The Constitutional Amendment 123/22, enacted on July 15, made relevant changes to the federal and state tax regime applicable to fuels, especially to establish competitiveness differential for biofuels in relation to fossil alternatives.

Among the tax changes brought by the amendment is the inclusion of a provision in the Federal Constitution that ensures the maintenance of more favorable tax regime for biofuels destined for final consumption. The change gives biofuels lower taxation compared to the on levied on the fossil fuels in order to make it more competitive.

The most favorable tax regime will be regulated by Complementary Law and will include, mainly, the social contributions levied on gross revenue and import (PIS and Cofins), as well as the ICMS.

Until the Complementary Law is published, the competitive differential of biofuels in relation to fossil fuels will be guaranteed by maintaining, in percentage terms, the difference between the tax rates or tax burdens applicable to each fossil fuel and the biofuel that replaces it, at a level equal to or greater than that in force on May 15, 2022.

Therefore, until the effects of the Complementary Lw take place, the immediate reduction in the tax burden applicable to biofuels will be determined according to the tax burdens applicable to fossil fuels to which they replace on the date of May 15, 2022, by assessing the tax difference existing on that date.

The tax regime favored for biofuels in relation to fossil fuels will be ensured for 20 years. Any legislative modification (state or federal) or originated from a court decision with erga omnes effects – that is, valid for all – the rates applicable to a fossil fuel will also result in an immediate and automatic change in the rate applicable to biofuels, preserving the difference in the rates between fuels. The mandatory approval of the ICMS Agreement under the National Council for Business Policy (Confaz) is waived for these rate reductions.

In addition, the Federal Government will deliver to the states and to the Federal District that grant ICMS tax credits to producers or distributors of hydrated ethanol in its territory a financial assistance in the amount of up to R$ 3.8 billion, in five monthly installments, from August to December of 2022, in an amount equivalent to the amount received.

ICMS tax credits and financial assistance will comply with the following main rules:

• They must be granted by December 31, 2022, with the right of the taxpayer to take advantage of them in the subsequent years;
• They aim to reduce the tax burden of the hydrated ethanol production chain, to also maintain a competitive differential in relation to gasoline;
• They will be calculated proportionally to the participation of the states and the Federal District in relation to the total consumption of hydrated ethanol in the country in 2021;
• The receipt of financial assistance by the states or the Federal District will import in the waiver of the right on any action based on any type of compensation due to the possible loss of collection for the granting of the presumed credits in transactions with hydrated ethanol;
• The granting of presumed credits is waived from the ICMS Agreement edition under the Confaz.

Constitutional Amendment 123/22 also authorized to set at zero the rate of taxes levied on gasoline, provided that the rate of the same tax levied on hydrated ethanol is also set at zero.

The amendment enters into force on the date of its publication, producing immediate effects for matters that do not depend on further regulation.