Return of fuel taxation in Brazil seen depending on inflation

Any change to Petrobras’ fuel pricing policy and the return of federal taxation on oil and gas derivatives will likely hinge on Brazil’s inflation in the coming months, Fabrício Gonçalvez, CEO of Box Asset Management, told BNamericas.

Inflation slowed from last year’s peak of 12.1% in April to 5.79% in December, but remains above the central bank’s target of 3.25%. 

With a dominant position in the country’s refining sector, the national oil company uses the import parity price policy (PPI), which considers exchange rate fluctuations, the international oil price and freight costs. 

However, the NOC has often lagged the prices of derivatives in relation to importers and private refiners with the argument that it wants to avoid passing on the impact of external market volatility to consumers. 

Petrobras’ next CEO, Jean Paul Prates – whose appointment by President Luiz Inácio Lula da Silva was confirmed Friday by energy minister Alexandre Silveira – recently said there will be no government fuel price intervention. 

But Prates has also said he is in favor of regional reference prices for fuels, which would be based on local refining costs plus a profit margin. 

“In the short term I think it’s unlikely that there will be a change to the current pricing policy. But this will depend on the market, inflation, among other conditions,” Gonçalvez said. 

On the first working day (Jan 2) of the new government, Lula signed a provisional measure extending a federal tax exemption for fuels. 

The measure exempts gasoline and ethanol, as well as aviation kerosene and vehicular natural gas, from the PIS/Pasep and Cofins taxes until February 28. In the case of diesel and liquefied petroleum gas, it will be in place until December 31.

Before Lula took office, his transition team was considering reversing the exemptions that were implemented last year in order to bolster the public finances. It is estimated that the reinstatement of fuel taxes would increase government revenues by up to 53bn reais (US$10.4bn) in 2023 alone.

Lula was warned by allies that higher fuel prices were likely to hurt his popularity at the very beginning of his term – and opted to continue the policy of former president Jair Bolsonaro. 

Gonçalvez expects the government to resume taxation on gasoline, ethanol and cooking gas in March. "But this will mainly depend on how inflation behaves in this period," he said.