[26 Nov] Tax Break Spells Greater Car Sales for Brazil Next Year

A surprise announcement Tuesday night to extend a tax break for Brazilian auto makers likely means greater-than-expected car sales in the first quarter of 2010.

"We still have to digest this news, and I doubt that it will lead to any sales increases this year, but for sure we will be increasing our sales projections for the first quarter of 2010," said Gustavo Schmidt, sales manager at Volkswagen do Brasil.

Brazilian car sales have been on the rise all year thanks to a combination of lower interest rates, new car models from Volkswagen and lower taxes.

But the government said in September that it would gradually restore a 7% industrial-production tax on motor vehicles by early 2010, adding 1.5 percentage points each month until fully restored in January.

However, Finance Minister Guido Mantega announced after market hours on Tuesday that the government would keep the industrial-production tax down to only 3% for flex-fuel vehicles, running on 1.0 liter engines, through March 31. The ostensible reason for the continued tax break is the environmentally friendly nature of the flex-fuel vehicles, which can run on either gasoline or ethanol.

The decision covers literally about half of Brazil's car fleet, as the majority of new car sales are small-engine flex-fuel vehicles. Larger engine flex-fuel cars will not benefit, but models like Volkswagen's Gol, Fiat's Palio and Uno and the Chevrolet Celta surely will. These are consistently the top four models sold in Brazil, according to Fenabrave, the Brazilian auto dealers trade association.

"Sure this measure is environmentally friendly, but clearly the government got a little nervous with early November car-sales figures," said Alexandre Andrade, a sector consultant at the Tendencias consulting group in Sao Paulo.

Fenabrave said on Nov. 18 that passenger-vehicle sales declined a whopping 21% to 123,083 units in the first half of November when compared to the first half of October.

With the new measures for 1.0-liter flex-fuel cars, total sales estimates will likely be revised upward for the sector, said Andrade, who forecast 2010 sales at 3.5 million, up from an estimated 3.05 million this year.

"We could even go a little higher than 3.5 million," he said.

"The Brazilian government is finally realizing it makes sense to cut taxes in many cases," Andrade said.

(Source: http://irco.biz)