The Turnaround in Auto Parts Imports from Paraguay

The automotive sector has been significantly impacted in recent years by a shift in interpretation by Brazil’s Federal Revenue Service (RFB) following the publication of Decree No. 10,493 on September 23, 2020. According to the RFB, it was only after the issuance of this regulation that the tax exemption incentive on automotive imports from Paraguay was considered valid.

As a result, the RFB disregarded the longstanding tax benefits applied by importers—specifically the exemption from Import Tax (II) and Tax on Industrialized Products (IPI)—and began demanding payment of these taxes retroactively for the five years before the decree. This resulted in significant assessments against the automotive industry.

The dispute stemmed from the RFB’s dismissal of Economic Complementation Agreement No. 18 (ACE 18), which had been applied since 1992 by importers to justify zero rates of II and IPI on auto parts traded between Brazil and Paraguay.

Under ACE 18, Mercosur countries established a Trade Liberalization Program, eliminating import tariffs among member states. At the time ACE 18 was enacted, specific agreements already existed regulating sectoral benefits—such as ACE 2 and ACE 14—for the automotive trade between Brazil and Uruguay and Brazil and Argentina, respectively.

Although ACE 18 came later, it explicitly preserved previously established sectoral agreements, which remained valid under their original terms.

Significantly, ACE 18 did not restrict tax exemptions for automotive imports from Paraguay. For nearly three decades, companies in the sector regularly imported auto parts from Paraguay under this understanding, with customs clearance carried out normally.

However, in 2019, the RFB disrupted this scenario. Despite ACE 18 lacking any express limitation on automotive imports from Paraguay, the RFB issued Siscomex Import Notice No. 30 (June 28, 2019), stating that ACE 18 did not apply to the automotive and sugar sectors.

The RFB argued that unlike ACE 14 and ACE 2, no specific agreement existed for the automotive sector between Brazil and Paraguay. Therefore, automotive imports from Paraguay were to be taxed under the regular II and IPI regimes.

Later that year, the RFB issued Siscomex Import Notice No. 34 (September 28, 2019), announcing that the applicability of ACE 18 was under review and temporarily suspended the guidance from Notice 30/2019.

Almost a year later, Decree No. 10.493/2020 was published, formally removing customs barriers for automotive imports from Paraguay. The RFB then maintained that the tax exemption would apply only from that date onward.

Consequently, the RFB began challenging imports carried out under ACE 18 before the decree, retroactively charging II and IPI on transactions dating back five years.
This change in interpretation—nearly 30 years after ACE 18 had been incorporated into Brazilian law—shocked the automotive industry.

According to the Ministries of Economy and Foreign Affairs, when the decree was issued, “the trade in automotive products between Brazil and Paraguay had been growing steadily over the past decade, especially due to Brazilian auto exports and Brazilian imports of auto parts (notably wiring harnesses).” In 2019 alone, such imports totaled USD 235 million.

The retroactive application of II and IPI on imports of this scale created substantial legal uncertainty for the sector. The RFB’s reversal violated core principles such as legal certainty and legitimate expectations.

The government noted that “the bilateral automotive agreement with Paraguay marked a key step toward consolidating Mercosur’s automotive policy” and warned that imposing full tariffs retroactively could represent a setback for the sector.

The RFB’s longstanding acceptance of ACE 18 as a basis for tariff exemptions constituted a consistent administrative practice and, by legal doctrine, became a de facto complementary norm. As such, retroactive changes to this practice violated importers’ acquired rights.

Out of 17 companies that challenged the tax assessments in administrative court, only one succeeded at the first level of review. In nearly all cases, the RFB’s interpretation prevailed.
This began to change in late 2023, when the government acknowledged the severity of the crisis and issued Provisional Measure No. 1,201 on December 21, 2023, granting full remission of II and IPI tax debts related to past imports.

The provisional measure had an initial 60-day validity, extended once by Congress. Although welcomed, it expired on May 30, 2024, reigniting uncertainty in the sector as pending tax claims were reinstated.

The matter was only resolved on July 24, 2024, when the RFB’s General Coordination of Tax Credit Administration (CORAT) issued Declaratory Executive Act CORAT No. 11/2024, granting complete remission of II and IPI to the 17 companies involved in the dispute. The RFB is estimated to have waived around BRL 503 million in claims (valued as of 2022).

Amid the turbulent and uncertain legal environment, this outcome—achieved through ADE CORAT 11/2024—represents a decisive victory for the automotive industry, restoring legal certainty regarding imports of auto parts from Paraguay under ACE 18.

Source: JOTA

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