Brazil: São Paulo plans to reduce ICMS Rate on Fuel

The governor of São Paulo, João Doria (PSDB), intends to announce the 25% reduction in jet fuel kerosene ICMS to 12%. The adjustment is to be made under the new program for air transport and tax reduction.


Background of the planned Tax Cut

Currently, the fuel consumption at the airports of São Paulo is the highest in the country. Of the 26 states, 18 charge between 3% and 12% of the ICMS for aviation fuel. Studies carried out by companies at the State Department of Finance indicate that the tax credit should be R $ 205 million per annum with a reduction in the ICMS.


Tax Reduction for Investments

As compensation, the companies would commit to a plan to create 490 weekly departures and 70 new domestic flights, said the Tourism Minister of the State of São Paulo, Vinicius Lummertz. The idea of ​​the state government is to further strengthen regional aviation, with more intensive use being made of currently idling airports such as Ribeirao Preto and Presidente Prudente.

The private-sector agreement with Doria, in return for lowering the ICMS tax rate, provides for an investment of 40 million reais by the airlines for advertising campaigns that promote São Paulo as a tourist destination. The advertising would focus on the new flights and the stopover.

This practice, which has already been adopted by foreign companies such as TAP on flights to Lisbon or Emirates for travel to Dubai, is to offer passengers one or more overnight stays at the connection point free of charge, before proceeding to their final destination. According to government and airline estimates, 2.5% of passengers use this option.


Measure against Tankering

With the reduction of the ICMS Doria should end another practice widespread in companies: tankering. On shorter routes, airlines leave their planes in other states. This is a strategy to avoid the 25% rate and to fill the tanks at airports with lower taxes. This usually happens on flights between São Paulo and Rio, Brasilia, Belo Horizonte or Curitiba.

However, this leads to inefficiency: aircrafts fly with a full tank to escape the supply in São Paulo, are heavier and ironically consume more fuel on the way. The kerosene consumption accounts for 40% of the operating costs of the airspace.


Economic Development

According to Lummertz, this measure will increase the availability of flights, which in turn will lead to a potential increase in tourism, which in turn will allow for an additional collection of ICMS. The Tourism Secretary says that the net balance projected between the ICMS exemption and the additional revenue collection is R$ 111 million a year. In his opinion, the reduction in rates can lead to an increase of 59,000 jobs per year and salaries of R$ 1.4 billion. The projection takes into account GDP growth of 2.53%, the average dollar to $ 3.75 and barrel oil to $ 51.17.

This type of agreement between the state government and airlines has already taken place in 18 states, the most successful examples being Pernambuco, Ceará and Brasília. There, the increase in the number of flights has led to more tourism and an improved local economy.


Foundation for low-cost Airlines

For the team of Minister Marcelo Álvaro Antônio, it is important, despite the measure of São Paulo, to “perpetuate” the lowering of the sentence and not to subject further increases in the future. In addition to releasing the free baggage allowance, the government estimates that this scheme paves the way for the distribution of low-cost airlines in the country.


Impact on the Stock Market

The airline shares were opened yesterday at B3 against the background of the expected reduction of the ICMS. Gol’s stock closed trading on the B3 with a score of 8.27% (traded at R $ 26.98) – the highest Ibovespa high. Azul’s share rose 2.26% to R $ 38.04. The Ibovespa closed the day at 0.74%.

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