Ambev Braces for Tax Headache as Brazil Beverage Makers BalkBy
Tax authority replacing automated system with self-reporting
Trade groups say smaller producers could fudge numbers
Brazilian beverage producers, including groups that represent Ambev SA, Heineken NV and Coca-Cola Co., are pushing back against a tax overhaul they say will open up the industry to fraud and put their trade secrets at risk.
The government’s plan is to ask companies to self-report the quantity of ingredients they receive and the volumes they produce. That would replace the current use of machines to track how much soda or beer is being made -- an expensive method that was meant to cut down on tax fraud but has ultimately been deemed overkill.
Changing the system will cut costs and make better use of revenue generated from state and federal taxes, which combined average about 44 percent for beer, the government says.
But the switch comes at a difficult time for Ambev, Brazil’s top-selling brewer, which is controlled by multinational giant AB InBev SA. To adopt the new system, companies will have to disrupt production at the end of this year, at the peak of summer in the southern hemisphere, according to the manufacturer of the current machines. And Ambev is still working to recover from a sales slowdown that hurt its first-half results.
The beer giants are also contending with an ever-growing crop of craft brewers, and they don’t want life to get any easier for the little guys. Trade associations for the beverage industry have said the new taxation method will make it simpler for smaller rivals to lowball their production numbers, letting them save on taxes and undercut the larger competitors on price.
In August, the Soda and Non-Alcoholic Drinks Producers Association, the Brazilian Association of Beverages, the Brazilian Beer Industry Association and the Brazilian Institute of Competition Ethics told Internal Revenue Secretary Jorge Rachid in a letter that they were worried about the replacement of the monitoring systems.
Ambev, Heineken and Coca-Cola declined to comment. Several calls and e-mails to Brazil’s Federal Tax Authority weren’t returned. The agency has given no indication that it will reverse or delay its decision.
Ambev’s shares fell 1.1 percent as of 11:35 a.m. in Sao Paulo on Thursday.
There’s evidence that Sicobe, as the current tax system is known, has helped prevent companies from cheating on their taxes. Tax collection increased by 20 percent after the system was introduced, according to a study by Getulio Vargas Foundation commissioned by the beverage associations. Sicobe works by using machines to measure the volume of beverage produced and mark the final products with bar codes for tracking, making it harder for companies to fudge the numbers.
“Before Sicobe, the beverage segment was known by its high rate of fiscal evasion,’’ said Alexandre Gleria, a partner specializing in tax law at ASBZ Advogados law firm in Sao Paulo. “This topic needs to be discussed on the fiscal aspect, but also on the competition aspect.’’ ASBZ has beverage and chemical producers among its clients. Gleria declined to name any, saying his comments don’t refer to a specific company.
But that extra tax revenue comes at a price. Sicobe is excessively detailed and extremely costly, said Kleber Cabral, president of the Tax Auditors Union. The system consumes almost 20 percent of the tax collected, compared with 0.5 percent to administer cigarette taxes, he said. “It doesn’t make much sense,’’ he said.
Questions about the current system emerged when the company that provides it, Sicpa Brasil, was targeted by a Federal Police corruption investigation last year. The probe indicated that the government hired Sicpa and renewed its contract without public bids, and that 100 million reais ($31 million) in bribes may have been involved, according to local media reports. Tax inspectors were arrested.
Sicpa Brasil President Raphael Mandarino Jr. declined to comment on the status of the investigations, saying the company is “fully cooperating with the authorities.’’ He said the company is open to discussing adjustments to Sicobe and the removal of the system would disrupt production and affect 900 jobs.
The beverage producers see other downsides to the new system, called Bloco K. For one thing, it requires companies to report to the government the ingredients they acquire for their products. The beverage trade groups warn that they would be essentially disclosing the formulas for their products -- a concern they share with some craft brewers.
“I don’t know anybody who is fully confident” about Bloco K, said Fabricio Bastos, a partner at Inconfidentes Cervejarias Conjuradas Ltda., a craft beer maker based in Nova Lima in the state of Minas Gerais. “The main question is whether the level of information detail can harm industrial secrecy.”
Even so, since the new system requires companies to report ingredients they’ve bought and end product they’ve sold, “the tax authority will actually be able to cross-reference data more effectively,” Bastos said.
Inconfidentes doesn’t use Sicobe because its production of 96,000 liters a year is below the minimum that makes the system mandatory. As a small producer, Inconfidentes pays a lower state tax rate than its larger competitors, and the company would be willing to adopt Bloco K to continue getting that discount. Bastos said he disagrees with the idea that Bloco K would increase tax evasion among smaller producers.
While expensive, Sicobe can still prove itself as a more efficient tool to increase tax revenue, or at least avoid tax evasion in the middle of Brazil’s largest recession, without putting at stake the company’s industrial secrets, Gleria said. “I don’t think they did a cost-benefit analysis,’’ he said. “It is an important consideration that foreign governments normally make.’’
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