Automakers to propose tax incentives tied to local production

Automakers have begun discussions with the government to adjust existing industry programs—or incorporate new measures—so that taxation reflects local content levels. Under the proposal, vehicles with a higher share of domestically produced components would face a lower tax burden, while those with fewer locally sourced parts would be taxed more heavily.

The initiative faces challenges related to Brazil’s fiscal situation, but the industry is searching for alternatives to counter growing competition from imported models. The debate has gained momentum as vehicles manufactured in China continue to increase their share of the Brazilian market.

Industry representatives are evaluating different approaches. One option would be to modify Mover, the federal government’s current automotive sector program. Another would be to take advantage of the upcoming implementation of the Selective Tax, scheduled to take effect on January 1, to revise tax rules.

Created under Brazil’s tax reform, the Selective Tax—often referred to as a “sin tax”—is designed to increase taxation on products deemed harmful to health or the environment. Vehicles are among the products targeted by the government. Industry executives, however, want commitments to emissions reductions to be accompanied by incentives for local manufacturing.

Meanwhile, on July 1, Brazil’s import tariff on hybrid and electric vehicles will rise to the maximum rate of 35%. Importers accelerated shipments ahead of the increase. Industry data indicate that imported vehicle inventories currently total about 300,000 units, compared with just over 70,000 units in stock for locally produced vehicles.

The need to reduce those elevated inventories is leading to price cuts that are putting pressure on domestic manufacturers, said Ciro Possobom, Volkswagen’s chief executive in Brazil. He also noted that vehicles imported under the CKD (completely knocked down) system—assembled from imported component kits—will continue to face a 14% import duty until January, a rate he considers too low and one that further increases pressure on local producers.

Possobom said the combination of high imported vehicle inventories and another six months of what he views as a low CKD tariff will make both the second half of this year and the first half of 2027 “difficult periods” for the industry.

Competition from Chinese automakers dominated discussions on Wednesday (June 10) during the second day of Anfavea Visions, an event organized by the National Association of Motor Vehicle Manufacturers (Anfavea). Other topics included alternative fuels, connectivity, and the impact of advances in artificial intelligence on the automotive sector.

Culture

Leading the Brazilian operations of a German company, Possobom said he now faces the challenge of reshaping cultural concepts within a multinational organization. Discipline and the search for perfection are traditional German strengths, he said, while Chinese companies excel in speed.

“As CEO, I need to combine German discipline with Chinese speed and Brazilian creativity,” he said.

According to the executive, Volkswagen do Brasil is preparing to enter the electrification era while ensuring it develops “the right product.” To accelerate that transition, the automaker could draw on expertise already developed abroad, whether in Europe or China, where the company operates 36 factories. One possibility would be adapting projects developed overseas for the Brazilian market.

Asked whether Volkswagen could eventually conclude that importing vehicles is cheaper than producing them locally, Possobom said the risk exists. At the same time, he added that, as someone who considers himself “a product of Brazil’s industrial sector,” he does not want to believe that outcome is likely, particularly for a company currently carrying out a R$16 billion investment cycle spanning 2024 to 2028.

“I believe in large sales volumes. And to achieve that, you need industry and local production. It is a hedge against exchange-rate volatility. Any disruption that affects the currency market can make imports collapse,” he said.

Source: Valor International

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