More than 20 years since the enactment of Law 9,432/97 (the Navigation Act), a major reform of Brazil's cabotage laws is underway.
Since the general strike of truck drivers in 2018, which shut down the Brazilian logistics system and had a major effect on the Brazilian economy and gross domestic product, the Ministry of Infrastructure has been studying how to reduce Brazilian domestic trade's dependency on land transport and develop the use of cabotage for the domestic transport of goods.
The ministry found that cabotage's 11% share of domestic trade is low, especially given Brazil's extensive 8,000km coastline and more than 150 ports.
On 11 August 2020 the federal government, after public hearings and debate, concluded the draft of the BR do Mar Bill and sent it to Congress for urgent review.
Mitigating restrictions for foreign-flagged vessels
Several amendments to the current cabotage regime (the Navigation Act) were proposed, but the bill's main focus is:
- the provision of more vessels – including foreign-flagged vessels – to Brazilian shipping companies which operate in cabotage;
- the reduction of operational costs; and
- a review of the restrictions on chartering foreign-flagged vessels, which, as a general rule, can trade in cabotage only if Brazilian-flagged vessels are unavailable.
Foreign-flagged vessels in cabotage under time charter
Although the bill would impose certain requirements on Brazilian shipping companies, some key operational upsides are offered. The bill proposes the possibility of time chartering a foreign vessel, owned or in the charterer's possession, if it is chartered from a wholly owned foreign subsidiary of a Brazilian shipping company without the need for circularisation(1) and eliminating the risk of blockade by Brazilian-flagged vessels. In this regard, the bill sets out the following measures:
- the expansion of the deadweight tonnage of vessels actually operating and registered in the name of the economic group to which the charterer belongs, according to the proportion to be defined in the Federal Executive Branch Act;
- the replacement of a similar type of vessel under construction in Brazil up to 200% of the gross tonnage of the vessel under construction for six months, extendable for the same period up to 36 months;
- the replacement of a similar type of vessel under construction abroad up to 100% of the gross tonnage of the vessel under construction for six months, renewable for up to 36 months;
- the replacement of a similar type of vessel, owned or chartered, for jumboisation, conversion, modernisation, docking or repair in Brazil or abroad up to 100% of its deadweight tonnage under the terms of the Federal Executive Branch Act;
- the exclusive fulfilment of long-term transport contracts under the terms of the Federal Executive Branch Act; and
- the provision of special cabotage operations for 36 months, extendable for up to 12 months under the Federal Executive Branch Act.(2)
However, for this type of charter, the bill proposes that two-thirds of crews for all vessels admitted should be Brazilian, regardless of where the vessel is registered. The new rule is notable, as Brazilian crews may be subject to the labour regime of the foreign flag and not Brazilian law, which is more restrictive compared with other flags.
This rule is one of the key points of discussion; most of the shipping sector is uncomfortable with the need for the crew of foreign-flagged vessels to be two-thirds Brazilian, as there are legal uncertainties over whether foreign labour laws would apply to such seafarers. If foreign labour laws (ie, flag regimes) are impossible to implement, the bill's main goal to reduce cabotage companies' ship operating expenses will not be achieved.
Foreign vessels under bareboat contract
The bill also aims to change the criteria for foreign vessels under a bareboat charter to have their flag suspended. The need to demonstrate Brazilian tonnage in a fleet or contract for vessel construction with a Brazilian shipyard will be removed and the number of vessels allowed to be admitted by Brazilian shipping companies will be gradually increased (ie, one in 2020, two in 2021 and three in 2022) until 2023, when these criteria will end and admission will be free.
Further, all vessels chartered, either by time or bareboat, by a Brazilian shipping company authorised by the BR do Mar programme will automatically be submitted to the special temporary customs regime. This will mean the suspension of federal tax payments on the import of such vessels. At present, this provision is established in customs regulations, but will be supported by law, thus providing more legal security to taxpayers.
Brazilian investment shipping companies
Another innovation that the bill would introduce is the concept of 'Brazilian investment shipping companies' – companies that hold the property of vessels and whose core business is to charter such property to other shipping companies, without the need to be engaged in shipping operations. The main purpose of this new legal entity seems to be to provide greater security to financiers, which will own assets and be able to enforce their credit with more efficiency.
The BR do Mar programme also proposes to modify Law 10,893/2004, which regulates the Additional Freight for the Renewal of the Merchant Fleet (AFRMM) tax and the Merchant Marine Fund (FMM).
In cabotage navigation, 100% of the AFRMM collected will be deposited in the account in the Brazilian shipping company's name.(3) As a result, the bill will expand the possibilities of using these provisions to dry-docking for Brazilian vessels and include the possibility to use such funds for chartered vessels from the Brazilian shipping company's foreign subsidiary. Another proposed change is to give the AFRMM resources as warranty in mortgage contracts for new vessel constructions.
Regarding the FMM, the bill wants to expand the possibility of loans for shipowners that want to not only increase the size of their fleet, but also modernise docking, converting and upgrading facilities or repair Brazilian or foreign chartered vessels in Brazilian shipyards. Under the bill, foreign shipowners will have access to this reserve to build vessels in Brazilian shipyards up to an 80% investment limit.
The Ministry of Infrastructure hopes that the bill will boost cabotage trade in Brazil by approximately 30% per year, encouraging greater competitiveness in this sector. The maritime community is carefully monitoring the discussion of the bill in Congress, which will likely be concluded by the end of September 2020. However, it is important to highlight that after the approval and enactment of the law, several normative acts and regulations will need to be passed for it to come fully into force.
Endnotes
(1) A specific proceeding to check the availability of Brazilian vessels to be chartered. Article 9 of Law 9,432/1997 states that:
The chartering of a foreign vessel by voyage or by time, to operate in the inland navigation of the national route or in the transportation of goods in the coastal navigation or in the port and maritime support navigation, as well as the bare hull in the port support navigation , depends on authorization from the competent body and can only occur in the following cases: I - when there is no or unavailability of a Brazilian flag vessel of the appropriate type and size for the intended transport or support; II - when there is a public interest, duly justified; III - when replacing vessels under construction in the country, in a Brazilian shipyard, with an effective contract, while construction lasts, for a maximum period of thirty-six months, up to the limit:
a) the gross tonnage contracted, for cargo vessels; b) gross tonnage contracted, for vessels intended for support.
(2) Article 5 of the Project of Law 4199 (BR do Mar Bill).
(3) Article 17(II)(c) of Law 10,893:
The product from the collection of the AFRMM will be destined to:…II - the Brazilian shipping company, operating its own or chartered vessel, registered in Brazil:… c ) 100% (one hundred percent) of the AFRMM that it generated in cabotage, river and lake navigation. (Emphasis added.)
