Angelo Ambrizzi
Lawyer at Marcos Martins Advogados
Can you imagine a small industrial production area being able to generate wealth for the whole country? In Brazil, the Manaus Free Trade Zone can be seen as a great example of a physical environment with economic incentives, which, if replicated in other regions, could positively help the economic scenario in which we live.
Proof of this can be found in the data released by the Superintendence of the Manaus Free Trade Zone – Suframa, at the end of 2020. In the midst of all the economic instability caused by the pandemic, the center earned R$95.49 billion between January and October – an increase of 9.71% compared to the same period in 2019.
The economic success that free trade zones have achieved is due to their very simple but highly efficient system of operation: encouraging the installation of industrial centers in the region, in exchange for exemption from the country’s main consumption taxes – the IPI (Tax on Industrialized Products) and the ICMS (Tax on Operations relating to the Circulation of Goods and the Provision of Interstate and Intermunicipal Transport and Communication Services).
With so many proven benefits, the big question is: why aren’t there other free zones in Brazil? There are several answers, but I believe that the most coherent one lies in the logic of the tax system to collect and not encourage the generation of wealth.
The Brazilian tax strategy to increase revenue is to increase the tax burden, rather than encouraging economic growth so that the new wealth generated increases revenue, even with a lower tax burden than the current one. This kind of governmental attitude is only short-sighted.
The big problem with the tax equation used in Brazil is that it produces a negative, non-prosperous curve, i.e. the high cost of taxes does not boost growth, but rather flattens the economy, because the tax burden raises prices and makes it impossible for the population to consume or reduces it.
In 2019, for example, the country’s tax burden reached a record high of 35.17% of GDP, according to a study by economists José Roberto Afonso and Kleber Pacheco de Alves. The last peak was in 2008, at 34.64%.
We urgently need a comprehensive tax reform to change this negative strategy for the economy once and for all. The most viable path will be to reduce the tax burden and consequently lower the prices of products and services, which will increase consumption and generate a virtuous cycle of tax collection in the country.
The creation of new free zones across the country would be a great way to stimulate this change and the economic boost that every country needs. Another point of implementing a free trade zone is the regional development brought about by the demand for skilled labor, as well as the structure of roads, hotels, among others.
In addition, free zones also encourage foreign investment in the country due to the existence of legislation that encourages tax benefits for a certain period, generating legal certainty and predictability for potential investors.
The creation of new free zones can go a long way towards improving the country’s economic situation. For this to happen, however, there needs to be alignment between the Union, States and Municipalities, with the short-term premise of reducing the tax burden through tax incentives, but in the long term increasing the country’s wealth and consequently improving the amount collected.
For Brazil’s political culture, it may seem a bold proposal, but it is the most efficient tax order.
Source: Estado de Minas
