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Brazil Extends Tax Breaks on Car Purchases to Revive Growth

Brazil will extend until the end of the year tax cuts on car purchases that helped spur record sales and are being counted on by the government to revive the economy.

President Dilma Rousseff made the announcement today at the annual Sao Paulo auto show. The tax cuts, which were already renewed once previously, were scheduled to expire at the end of the month.

The tax break is one of several government measures targeting the automobile sector, a cornerstone of the economy, to shore up growth that has trailed other emerging markets this year. In addition to lowering the so-called IPI tax charged on vehicles in exchange for automakers’ commitments to improve fuel efficiency, Rousseff’s administration has lowered reserve requirements for banks to boost car loans.

“We don’t want any price increases at the end of the year,” Finance Minister Guido Mantega told reporters. “If we suspend the exemption, companies are probably going to increase prices in November and December. We want prices to remain low.”

This extension of the IPI tax cuts is “probably” the last one, Mantega said.

Car Sales

The measure has helped fuel a rebound in car sales and economic growth in the third quarter, though purchases fell 31 percent in September from a record 420,080 in August. Cuts in the IPI tax for other big-ticket items including appliances, furniture and refrigerators were extended in August through year-end.

As part of Rousseff’s bid to protect local manufacturers amid a global economic slump, the government has raised tariffs on carmakers that don’t have assembly lines in the country.

While the effort has been criticized by Brazil’s trading parters, including Japan, a slew of carmakers have since agreed to boost investments in the country. This week Bayerische Motoren Werke AG (BMW), the largest maker of luxury vehicles, announced a 200 million euro ($259 million) investment in a factory in Santa Catarina state.

Fiat SpA (F) Chief Executive Officer Sergio Marchionne said in September that Brazilian incentives encouraged the Turin, Italy-based carmaker to build a factory in the country. Chinese manufacturer Anhui Jianghuai Automobile Co. Ltd. (600418) said last month it plans to make 100,000 cars annually at a new Brazil facility.

Economists surveyed by the central bank last week forecast the world’s second-largest emerging market will grow 1.54 percent this year, less than Russia, India or China, Brazil’s peers in the so-called BRIC nations.

To contact the reporters on this story: Leonardo Lara in Sao Paulo at llara1@bloomberg.net; Arnaldo Galvao in Brasilia Newsroom at agalvao1@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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