New Tax Breaks to Spur Major New Investment by Brazil’s Defense Industry
By Dialogo November 07, 2011
Brazil’s defense industry — the largest of any Latin American nation — could double in size over the next 10 years, thanks to a new fiscal policy proposed by President Dilma Rousseff.
That policy will soon provide tax breaks to Brazilian defense manufacturers, giving them lucrative incentives to make new investments and acquisitions. As a result, thousands of new defense-related jobs are likely to be created. This initiative responds to Brazil’s national defense strategy and dovetails with the country’s industrial, technological and economic development plans.
On Sep. 29, the president signed a provisional measure that exempts the defense sector from paying the industrialized products tax (IPI), the social security tax (Cofins) and the Social Integration Program tax (PIS) for five years. This could translate into savings of 30 percent for defense companies. It’s a relief for business executives who rank the tax burden along with poor infrastructure as the top impediments to growth.
“These measures are important to promote the defense sector, because the industry lacks adequate conditions for domestic enterprises to compete with foreign companies inside and outside Brazil,” explained Armando Lemos, technical director for the São Paulo-based Brazilian Association of Manufacturers of Materials for Defense and Security (ABIMDE).
The measure is expected to generate 23,000 direct and 90,000 indirect jobs. This would nearly double the defense sector’s current workforce of 25,000 direct and 100,000 indirect jobs, said Lemos. In all, 186 companies will benefit from the program, including industry leaders Avibras (aerospace), Embraer (aircraft), Helibras (helicopters) and Odebrecht Defesa (technology).
“While the measure is still pending formal implementation, it will define the registration criteria for strategic defense companies and detail the specific tax regime that will apply to them,” said Lemos.
The 2008 National Defense Strategy document, published during the presidency of Luiz Inácio Lula da Silva and devised by former Defense Minister Nelson Jobim, was a major milestone for Brazil’s defense establishment after years of neglect following the country’s return to democracy. One of its primary missions was to resuscitate the largely abandoned defense industry and turn it into an efficient, competitive business capable of contributing to Brazil’s international prestige and economic growth.
“Brazil’s defense requires the reorganization of the national defense industry,” the document explicitly states. A guideline set forth by the report to achieve this reorganization highlights the need for independent technological capacity through international partnerships — as well as the importance of subordinating commercial considerations to so-called strategic imperatives, such as a special legal, regulatory and taxation regime for the defense industry.
Since the document’s publication, technology transfer arrangements have been made between Embraer and overseas suppliers to produce the KC-390 military transport aircraft. Brazil´s cooperation with France to build four conventional submarines and one nuclear submarine also includes a similar technology transfer agreement.
A key pillar of Brazil’s new strategy is to bolster its defense industry, thereby ensuring that equipment needs are met by domestic companies capable of competing in external markets. That would guarantee economies of scale for production.
“Whether owing to the size of our territory or our borders, or to the fact that our country has been blessed with enormous wealth, we need this industry because it is strategic for our sovereignty,” Rousseff said following the announcement of tax breaks for the sector.
The defense industry is not alone in receiving preferential treatment.
Last August, Rousseff announced the Bigger Brazil Plan (Plano Brasil Maior) aimed at protecting domestic manufacturers from increased Asian competition and a rising currency. The pilot program supports the production of clothing, shoemaking, furniture and software by offering $16 billion in tax breaks to support innovation, investment, productivity, foreign trade, human capital, sustainable production, and small and medium size companies in these sectors.
In essence, the plan puts homegrown innovation and value-added production at the forefront and aims to make Brazilian companies more cost-competitive globally.
“We need to develop technology in Brazil in order to add even more value to our industrial production by reducing costs through tax reductions and by minimizing bureaucracy,” said Labor Party Sen. Acir Gurgacz, in arguments shortly before the plan’s passage in August.
Brazilian defense companies already receive some direct financial support from the federal government. For example, Optovac, which created a uranium valve for Brazil’s future nuclear submarine, counts on resources from the São Paulo State Research Foundation as well as FINEP, an agency of the Ministry of Science and Technology.
According to the 2008 National Defense Strategy, the largest industrial projects of Brazil’s armed forces will require investments of at least $40 billion. Addressing all military needs expands the total to about $120 billion, said ABIMDE’s president, Orlando José Ferreira Neto.
Brazil’s ambitious goals appear achievable. In 2010, the country was Latin America’s highest defense spender at $33.5 billion, and the only one in the region to rank among the world’s top 15 spenders, according to the Swedish research center SIPRI. The new fiscal incentives will help free up even more capital for investments in this sector.