Brazil courts give Guedes 10 days to explain election-year tax cut

By Marcela Ayres

BRASILIA (Reuters) -Investigators from Brazil’s electoral courts have given the Economy Ministry 10 days to explain a huge tax cut on industrial goods such as televisions and refrigerators over concerns about its legality and impact on the October election.

In a letter dated April 28 to Economy Minister Paulo Guedes and seen by Reuters, Deputy Electoral Attorney General Paulo Gustavo Branco gave the ministry the deadline to respond to concerns raised by federal lawmaker Marcelo Ramos.

A day after the letter was received, Brazilian President Jair Bolsonaro signed another decree cutting the industrial products (IPI) tax by 35%, effective May 1, deeper than the 25% cut previously in force.

Together, the Economy Ministry estimates the decrees, which do not require approval from Congress, will cost some 23.4 billion reais ($4.6 billion) in government revenue this year.

The Economy Ministry told Reuters that the letter on the electoral court investigation was received on Friday and is being analyzed.

Daniella Marques, the ministry’s secretary of productivity and competitiveness, said last week that the government recognized the risk of legal challenges to the tax cut, but was “sure of the legal prerogative it has to promote tax reductions for the entire Brazilian industrial sector.”

Guedes has argued that booming commodity prices have boosted government revenue and allowed the government to lower taxes, helping local industry and enabling producers to pass along lower costs to consumers.

An injunction request filed by the Republican Party of the Social Order (PROS) in the Supreme Court also questioned the tax cut’s constitutionality, arguing that it threatened the Manaus Free Trade Zone in the state of Amazonas.

Companies operating in the zone are exempt from paying IPI, and can generate credits equivalent to the industrial tax and make deductions from other tax obligations. The lower the IPI rate, the smaller their potential credits, which reduces their fiscal advantage.

($1 = 5.0848 reais)

(Reporting by Marcela AyresEditing by Brad Haynes and Nick Macfie)