With production capacity for notebooks rising fast in Brazil, state governments in the South American country have run into a dispute between themselves over tax rates for notebook firms, resulting in delayed shipments, according to sources with the supply chain.

Since the beginning of 2013, brands have not been able to ship domestically manufactured notebooks to the Brazil market and inventories there have been piling up, the sources said. This is not because of low domestic demand, but due to a taxation dispute between the states of Sao Paulo and Amazonas (the capital city is Manaus). Although Sao Paulo has now agreed to requests made by Manaus and the dispute is likely to be solved, this issue has alarmed notebook makers about the complexity of the tax system in Brazil.

While average global notebook sales continue to be weak, emerging markets with low penetration rates have become the center of attention for various notebook brands. In particular, Brazil is the largest market in Central and South Americas, and brands such as Samsung Electronics, Lenovo, Acer and Asustek are all eyeing the market. Jim Wong, president of Acer, recently noted that shipment growth in Brazil in 2012 reached 20% and in 2013, the figure may increase to 25%.

Currently, Taiwan-based firms such as Compal Electronics and Foxconn Electronics (Hon Hai Precision Industry) have plants in Jundiai, Sao Paulo, while Quanta Computer has plants in Campinas, another city in the Sao Paulo state. The sources noted that the row between the two state governments centered around the tax rates for notebooks that are produced in Sao Paulo and shipped to Manaus.

The sources noted that the dispute stemmed from a state merchandize and services circulation tax known as ICMS. This tax may vary depending on product types and states. Take the Sao Paulo state for example, the ICMS tax rate is around 7-28% but the state government lowered the tax to 7% in order to attract firms to set up manufacturing plants there. However, this move caused the Amazonas state to protest as the low tax rate will likely affect the business of the industrial city of Manaus. The Amazonas state has requested Sao Paulo to increase the tax rate to 12% and Sao Paulo has agreed to do so, the sources said.

The sources stated that the tax systems in Central and South American countries are complicated and protective of domestic firms. However, many consumer electronic brands have been eager to enter the Brazil market as it is the third largest PC market in the world after China and the US.