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Brazil's Tax Code Offers Conservation Opportunities, Challenges

Karina Ninni

>This article was translated from the new Portuguese version of the Ecosystem Marketplace – The Ecosystem Marketplace gets an overview of Brazil's experiment funding conservation through tax revenue.

The Ecosystem Marketplace gets an overview of Brazil's experiment funding conservation through tax revenue. One way of modifying behavior to benefit environmental conservation is through taxation, and when it comes to taxes, Brazil has a demonstrated expertise. Among other forms of tributation, we have the ICMS-Ecológico (a value-added tax dedicated to environmental purposes), which has been perfected at the state level. The state of Paraná has even experimented with payments to landowners who commit to conservation measures on their properties. Paraná's statewide experiment with the ICMS-Ecológico calls for transfer of tax revenue to municipal governments that shelter Conservation Units (CUs) or important watersheds. In general, the money is transferred to the local city council, which is not obliged to earmark these funds for conservation. Paraná has also been developing a proposal to make payments directly to the owners of Private Preserves of Natural Heritage (RPPNs in the Portuguese abbreviation). "The ICMS-Ecológico operates as a proactive measure," explains Wilson Loureiro from the Environmental Institute of Paraná. "It's no longer necessary for us to wait for the guy to cut down the forest for us to go there and fine him," says Loureiro, who points out that the monies paid to landowners would have to be spent on conservation of the land. This process would be overseen by the Tribunal de Contas do Estado (a state-level agency that performs functions similar to those of the General Accounting Office). This transfer of public money to private citizens would be established by municipal law, a fact that requires the participation of everyone from state-level environmental organizations to mayors and city councilmen. In the view of Clóvis Ricardo Schrappe Borges, executive director of the Society for Wildlife Research and Environmental Education (SPVS, in the Portuguese abbreviation), the initiative is a small step in the right direction. Borges believes that such measures to reward private landowners may be the only immediate action that can be taken to protect the few remaining fragments of forest,"This is a desperate decision; either we resort to these measures to preserve what little is left, or they disappear altogether." From the moment of its creation in 1991, the ICMS- Ecológico has attempted to redress environmental damage. The measure has been adopted in nine other Brazilian states besides Paraná: São Paulo, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul, Minas Gerais, Tocantins, Amapá, Pernambuco, and Rondônia. The legal basis for the tax is found in Article 158 of the federal Constitution, which permits states to define the criteria for transfer payments of revenues from the Goods and Services Exchange Tax (ICMS, in the Portuguese abbreviation), a portion of which is earmarked for city governments. According to the Constitution, of the 25% of ICMS revenues that accrue to the city governments, three-quarters is transferred in the manner stipulated by the basis of the tax, with the remaining 25% subject to further criteria."In Paraná, we take 5% of this amount and transfer it to municipalities in watershed regions or with Conservation Units within their limits," explains Loureiro. The payments for landowners with private preserves are taken from the portion of revenues meant for the Conservation Units. Paraná now has 187 private preserves, the majority created within the last 15 years. According to Brazilian Institute of Geography and Statistics, there are 389 municipal governments in Brazil that receive funds from the ICMS-Ecológico. From the viewpoint of Georgia Pessoa, legal counsel for the World Wildlife Fund of Brazil (WWF), the advantage lies in the redistribution of ICMS tax revenues,"[Without the ICMS-Ecológico] municipalities that don't produce goods would receive nothing." The city of Piraquara in Paraná receives the largest amount of revenue from the state ICMS Ecológico, approximately R$800,000 per month, a sum equal to one-fourth of the city's total revenue. With watershed regions that include the headwaters of the Iguaçu River, Piraquara is responsible for 50% of the water used by the municipal area of Curitiba. Approximately 97% of the municipality's territory is made up of Conservation Units. The mayor of Piraquara, Gabriel Samaha, points out some shortcomings in the present arrangement, "The ICMS-Ecológico is a big help, but doesn't really compensate for the heavy environmental restrictions that we face. We have the second lowest tax revenue per capita in the state." Samaha explains that while the use of industrial pollutants is forbidden in the city, 70% of households suffer from a lack of basic sanitation."Of the 100,000 residents of Piraquara," he says,"a total of 40,000 live in irregular areas, that is, within the protected watershed." Samaha is pressing for a increase in the percentage of the ICMS-Ecológico passed on to municipalities, together with the payment of royalties for water. The mayor calculates, "If we were to receive R$0.08 per m3, the city's tax base would increase by R$6 billion annually." The idea of using taxes to protect the environment is not new, with countries like Australia, Belgium, Japan, and Norway using tax rebates to reimburse for costs of pollution control and prevention. In Portugal, company investments in the environment can be used as tax deductions, whereas in Canada, companies that exceed their pollution quotas are taxed more heavily. In this latter case, taxation may be regarded as a tool to change civic behavior, something tax specialists refer to as an "extra-fiscal" function. "Taxes are a language that everyone understands, just like incentives," states Rogério Tubino, a tax expert, stressing that environmental legislation in Brazil tends to be ad hoc. In the words of Tubino, "There are various initiatives based on specific objectives, but they lack synergy." Brazil is still in the process of structuring tax law and incentives in such a way as to help protect the environment. A recent step in this process was the approval of a modification to the income tax law known as IR-Ecológico (5974/05), which allows individuals and companies to deduct charitable donations to non-profit organizations dedicated to the protection of the environment and promotion of the sustainable use of natural resources. Organizations that would like to receive donations or sponsorship under the framework of the new law are required to register eligible projects with the Ministry of the Environment. If the project is approved, the organizations seek out sponsors to provide funds. Individuals may deduct up to 80% of the charitable donation, with company donations eligible for a 40% deduction, up to 6% and 4% of the total value of income tax due from individuals and companies, respectively. According to Pessoa, "The donation may be made directly to the NGOs or to public environmental funds." The Ministry of the Environment is charged with monitoring the execution of these projects. The bill's passage now depends on approval by the House Finance and Tax Committe and the Consitution, Justice, and Citizenship Committee before returning to the Senate. Tubino warns of the possible downside to this measure, "We are dealing with a diversion of funds from the public coffers. Offering tax deductions without a clear notion of the positive returns this might generate [for the environment] is risky." But Pessoa sees things differently, noting, "There was a broad study to calculate the impact on revenue." This viewpoint is echoed by environmental lawyer and non-profit specialist Érika Bechara who says, "The government gives up a sum of money, but the projects themselves will make up the difference." First Posted: September 29, 2006 Please see our Reprint Guidelines for details on republishing our articles.

Please see our Reprint Guidelines for details on republishing our articles.