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Brazil Tax Break: FDI Boost

Tax breaks and a robust domestic market will encourage FDI to the computer industry, though taxes will still be high.

Exclusive Analysis

In January 2012, Taiwan-based Apple partner Foxconn announced a $12 billion investment into five different plants over the next four to six years. The investment plan followed the government's introduction of tax breaks for producers of computer tablets and smart phones. Foxconn already operates in
Brazil, in a recently established $300 million plant in Jundiaí, Sao Paulo state, which started assembling iPhones in January 2012. The new plants are projected not only to assemble the final products but also produce their parts and components.

The tax breaks include lower tariffs on the imports of machinery and a decreased IPI tax (levied on manufacturing products) of 3 percent from 15 percent. The companies will also be exempted from the PIS and COFINS, a social security and federal contribution tax respectively. It is estimated that this measure will result in a 40 percent reduction in costs. The tax exemptions were a key factor in Foxconn's decision to invest in
Brazil: the company had announced in 2010 its intention to set up plants in Brazil, but until now heavy taxation had proved a sticking point.

However, even with the tax breaks, the Apple products manufactured in
Brazil will remain expensive for global markets. It appears that Foxconn's main goal is to supply Brazil's domestic demand and that of the other Mercosur countries - Argentina, Uruguay and Paraguay. This is a fast-growing sector, driven by the government's efforts to universalize Internet access to boost education. In early February 2012, the government announced that it will distribute 600,000 tablets to secondary school teachers.

Six other companies are also benefiting from tax incentives: Brazilian companies
MXT, AIOX and Positivo as well as multinationals Samsung, Motorola and Envision. However, none of these are committing a level equal to that of Foxconn. Foxconn will work in joint ventures with the Brazilian state development bank BNDES and the billionaire Eike Batista, which will invest $1.2 billion and $500 million respectively.

This measure is different from the industrial policies
Brazil has implemented in the ITC sector in the past, which relied on inefficient state-owned companies rather than foreign multinationals. The tax breaks are also different from the duty-free area that exists in Manaus, Amazonas state. By locating the factories in Sao Paulo, Foxconn can attract highly skilled labor to produce parts and components of tablets and iPhones, which is not the case of the assembling lines located in Manaus.

Carlos Caicedo is head of Latin America division at Exclusive Analysis, a UK-based global risk consultancy. 


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