Exclusive: Brazil to cut electricity taxes to boost economy

SAO PAULO (Reuters) - President Dilma Rousseff plans to cut and simplify taxes for electricity producers and distributors, two senior officials told Reuters, as part of a strategy to reduce Brazil's high business costs and stimulate its struggling economy.

Brazil has been on the brink of recession since mid-2011 as high taxes, an overvalued exchange rate and other structural problems squeeze what had previously been one of the world's most dynamic emerging economies.

Rousseff has in recent months announced targeted tax cuts for stagnant sectors such as the automotive industry, embracing an incremental approach to reform that has drawn criticism from investors who say more drastic changes are needed.

But the officials, who spoke on condition of anonymity, said the tax reductions for electricity companies would likely be the most far-reaching to date.

They said Rousseff will announce the plans in coming weeks. Brazil has the world's third-highest power costs so Rousseff is aiming to give relief to consumers as well as companies in energy-intensive areas such as steel and petrochemicals.

Internal government studies suggest that, depending on which taxes are cut, electricity costs could fall by between 3 and 10 percent starting as early as 2013, the officials said.

That would have a measurable impact on inflation, and thus aid Rousseff's quest to push Brazilian interest rates lower.

"We know that taxes in Brazil are crazy, and we're trying to do something about it," one senior official said. "(Electricity) seems like a case where we can make a big difference quickly."

Rousseff probably will not pass the tax cuts by decree, so she will have to negotiate them with Congress and other groups.

She plans to use her record-high popularity ratings to push through cuts to taxes at both the federal and state level, with a special focus on eliminating levies that overlap or are difficult to calculate, the officials said.

Brazil's tax code is so complex that an average company spends 2,600 hours a year calculating what it owes, according to the World Bank's annual Doing Business study, which compares business practices around the world. That is almost 14 times the time needed to do taxes in the United States, and by far the highest among the 183 countries in the bank's survey.

"The focus is as much on simplifying taxes as reducing them," a second official said.

Brazil's electricity industry includes state-run companies such as Eletrobras as well as multinationals like AES Corp. and GDF Suez . Hydroelectric power supplies about three-quarters of Brazil's electricity needs, with nuclear, thermal and wind power accounting for the rest.

If the initiative is successful, Rousseff will use a similar blueprint to reduce taxes for other industries in coming months, possibly including telecoms, the officials said.

Specific details such as the size of the tax cuts, which taxes will be targeted, and the timing of the announcement are still being finalized by Rousseff's team, the officials said. One said the plan would likely be unveiled in late June, before politicians nationwide turn their attention to municipal elections in October.

POWER COSTS A PROBLEM FOR INDUSTRIES

Electricity prices are a big component of the so-called "Brazil cost" - the mix of taxes, high interest rates, labor costs, infrastructure bottlenecks, and other issues that have caused the economy to become less competitive.

After a decade of strong performance, Brazil grew below the Latin American average in 2011 and so far this year.

Brazil's average electricity cost of $180 per megawatt hour is exceeded only by Italy and Slovakia, the Getulio Vargas Foundation, a private think-tank, said in a 2011 study based on data from the International Energy Agency.

High electricity rates have contributed to stagnant investment and production in energy-intensive industries. Despite Brazil's bauxite and alumina resources, no new aluminum factories have been built in Brazil since 1985 and two have closed, keeping production levels stagnant, the Getulio Vargas study said. It added that electricity accounts for 35 percent - "an insane proportion" - of the industry's production costs.

Pittsburgh-based aluminum producer Alcoa said in April it was considering big production cuts at two of its Brazil factories in part because of high electricity costs.

One of the officials who spoke to Reuters said the situation at Alcoa had added urgency to Rousseff's plan to cut taxes.

All told, taxes account for about half of the cost of electricity in Brazil, studies show. The taxes themselves are roughly evenly split between the federal and state level.

Cutting or simplifying taxes at the federal level will be relatively straightforward for Rousseff. However, she also believes she can push through tax cuts at the state level by using leverage from upcoming debt negotiations.

Several states are asking for lower interest rates on debt they owe the federal government. Rousseff will likely ask the states to simplify or cut their taxes on electricity in return, one of the sources said.

The left-leaning president will also ensure that any tax relief is fully passed along to consumers, the officials said.

Although the electricity sector is partly privately controlled, Rousseff believes she can use the pricing power of state-run companies to effectively push rates lower if needed, they said. An upcoming renegotiation of concessions in the industry could also be an opportunity to push for lower rates.

SHADOWS OF STRATEGY WITH BANKS

Rousseff's tactics are similar to those she used to cut interest rates in recent months - another pillar of her strategy to reduce the "Brazil cost."

Her government has frozen billions of dollars in spending, allowing the central bank to slash its benchmark interest rate by 3.5 percentage points since August. When some private-sector banks balked at lowering rates for consumers, Rousseff and senior officials publicly hectored them for having some of the world's largest spreads.

State-run banks then announced lower interest rates for customers, and the private banks soon yielded and followed suit.

Such tactics have caused friction between Rousseff and some members of the business community, especially banking executives, who privately accuse her of trying to bully the private sector.

Yet the officials said Rousseff is using the best tools available to her to restore Brazil's competitiveness. Congress blocked attempts at a comprehensive tax reform by her predecessor as president, and Rousseff, herself a former energy minister, believes the only politically viable alternative is to move one sector at a time, they said.

"I'm fully aware that Brazil needs to reduce its tax burden," Rousseff told reporters while on a visit to India in March. "What I have done is take little measures that, in their totality, create greater tax breaks, which is fundamental for the country to grow."

(Reporting by Brian Winter; Editing by Kieran Murray and Sofina Mirza-Reid)

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