Tax hikes in the Brazilian mining industry – are more on the way?

Threats of tax increases in Brazil's mining sector now seem to be starting to materialize, as state governments try to boost their flagging public revenues.

The latest episode took place in Mato Grosso state, where state legislators approved the TFRM tax on exploration and exploitation of mineral resources on December 20, while other states could well make similar moves.

This situation, along with the growing cost pressures already faced by companies due to high inflation and interest rates, could make some projects financially unfeasible, sector stakeholders claim.

Paulo Honório de Castro Júnior, head of tax issues at law firm William Freire Advogados and president of Minas Gerais state tax law institute (IMDT), talks with BNamericas about levies in the Brazilian mining industry.

BNamericas: In your view, is it possible for companies to go to the courts to challenge this TRFM tax approved by Mato Grosso's lower chamber of congress?

Castro Júnior: In August this year, the federal supreme court ruled in favor of three states in Brazil – Minas Gerais, Pará and Amapá – on whether it was legal to charge the TRFM.

However, at the time, the supreme court also made it clear that the revenues collected from the TFRM should be used only to pay for measures by state governments linked to inspections in the [mining] sector.

Since some states seem to be putting the TRFM at a very high rate and there are signs that these funds will be used for things other than inspections in the sector, there is room for challenges in the courts.

BNamericas: Should these challenges come from companies themselves or sector associations?

Castro Júnior: The tendency is for both individual companies and industry associations, as is the case with [Brazilian mining association] Ibram, to take legal action against such taxes.

The problem is that for the states, even if they suffer a defeat in court in the future, it is worth imposing these taxes right now, because the court won't ask for reimbursement of what was collected until the final judgment.

That is, if a legal dispute takes 10 years, the state will have collected the tax for all that time.

BNamericas: Could this decision by the Mato Grosso state be followed by other states?

Castro Júnior: What we have seen at the moment is really other states preparing similar laws. Goias state has also been trying to do this, but hasn't yet enacted a law.

But in addition to the states, there's also room to press for the creation of taxes on mining in municipalities where there is mining activity. I see a complicated scenario being created.

BNamericas: Since 2020, after the emergence of the COVID-19 pandemic, we've seen threats from local governments to increase mining taxes across Brazil. Why do these threats seem to be materializing now?

Castro Júnior: Earlier this year, the federal government promoted a reduction of the ICMS tax charged by states on fuel sales. This led to a significant loss of revenue for the states and now the state governments are looking for ways to offset the drop in funds.

BNamericas: In view of the increase in taxes, do you see any risks in relation to investments in mining projects?

Castro Júnior: Without a doubt, there's a risk of making projects unfeasible. In addition to the issues we're talking about regarding tax increases, we've seen a federal government elected that has sent out some not-very-positive signals to the financial market, related to increased public spending.

There will likely be a brake on some investment decisions in the sector.