December 7, 2017

Proposal Introduced in Brazilian Congress to Tax Grain Exports

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The Brazilian agricultural sector is once again fighting back against a proposal in the Brazilian Congress that could potentially increase taxes on grain exports. A proposal to revoke what is called the Kandir Law has been introduced in the Brazilian Congress. The Kandir Law was instituted in 1996 and it exempted raw commodities destined for export from the ICMS circulation tax in Brazil.

The ICMS circulation tax is a tax on products that are produced in one Brazilian state, but sold in another state. Each state can determine the amount of the tax, which is generally in the range of 10-13%. The tax is a major source of revenue for the states and the tax must be paid before products are allowed to cross state lines.

The intent of the Kandir Law was to promote agricultural production by keeping Brazilian agricultural products competitive in world markets. The law has worked extremely well. When it was instituted in 1996, Brazil had a US$ 12.2 billion balance of trade surplus for agricultural products. That has surged to a US$ 71.3 billion balance of trade surplus for agricultural products in 2016. A lot of factors have gone into the increased balance of trade, but certainly one of the factors was the Kandir Law.

All the agricultural organizations are united in their opposition to the elimination of this law. They contend that the current low commodity prices would be driven even lower if an export tax is instituted on grain exports. And it is not just grain that could be impacted, revoking the law could drive down domestic prices for sugar, coffee, iron ore, among other products. In order for these products to remain competitive in the world market, exporters would have to offer lower prices for producers.

Supporters of the measure to revoke the Kandir Law state that the entire country benefits from increased exports, but the states that actually produce the benefits are not receiving this important source of revenue.

An economists for the Agricultural and Livestock Confederation of Brazil (CNA) wanted to remind the Senators proposing this new tax on grain exports that neighboring Argentina tried the same thing and the results were disastrous. Farmer incomes dropped to the point where many were forced out of business. Many of the very large farming organizations in Argentina reduced their operations in the country and moved some of their operations to neighboring countries. The policies of the prior administration in Argentina basically forced farmers to grow a monocrop of soybeans. The new administration in Argentina reversed these measures and the prospects for the agricultural sector are now much brighter.