President Jair Bolsonaro today announced a proposal that would levy a VAT-like tax known as ICMS at a fixed rate at the refinery gate, rather than a percentage rate at the pump. The announcement for a change to the state-level tax was made alongside his cabinet, including influential economy minister Paulo Guedes and mines and energy minister Bento Albuquerque, and state-controlled Petrobras chief executive Roberto Castello Branco.

Bolsonaro brushed off the possibility that the proposal would deprive cash-strapped states of tax revenue.

“Governors will not have to give up any revenue. It is their respective legislative assemblies that will set [the rate] of the fixed value of ICMS on each liter of fuel or a percentage of each liter of fuel. Just as there is no interference from us in Petrobras, there is no interference from us in what is needed by the governors,” Bolsonaro said.

The change would require the approval of the federal congress and would cover diesel as well as other motor fuels such as ethanol and gasoline.

The proposal has a good chance of securing congressional passage after two of Bolsonaro’s political allies were elected as presidents of each congressional chamber.

At Bolsonaro’s request, the government is already pursuing a reduction of the federal fuel tax PIS/Cofins. Guedes said studies on the reduction are ongoing.

A nationwide truck drivers’ strike that started on 1 February fizzled in part because of promises Bolsonaro made to the important voting bloc in recent weeks.

The federal government has a record of interfering in decision-making on wholesale fuel prices generally set by Petrobras based on market parameters. Castello Branco has repeatedly dismissed any interference.

The issue is particularly sensitive for Petrobras as it works to sell around half of its 2.2mn b/d of domestic refining capacity. For potential buyers, a market-based pricing system is critical to ensuring a return on capital investment.

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