Brazil's airlines fear tax rise impact as election nears

By Gabriel Araujo

SAO PAULO, Oct 19 (Reuters) - Brazil's airline industry fears that the implementation of an impending consumption tax reform could raise fares and curb passenger growth, as the country's tight presidential election fans uncertainty over a policy due to kick in next year.

Right-wing Senator Flavio Bolsonaro, frontrunner in the presidential race, has pledged to revise parts of the reform, which was approved in 2023 and is due to gradually replace multiple taxes with a dual value-added tax system from 2027.

Bolsonaro faces leftist President Luiz Inacio Lula da Silva, who has championed the reform, in a runoff on October 25.

The planned reform would lift the effective tax burden on tickets to about 26.5% from roughly 9%, industry executives say, further raising costs in a sector facing higher ​fuel prices.

Airline lobby group IATA estimates it would increase domestic ticket prices by 16.1% and international fares by 13.3%, leading to a 21% annual fall in passenger traffic, the equivalent of about 25 million fewer passengers.

IATA has asked the government either to delay implementation or adopt a reduced rate for aviation, arguing that the sector's broader economic importance should be taken into account, its vice president for the Americas, Peter Cerda, told Reuters.

The higher tax burden would hit tourism and cargo transport as Brazil seeks to attract more visitors and ripple through the economy by raising the cost of products and services, he said.

Brazil's Finance Ministry declined to comment.

ELECTION UNCERTAINTY

Bolsonaro, who finished ahead in the first round, has said his team is studying constitutional amendments to revise parts of the reform because the expected VAT rate is too high.

The uncertainty surrounding both the election and the tax framework has left the industry in a difficult position, Cerda said, adding that IATA had met members of Lula's cabinet, including Vice President Geraldo Alckmin, to press its concerns.

"If President Lula is elected again, many of the ministers will change, and that will require us to sit down again with the same government to talk to new actors," Cerda said.

"If Bolsonaro is to win, we have to see what will be the future of the tax reform," he added.

LEISURE TRAVELERS MOST AFFECTED

The reform will primarily affect leisure travelers because companies purchasing tickets for corporate trips would be able to claim credits on taxes paid under the VAT system, said LATAM Brasil LTM.SN CEO Jerome Cadier.

"The passenger will pay more," Cadier told reporters, noting that while implementation would be gradual over the next eight years, higher taxes on tickets were likely to curb the demand growth the industry had expected.

The elimination of the ICMS state tax on jet fuel would benefit airlines, but not offset a steep increase in taxes charged on ticket sales, Cadier said.