The Manaus Free Trade Zone (MFTZ) was formally established in 1967, an expansion after seven years of Brazil operating a free trade port from the Amazonas capital city Manaus. The 'free import and export trade area where special fiscal incentives apply' was set up to create an industrial, commercial and agricultural center in the Amazon region and since its formation has drawn major multinationals like Coca-Cola, PepsiCo, Panasonic and Honda to set up operations there.
Companies operating in MFTZ benefit from total exemption on Tax on Industrial Products (IPIs), among other fiscal incentives, able to accumulate IPIs as tax compensation credits at a rate of 20% of the total sale value of products made in the region. These IPIs can then be used to pay other taxes.
But on May 30, 2018, as part of provisional measures to resolve fiscal losses from a national 10-day trucker strike that crippled the country, the Brazilian government by presidential decree reduced the tax compensation credit rate from 20% to 4%.
'It has to be reversed, in my opinion'
Alexandre Jobim, president of Brazil's Association for Soft Drinks and Non-Alcoholic Beverages (ABIR), said the move had significant consequences for Brazil's beverage industry because MFTZ was a significant manufacturing region for the sector.
“There are 31 companies who produce 90% of the syrup concentrates for all bottlers in Brazil operating in the Manaus Free Trade Zone,” Jobim told FoodNavigator-LATAM.
Not only do producers in the region have fiscal incentives, so too do the bottlers buying the syrups, he said, so the change effects Brazil's entire beverage chain.
“It has to be reversed, in my opinion. If it's not reversed, there will probably be job losses and a big impact.”
Without fiscal incentives, Jobim said it made no sense to manufacture in MFTZ because a lack of road systems meant everything had to be flown in and out, which led to very high logistical costs. Companies, he said, would likely start pulling operations out of the region.
“Many of them have built their companies thinking about compensation. If they don't have that, there's no business for them.”
There were plenty of other site propositions which could tempt firms to relocate, he said, some outside of Brazil entirely which would be problematic for local, regional Brazil brands who purchased supply from numerous small syrup producers in MFTZ.
In talks with government...
ABIR was currently in discussions with the government, and had already met with the president and minister of finance, among others, he said, in a bid to make them realize the severity of this adjustment and the negative, long-term impact it would have on the wider economy.
“We're trying to show the government the real impact this measure is causing, and will cause in the near future, to convince the government to think about it,” Jobim said. “I think the government really understood they have to do something.”
This fiscal change came without any warning or consultation with industry - “no red flag, no yellow flag, no asking to talk about it at all”, he said. Companies had worked for more than 30 years on these tax terms and overnight, with one presidential decree, everything changed, he said.
However, he said it could be a significant length of time before the measure was reversed or adjusted, if at all.
“All the companies involved are now to make their own decision. I can't speak for them or say how far they are with their decision (…) Industry broadly is waiting a little bit for a decision but we don't know how long that will take.
“... We are working hard to get this finalized because decisions after will be irreversible,” he said.
Should companies opt out of working in MFTZ, this would put around 17,000 jobs at risk, Jobim said, and cost the government even more in tax losses.
“The government are seeking to economize R$7.5m from this adjustment but this impact could be $1.7bn for the government because if sales go down, if you have job losses, of course you have a loss of collecting taxes. So, we are showing that data to the government. …We are trying to show the whole perspective and whole figure to the government.