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Effects of AFRMM on the Brazilian naval industry development
Aug, 07, 2024 Posted by Gabriel MalheirosWeek 202432
Like many other vital sectors, the shipbuilding industry depends on ongoing initiatives to ensure continuous development. These initiatives include new investments, technological advancements, and fleet modernization, which are crucial for sustaining employment in the sector. One such initiative is the AFRMM (Additional Freight for Renewal of the Merchant Navy), a CIDE (Contribution for Intervention in the Economic Domain).
Established by Law 9,432 of 1997 and regulated under Law 10,893 in 2004, AFRMM is an additional freight charge for cargo unloaded in Brazilian ports. This applies to imports, cabotage (maritime transport between Brazilian ports), and inland navigation via rivers. The tax collected funds the Merchant Marine Fund (FMM), managed by the Ministry of Ports and Airports through the Secretariat of Waterways and Navigation, which finances the construction and modernization of the Brazilian fleet in Brazilian shipyards.
Law 10.893 specifies that AFRMM generated from cabotage, long-haul, and inland navigation by Brazilian-registered vessels operated by Brazilian companies is directed back to these companies via a deposit in their linked account at Banco do Brasil. These funds, managed by BNDES (National Bank for Economic and Social Development), are specifically used for constructing or maintaining vessels in Brazilian shipyards.
The AFRMM rate varies by navigation type and product transported, ranging from 8% to 40%. For cabotage services, the rate is 8% on water freight. However, most customers do not pay AFRMM due to a provision that exempts cargo transported to and from ports in the North and Northeast regions. These unpaid amounts are reimbursed to the companies operating Brazilian-registered vessels, a process managed by the Federal Revenue Service since 2014.
The Federal Revenue Service has reported a consistent decrease in reimbursement amounts since 2019, with only half of the payments for 2023 being processed in 2024 and just 28% of the amounts reimbursed in 2022. This reduction has become a significant bottleneck for shipping companies, which rely on these funds for investments in the Brazilian naval sector, particularly for fleet construction and modernization. Legal and operational security in obtaining these resources is crucial for planning such investments.
The Federal Revenue Service cites numerous obstacles, including budget constraints, lack of trained personnel, and an inadequate system for validating processes. Since 2014, the absence of a proper system has meant that reimbursements have been processed manually on a case-by-case basis, leading to significant liabilities and pending reimbursement processes that have lasted almost a decade.
In January 2023, a new information validation system for AFRMM reimbursement was implemented, but it blocked 100% of reimbursements for all shipping companies due to excessive locks in the system, some lacking clear validation criteria. Consequently, many companies spent most of 2023 without reimbursements, with some payments only occurring in the last quarter. Some companies have yet to receive the amounts owed since January 2023.
In response to this worsening situation, which is jeopardizing the financial health of several companies, a debate was held in June 2024 in the Chamber of Deputies in Brasília. The event was promoted by ABANI (Brazilian Association for the Development of Inland Navigation) alongside the Parliamentary Front for Inland Navigation and the Naval Industry. It included participation from authorities, representatives of the Ministry of Ports and Airports, ANTAQ (National Waterway Transportation Agency), ABAC (Brazilian Association of Cabotage Shipowners), and the Federal Revenue Service.
At this event, the Federal Revenue Service revealed that outstanding AFRMM reimbursement amounts exceed R$800 million, with R$638 million for cabotage and R$214 million for inland navigation. The discussion included a proposal to transfer the management of AFRMM reimbursement to the Ministry of Ports and Airports, which is the responsibility of the Secretariat of Waterways and Navigation. This transfer aims to streamline and de-bureaucratize the AFRMM reimbursement process through structural, regulatory, and systemic reviews.
Benefits of AFRMM for the Brazilian Shipbuilding Industry
Given all the nuances surrounding the AFRMM, the main issue pertains to the competitiveness of the Brazilian maritime market. This tax allows shipowners to foster the development of the naval sector by implementing infrastructure improvements, whether for the construction of new vessels or maintenance and retrofits during docking periods.
When utilizing AFRMM funds for these services, shipping companies are required to hire shipyards in Brazilian territory, thereby discouraging the internationalization of such initiatives and fostering the national industry. Consequently, the naval sector benefits from increased project contracts and access to more resources for infrastructure improvements and technological development. This ensures quality construction and legal security in contracts, promoting job creation and technological innovation, which boosts the sector’s development.
Moreover, the AFRMM plays a crucial role in the development of cabotage. Its resources enable Brazilian companies to expand and modernize their fleet of ships within Brazilian shipyards, thereby enhancing their competitiveness relative to road transport. This shift contributes to a more balanced transportation grid and fosters the development of a more sustainable transportation mode, waterways, which can reduce CO2 emissions by up to 80%, depending on the route, compared to road transport.
Therefore, in addition to stimulating the Brazilian shipbuilding industry, the effects of the AFRMM extend to the entire Brazilian economy. Understanding its details and advocating for legal certainty in investments based on this tax enables companies in the sector to make strategic decisions that leverage its benefits, thereby strengthening the market.
By Eduardo Simeone, Legal, Compliance, and Government Relations Director at Log-In Logística Integrada. The opinions expressed here are his own.
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