Soybean Taxes and Tariffs regulation

The soybean taxes and tarrifs, policy regulation can often work wonders and going by China?s efficient handling of the same in soy sector can be a lesson for many; especially Brazil.

China is the world?s biggest importer and consumer of soybeans and accounts for 60% of world?s total imports. Its appetite for soybeans is so huge that even crushers in US--the country is the top producer of soybean-- are unable to source their requirements.

?China?s surge in soybean imports mean that US processors must pay higher prices for soybeans relative to the domestic price for soy meal, which has contributed to processor margin contraction.? says a Rabobank report.

Despite this robust demand increase, China?s domestic production has remained relatively stable near 15 million tonnes, as soybeans are not considered to be a strategic crop, unlike corn, Wheat and rice.

Keen to support its domestic crushing industry, China introduced a differential import tax structure in 1998 to encourage imports of whole soybeans rather than Soymeal and soy oil.

Look at their tax regime for soy complex:

--3 percent import tariff plus 13 percent value-added tax on soybeans

--5 percent import tariff plus 13 percent value-added tax on soymeal

--9 percent import tariff plus 13 percent value-added tax on soy oil (same as on palm oil)

This tax structure facilitates imports of soybeans while discourage soymeal and soyoil imports. The crushers are thus benefitted, though overcapacity is a scourge.

In 2010, Rabobank estimates that China had a total soybean crushing capacity of approximately 100 million tonnes and crushed 55.8 million tonnes. To address its overcapacity problem, China?s National Development and Reform Commission published a directive titled ?Guideline of Pushing a Healthy Development of Soybean Processing Sector? in September 2008.

The Guideline suggested decreasing capacity to 75 million tonnes by 2010 and to 65 million tonnes by 2012. The Guideline also stipulates that a single company may not expand once it accounts for 15 percent of national production volume.

It should be understood that approval for expansion will tend to favour state-owned crushers under this policy. To date, the Guideline has been unsuccessful at shrinking capacity. However, it has prevented foreign companies from green field or merger and acquisition (M&A) expansion, instead forcing them into lease agreements with local crushers.

Needless to say, industries thrive in this ambience.

The case of Brazil

Brazil?s export taxes on soybeans and soybean products were abolished with the introduction of the Kandir Law in 1996. Prior to the Kandir Law, Brazil taxed soybean exports at 13 percent and Soymeal and soy oil exports at 10 percent.

Domestic crushing was incentivised and the industry expanded crushing capacity. After differential export taxes were removed in 1996, Brazil?s soymeal and soy oil exports declined sharply as a percentage of the world export market while its soybean exports showed a steady increase as a percentage of the world export market. The decline in soymeal exports also reflects growing domestic meal demand. The legacy of Brazil?s differential export tax was excess crushing capacity and compressed margins, but the industry has now grown beyond this, especially with continued growth in animal protein production and new incentives for biodiesel.

What remains of Brazil?s soybean tax system is the Tax on Movement of Goods and Services, or ICMS.

ICMS is administered by each individual state in Brazil and is one of the country?s primary tools for generating state tax revenues. As such, the tax has many entrenched supporters among state governments, even though it is complicated and does not serve the strategic interests of the industry or the country as a whole. It works as follows:

--Soybeans are taxed at 12 percent each time they cross a state border

--Soymeal and soy oil are not taxed for crossing state borders

--Exports are not taxed

In principle, Brazil?s intention is to tax soybeans at a total rate of 12 percent. The complication arises because there is little integration between taxing authorities in the different states. As a result, the 12 percent state tax is cumulative unless a transporter is sophisticated enough to use legal means to collect overpayment credits. This can be an expensive and time-consuming exercise.