs in 2023. About R$1.2 billion of that was Difal. “If we divide it by quarter, it’s R$300 million that we hadn’t collected in 2022, which we started collecting in 2023. So, there was a very significant increase in prices to defend our profitability,” CEO Frederico Trajano told analysts in March.

It took three quarters to pass everything on, with a total pass-on sum of about R$1 billion in 2023. There was no effect on the chain from the subsidies.

At retailer Casas Bahia, the company accounted for the effect of Difal for 2022 in the results and passed on the full amount to prices.

According to Mr. Tavares of CNC, it may not be possible to identify this pressure in inflation indicators now. This is because these effects spread within durable and semi-durable categories, with a smaller weight in the index.

In the chains, there has been an increase in home appliance prices in five of the last six months, considering Brazil’s official inflation index IPCA, and in four of the last six months in clothing categories. Both segments were affected by Difal.

Subsidies, on the other hand, impact the wholesale food sector, which has made robust investments in the last three years.

In January, Genial Investimentos mentioned in a report the effects on Assaí, a cash-and-carry chain. It stated that investment subsidies had reduced tax and social contribution payments by R$248 million in 2022, a benefit that will no longer be in place.

For financial publishing company Empiricus, the end of this effect can be offset by price increases in 2024, albeit less than those of its competitors.

In the fashion sector, Arezzo&Co’s chief financial officer, Rafael Sachete, said at an event last week that chains in general felt the new Difal rule and the impact of the change in how subsidies are taxed at the same time.

In Arezzo’s case, with the changes in the rules, the group held back acquisitions and streamlined its structure to improve margins. In 2024, this approach continues, aiming “not to pass on too much to price increases.”

He said that there was a price increase to cover part of the Difal impact. The company plans to avoid major hikes in order to remain competitive—and gain efficiency in expenses by selling more.

“These gains from the expenditures, however, are not permanent. So, the gain has to come in two ways, through increased revenue or by starting to raise prices,” he said. “The focus for 2024 is still to increase revenue, but we may have a limit on that at some point.”

There are still other measures taken that have already reached the balance sheets this year, such as the increase in ICMS rates by the states.

According to consultancy LCA Consultores, IPCA is expected to be impacted by 0.10 points with the tax increase, rising from 4.1% to 4.2% for the year.

A study by Pernambuco’s trade federation Fecomércio indicates that food, beverages, clothing, and footwear will be the most affected by the increase—ICMS will rise between 17% and 22%, depending on the state. In pharmacies, prices increased automatically after January, according to ABRAFARMA, the entity that represents the stores, because stocks are lean.

Looking a little further ahead, other surprises may appear and make this bill more expensive for consumers.

There is an ongoing debate in the states to increase the ICMS rate on Brazilians’ international purchases, for shipments up to $50 made on foreign online marketplaces and apps. The tax could increase to 25% from 17% on the sale, according to initial discussions.

At present, it is the consumer who assumes the responsibility of paying the ICMS on products purchased from online marketplaces such as AliExpress, Amazon, and Shopee, directly through methods like card payments, instant-payment system PIX, or payment slips.

This 17% rate has been enforced since August by companies participating in the Remessa Conforme program (which establishes a set of rules for the advanced customs clearance of products in exchange for an exemption from import taxes for shipments up to $50), limited to international websites, after being previously exempt. Now, less than a year since its implementation, discussions about a potential increase are anticipated to take place in state assemblies this semester.

ICMS increases are a way for states to try to replenish their budgets, which have been affected since the pandemic.

Casas Bahia, Magazine Luiza, and Arezzo/Soma did not comment beyond what is already public. Assaí said it maintains strict expense control, citing the balance from October to December, and constantly seeks opportunities for efficiency improvements. It added that the ICMS increase is passed on directly to the consumer because the industry already includes the tax change in sales to retailers.

*Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/