What Changed with Brazil's Export Processing Zones Reform
July 2021, Brazil passed Law 14.184/2021 which reformed its EPZ regime. How has the reform impacted the country's zones?
Overview of the previous regime
On the 15th of July of 2021, Brazil passed Law 14.184/2021 which reformed its regime of Zonas de Processamento e Exportação (ZPEs), Portuguese for Export Processing Zones (EPZ). Today, on the 27th of September of 2021, the Brazilian National Congress took down the presidential vetoes to the reform, giving the law its final shape.
Brazil's Export Processing Zones were established in the 90s, but until the present reform saw little use due to unfriendly regulation. However, the new reform has already started creating traction for the development of more zones in the country.
Since the beginning of the EPZ regime in the 90s, 25 projects have been authorized, but only one has become operative. That is the Pecém EPZ in the state of Ceará, home to Companhia Siderúrgica do Pecém, one of Brazil’s largest steel mills.
Of the other 24 projects, 7 are inactive while the remaining 13 projects are in different stages of development. The active projects are:
· Acre EPZ, in Acre.
· Açú EPZ, in Rio de Janeiro.
· Araguaína EPZ, in Tocantins.
· Bataguassú EPZ, in Mato Grosso do Sul.
· Boa Vista EPZ, in Roraima.
· Cáceres EPZ, in Mato Grosso.
· Ilhéus EPZ, in Bahia.
· Imbituba EPZ, in Santa Catarina.
· Macaíba EPZ, in Rio Grande do Norte.
· Parnaíba EPZ, in Piauí.
· Suape EPZ, in Pernambuco.
· Teófilo Otoni EPZ and Uberaba EPZ, in Minas Gerais.
The EPZs allowed for businesses to operate without paying import taxes and duties - as long as products were exported - and provided a few other regulatory simplifications. 80% of all production in the EPZs had to be destined for foreign markets, with the remaining 20% free to be sold either to foreign markets or to the national market with added taxes and penalties.
What Changed with The 2021 EPZ reform
Due to the COVID-19 crisis, legislation was made to allow for up to 100% of the oxygen production from the steel mill to be sold to the Brazilian market. The parliament used the opportunity to discuss a reform of the EPZ regime, which was approved in July. The legislation is composed of two main articles, each changing several articles of two laws that govern the EPZs, their taxation, and administration. Lastly, a series of minor laws, decrees, and regulations concerning EPZs have been revoked.
In short, the main changes introduced with the current reform are:
- EPZs are considered “Zonas de Livre Comércio” Free Trade Zones for manufacturing and services that work exclusively with exports. Previously, the services sector was not included.
- Private EPZs can be developed in the form of business and industrial parks. Housing is not allowed in the zones, but hotel activity is permitted implicitly as supporting services are allowed(Art 1).
- Research and development activities inside the zone are allowed (Art 1).
- EPZs no longer have export requirements, being able to export or sell domestically any percentage of their production. Domestic sales still incur the added taxes and penalties.
- Companies in the EPZs will have the regulatory freedom to adopt the rules and regulation of the countries to which they export their products and services. A future decree will state the rules to make such a requisition.
- Dispute resolution and arbitration services are implicitly allowed, since Brazil has arbitration laws and such a service would classify as a supporting service (Art 1).
- Raw materials, machinery, and technology can be imported exempt of the following taxes: import tax, industrialized product tax, PIS/Pasep, and merchant navy additional duties. This includes services and products bought from companies in Brazil (Art 1).
- Imports and exports are exempt from licensing and authorization from Brazilian regulating bodies, except for those related to environmental, sanitation, and national security.
- EPZs can be created by federal, state, or local government, or requested by private parties. A future decree will state the rules to make such a requisition (Art 1). Previously, EPZs could only be established by the federal government.
- Private zones may have privately owned managing boards without state participation if the private company owns the zone. (Art 1 and 2).
- Zones no longer need to be continuous, but cannot have regions separated by more than 30 km (Art 1 and 2).
- Administrative offices or other parts of the company not related to production or the provision of the services that the company offers may be located outside the special zones (Art 1 and 2).
- Services companies that relocate to or become EPZs must invest on or develop their companies' substance in some way to do so, as a simple relocation is prohibited (Art 2).
- Companies that provide services in EPZs must not have income from Brazilian companies outside their EPZ (Art 2).
- The duration of the regime may be extended for additional periods of up to 20 years.
Future perspectives for EPZs in Brazil
In practice, the reform allows companies to create privately owned and managed businesses or industrial parks that work with technology development and research, manufacturing, or services, and to bring in any supporting service, with the exception of permanent housing.
Although there is a reduction of taxes, the biggest game changer is regulatory freedom, as companies will no longer have to go through the process of clearing Brazil’s complicated regulatory environment. And since they can follow other regulatory codes, this allows for very competitive production on the global stage.
The main limiting factors are the existing infrastructure in Brazil and the geographical positioning of the existing zones, which may or may not be conducive to efficient world trade. Clearing these limiting factors would require large investment in creating infrastructure, including ports and electricity generation. However, the new zone designation criteria make the process of establishing zones in more favorable sites substantially easier.
The main risk associated with such investments is political. Brazil has an unstable political environment, and although unlikely, left-wing or nationalist governments may come to power and attempt to nationalize such zones, or simply revoke the EPZ law.
Although the reform has only been recently approved, there has already been considerable interest in setting up new zones and getting current ones to become operative. The state of Santa Catarina is working towards activating the Imbituba EPZ, created in 1994 that so far has remained inactive. Besides the operationalization, Governor Carlos Moisés announced the creation of two more EPZs, in the cities of Lages and in Dionísio Cerqueira, forming development poles in two important regions of the state.
The mayor of Uberaba, Elisa Araújo, also met with the state government of Minas Gerais to discuss investment attraction and the activation of the Export Processing Zone . The mayor of Ilhéus, Mário Alexandre, is also resuming activities after the new reform and plans to make the Ilhéus EPZ an "Eco ZPE" or eco free zone. Further, the secretary of planning from the state of Roraima stated their intention of moving forward with the EPZ project in Boa Vista as well.
How many more Brazilian EPZs will become operative in the coming years remains to be seen. In any case, with the new reform Brazil finally has an EPZ regime that is on par with those of other Latin American countries. This will allow them to more effectively compete for foreign direct investment in the region.