The government is shutting down the economy. And it's starting with luxury cars.

247 with Agência Estado – The Ministry of Finance announced on Thursday night a 30 percentage point increase in the Tax on Industrialized Products (IPI) for vehicles with less than 65% national content. According to the government, the IPI reduction is not aimed at lowering car prices for consumers or combating inflation, but rather at stimulating the production chain linked to the automotive industry. The announcement was made by the Ministers of Finance, Guido Mantega, Science and Technology, Aloizio Mercadante, and Development, Fernando Pimentel.

The measure is expected to affect 12 to 15 companies, with half of imports having their tax increased. The IPI (Tax on Industrialized Products) increase is effective from this Friday and will last until December 2012. It should increase the production cost of imported vehicles by between 25% and 28%, depending on the engine size of the model. The tax on light vehicles up to 1000 cc, for example, which was previously 7%, will increase to 37%. For vehicles with 1000 to 2000 cc, whose IPI was 11% and 13%, the tax will rise to 41% and 43%, respectively.

“The goal is to defend innovation, technology, and jobs in the country,” Mercadante summarized. “It’s an indispensable defensive measure to preserve one of the most important chains in Brazilian industry,” he added. To avoid the increase, automakers will have to prove technological investment in the development of new technologies in Brazil. Companies that meet 6 out of 11 requirements – including vehicle assembly, painting, and manufacturing of engines, transmissions, clutches, and gearboxes in Brazil – will not be affected by the tax increase.

In a protectionist speech, the Minister of Science and Technology, Aloisio Mercadante, stated that raising the IPI (Tax on Industrialized Products) for vehicles is a measure to defend Brazilian jobs and that the government will not stand idly by while the national manufacturing production base is compromised. He emphasized that with this measure, the government is increasing the cost of cars produced in other countries while preserving jobs in Brazil. The minister affirmed that it is a consumer right to buy an imported car, but this cannot be done at the cost of worker layoffs and increased unemployment.

Mercadante stated that the increase in the IPI (Tax on Industrialized Products) is also an important signal for the global automotive market. Those who want to take advantage of the Brazilian consumer market's potential will have to come to Brazil with advanced technology. "Especially since there aren't many options abroad," Mercadante emphasized. He said the measure is creative in the current adverse international scenario. The minister informed that the action already includes a "small commitment" from companies in research and development. "We will deepen this. It's not the end of the road. But it's a decisive step towards a new trajectory," he stated.

According to Mantega, the 15-month validity period ensures that companies already established here will expand their investments in the country. "The objective of the IPI (Tax on Industrialized Products) in this case is not revenue collection," emphasized the Finance Minister, who promised to monitor prices in the sector "to guarantee that national products do not increase in price." "The measure encourages companies to manufacture their vehicles in Brazil, and not just sell them here," summarized Pimentel.

The risk of this measure is that automakers will not accept the costs of reinvesting in Brazil, taking the country back to a time when Brazilian drivers had no option but to endure the limitations of domestically produced cars.