Remarkable effect of local tax reduction on both economical development and tax increase is recently demostrated by the local government of Santa Catarina state in Brasil. It is well known, that Brazil suffers from a tremendous number and height of different taxes, putting pressure on international exporters in particular.
Besides a long number of national import taxes, the ICMS is under the control of each federal state.
To empower local activities of foreign companies, the ICMS taxes were reduced from 17% to 3% in Santa Catarina. In fact, a few Brazilian regional governements decrease the ICMS taxation level. The intention of the local authority is clear – reduced taxes will empower foreign activitites to increase their business within this region.
As a result of this adjustement, in 2010 the quantity of imports in Santa Catarina increased up to 140% (in Brasil only 50%). Four years ago, the state was on rank 9 in number of imports, nowadays it is on rank 5. Surprisingly the total tax income on ICMS increased about 50%.
As a further consequence a partly deindustrialization could be a severe effect. In the first seven months of 2011, import volume enlarged to about 28%. In the same time span the industrial production declined 2,4%.
A brief example: After all taxes, the market price of an electric shaver in Brazil is 177 R$, including 32 R$ ICMS tax. In Santa Catarina, the part of ICMS is only 20 R$ – a difference of 12 R$. This about 8% increase in product margin could help to develop new products and services or even help organisational restructuring – or could be used to adjust prices to gain advantages against competitors.
As one ot he most powerful in the emerging markets, Brasils economic growth gain a new dimension. According to the „Center for Economics and Business Research“, recent developments shoot Brasil to rank five in the list of the worlds most powerful economics and replaces Great Britain in actual times. If the actual growth speed keeps the pace, the next target – France – could be achieved in 2015 as the IWF stated recently. As the Brazilian Ministery of Finance. Sr. Montega believes, this could happen even earlier. Evidently this does not represent the same level of individual income and therefore consequently lower purchasing power and life standard. Brazil is going to need more 15 to 20 yrs to gain the same standards as in Europe, cf to Sr. Mantega.
In 2011, the Brazilian economy will reduce growth from 7.5% (in 2010) to expected 3.0%. New prognostics state an increased growth In 2012 up to 4 to 5%. >>> Read More
Brasil and Argentina represent more than 85% of the Mercosur free trade zone area.
The INDEC (Instituto Nacional de Estatística e Censo) announced recently, that the Argentinian GDP increased 9,2% in 2010. This is a major improvement after the financial crisis in 2009 (0,9%). The production of goods increased 10,6% in particular through activities in the agricultural sectors. The service sector even showed an spectacular growth of 76% in 2010.
This positive development is due to an interesting growth of industrial production (automotive & suppliers) to 9.7%. Since 2003 Argentina showed an remarkable yearly growth of about 9%, interrupted in 2008 (7,1%) and 2009.
To the contrary, Brazilian authorities try to control market overheating, as already noted in the last blog post. Economists from the ITAU revised now their GDP analysis from 4.0% to 3,6% for 2011 and a forecast to 3,8% for 2012, which underlines the success of this activities.
It is expected that the base lending rate (taxa selic) will be reduced from 75 to 50 base points. The economists expect further an global economic increase from 4,2% to 4,4% in 2011.
According to an announcement of the IBGE, the Brazilian statistical authority, on march 4th, the GDP increased 7,5% in 2010. This is the biggest economic growth in one year since 1985. Brasil could outperform Italy and take the seventh place in the ranking of the world biggest economies. The actual Italian figures are expected at the beginning of April.
This figures also lead to some preoccupation about inflationary tendencies and are seen as effects of economical overheating. With a massive control of the monetary policies, the Brazilian Central Bank achieved already results to reduce this thread, gaining smaller growth rates in the Q4/2010, and a continuing decrease in 2011. Actual figures expect an economic growth target of about 4% for Q1/2011. It is expected, that this will reduce inflation danger – measured recently up to 6,7% – substantially.
Import tax load is an important parameter for foreign companies to decide wether to enter a foreign market or not. Often used to protect the national economic sectors, is also has to be seen as an critical parameter in the competition between the BRIC states for new technologies and investors.
Recently China announced (article), that it intends to reduce the import tax level for several high tech products to open the markets for worldwide investors. Named reasons were
- a reduction of the critical export dependence
- a massiv support for the domestic demand (chinese households deliver only 35% of the GDP in 2009)
To the contrary, some weeks ago, the Brazilian secretary of trade announced, that it is intended to increase import taxes in Brazil for luxury goods to 35%.
How will the chinese regulatory changes affect the behaviour of the other BRIC states, namely Brazil?
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