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Brazil Focus

Sponsored by Palladium Trust Services
05 September, 2013

With its large and increasingly affluent population, Brazil offers plenty of opportunities for foreign investors in a variety of economic sectors. But there also are many potential tax, regulatory and cultural pitfalls lying in wait for the unwary investor, and in this feature we summarize both the good and the bad that Brazil has to offer.

Economy and Foreign Investment Growth

Brazil’s rise to prominence on the world economic stage has been rapid. Beset by hyperinflation and political instability for much of 1980s and 1990s, the country’s economic problems are now firmly behind it and recent governments have sought to create conditions favourable to foreign investment with much success.

Statistics attest to Brazil’s impressive economic track record. GDP grew at an average annual rate of 6% between 2004 and 2009, and growth has averaged around 4.5% a year since the global financial crisis erupted. As a consequence of its swift economic expansion, Brazil is now considered the world’s sixth-largest economy by most measures, having overtaken the United Kingdom in 2011, and it is predicted that it will surpass France to become the world’s fifth largest economy by 2017.

Brazil is by far the largest economy in South America, and the country attracts the region’s largest share of foreign direct investment (FDI). Indeed, in 2011, Brazil was the second most popular global destination in terms of FDI value and fifth in terms of number of projects; during the period from 2007 to the end of 2011 the value of inward investment projects to Brazil tripled from USD19bn to USD63bn while the number of projects jumped from 165 to 507.

Although economic growth has slowed of late – to as low as 1% last year – most economists agree that the country’s long-term economic prospects remain positive with a young population, abundant natural resources and its increasingly less bureaucratic system.

Commercial Opportunities

As with the other large emerging economies in the ‘BRICS’ grouping (Brazil, Russia, India, China and South Africa), the sheer size of the domestic market place is a significant lure for foreign companies. The population stands at around the 200m mark – the fifth largest in the world – and like its BRICS peers, Brazil has an expanding middle class with rising disposable income. As a result, Brazil’s market for consumer goods and services is growing, and demand for ‘big ticket’ items like cars, white goods, electronics and luxury goods is high. According to market research firm IPC Marketing, Brazilian consumption will total more than USD1.5 trillion in 2013, representing 10% growth in the retail market compared to 2011. Not surprisingly, these impressive statistics are attracting many new investors to Brazil, as recent figures show: FDI into Brazil’s retail and consumer products sector surged by 90% in 2011 compared with 2010, accounting for just under 10% of all FDI projects in the country that year.

However, with the Brazilian Government rushing to complete preparations for the hosting of the world’s two largest sporting events in rapid succession – next year’s soccer World Cup and the 2016 Olympics – it is investing a huge amount of money in infrastructure projects. Therefore, some of the most attractive opportunities for private companies are to be found in the transport sector, particularly roads, urban transit systems, and airports.

If the experience of this year’s Confederations Cup, a warm-up tournament for the World Cup, is anything to go by, Brazil has a lot of work to do to get things up to scratch. Many spectators found themselves gridlocked in traffic jams on their way to games, while the exterior of some venues resembled building sites. But the scale of the investment being pumped into transport infrastructure alone is truly staggering: in 2012, the Government committed to investing almost USD70bn in transport by the end of 2014.

Although there is the risk that infrastructure investment could dramatically tail off after the world’s athletes have packed their bags and left for home after Rio 2016, analysts suggest that Brazil’s long-term infrastructure needs are just as important, if not more so. Looking beyond the Olympics, rail transport is going to be a key sector. Brazil is blessed with an abundance of natural resources from iron ore (Brazil is the world’s largest iron ore producer) to agricultural produce (the country is also the world’s largest exporter of sugar and coffee, and its second largest exporter of soyabeans). However, the country’s rail infrastructure is poorly equipped to cope with transporting these commodities from mine/production facility to port in the volumes required and in a timely fashion. Consequently, last year the Government announced that USD45bn will be spent on around 10,000 km of new track connecting major centres of production to key port cities.

Additional opportunities are also opening up in the aviation industry, particularly airport infrastructure. Predictably, the Government is investing heavily in existing airports to cope with the influx of passengers expected in 2014 and 2016. But it also has ambitious plans designed to ensure that almost no part of this vast country is more than 100km from an airport, and a USD3.5bn airport infrastructure programme was announced last year, with USD2bn dedicated to over 130 airports in remote north and north east regions of Brazil.

As alluded to above, primary products account for the largest share of Brazil’s exports, principally iron ore and concentrates, petroleum, raw sugar cane, soya beans, coffee and other agricultural produce. And since the recent discovery of substantial “salt oil” deposits on the Brazilian continental shelf, petroleum is likely to play an even bigger role in Brazil’s economy in future years.

However, Brazil is also a major manufacturing centre – the largest in the Americas in fact – and industry accounts for over one-quarter of economic output. Significant industries include steel, cement, petrochemicals, automobiles, aircraft, computers and electronic equipment.

The Challenges

For investors from outside of Latin America, the obvious challenges of setting up a business in Brazil are linguistic, cultural and bureaucratic.

While English is spoken by many in the business and commercial centres of this Portuguese-speaking country, the vast majority of Brazilians do not have a second language. While it is said that Spanish speakers have an advantage in the language stakes, employing the services of a local adviser or intermediary when setting up a business, dealing with investment partners or communicating with government agencies will prove invaluable.

Furthermore, the business culture is also likely to feel somewhat alien in many respects to those used to Western business practices. Management structures are strictly hierarchical and most decisions, large or small, tend to be taken at the top rather than in the middle or lower echelons of the management chain. Having said this, personal and family relationships and friendships within commercial organizations also count for much, and in certain circumstances they might trump one’s position in the company hierarchy. All of which further underlines the importance of using a local advisor.

Tax and Regulatory Environment

Perhaps the biggest challenge of all for foreign investors is the negotiation of Brazil’s maze-like tax and regulatory regimes.

In Brazil, companies pay corporate taxes at federal, state and municipal levels. The headline federal rate of corporate tax is 15%, which compares favourably relative to Brazil’s competitors. However, when a 10% surtax on income above BRL240,000 (USD100,000) and a 9% social contribution (known as CSLL) is factored in, the effective tax rate for businesses in Brazil is bumped up to a much less attractive 34%. By way of international comparison, the OECD average corporate tax rate in 2012 was just over 25%.

Brazil also has a complex set of sales taxes, which includes a local value-added tax, known as ICMS, applied at different rates in the various states at between 17% and 25%, depending on the type of goods or services; and a federal sales tax, or industrial sales tax, known as IPI, which applies just to goods at rates up to 300%, but within which are large number of temporary exemptions.

There are also other social-related indirect taxes. The PIS and the COFINS taxes are federal taxes imposed on gross revenue at rates of 0.65% (PIS) and 3% (COFINS), where a Brazilian entity pays corporate income tax under a deemed taxable income regime. Where a Brazilian entity pays corporate income tax based on actual income, the PIS and COFINS rates are 1.65% and 7.6%, respectively. In addition, there is a municipal tax known as ISS which applies to the import of services as well as the domestic provision of services and is levied at rates between 2% and 5%.

Then there is the IOF, a federal tax levied at rates between 1% and 25% on financial transactions, including foreign currency exchange and loans and credit. Compounding the problem is the fact that the Government has changed the rates and scope of the IOF on a regular basis over the past few years, mainly to manage fluctuations in the local currency, the Real.

The Government does offer some tax concessions. For example, there are tax incentives for various aspects of research and development expenditure, allowing tax credits up to 180% of cost, and other incentives providing tax reductions to export-oriented investment and to the semiconductor industry. There are also a number of free-trade zones in Brazil which provide businesses exemption from import taxes and from VAT, and there are export processing zones which relieve firms from a range of taxes, including the IPI and COFINS.

Additional tax concessions have been announced in recent months as part of the Government’s attempts to stimulate economic activity.

In February 2013, the Brazilian Government approved new tax breaks to encourage investment in the nation's Internet infrastructure. The breaks, detailed in Decree 7291, provide for an exemption to PIS/COFINS taxes and to IPI. The concessions will not only benefit telecoms providers but also those firms providing the equipment and necessary hardware and software infrastructure to facilitate the improvements. It is estimated that in total the tax breaks will be worth BRL9bn (USD4.5bn) by 2016.

Then, in April 2013, Finance Minister Guido Mantega announced that the Government would increase the number of industries that are to benefit from payroll tax exemptions, and boost the number of small businesses eligible for reporting under the simplified income reporting regime. Under the change, a further 14 industries, including construction, engineering, news organizations, a wide range of transportation companies and port services providers, will benefit from new payroll tax exemptions from 2014, adding to the 42 sectors that already benefit from the concessions. In total, the payroll tax exemptions will cost the Brazilian Government more than BRL21bn (USD10.5bn) in revenues annually from next year.

Later that same month, Mantega announced additional tax breaks to benefit the nation's ethanol producers in a bid to increase the concentration of ethanol in environmentally-friendly fuel blends and boost output.

The Brazilian Government is also attempting to address the problem of its sometimes impenetrable sales tax regime. After many delays, in May 2013, the Senate Economic Affairs Committee finally approved legislation to phase in a unified 4 percent rate by 2021, and a law to establish a compensation fund for less-developed states. There is no guarantee that the law will be introduced however, especially as the Government opposed many aspects of the Senate Committee’s plan.

The upshot of this dense layer cake of taxation though, is that Brazil is often perceived negatively from the outside, and it is tax complexity as much as high tax rates that acts as a barrier to investment for many potential investors.

Brazil was ranked a lowly 156th out of 185 countries in PwC’s 2013 Paying Taxes survey, because, while companies have to make just nine tax payments per year, they must spend on average 2,600 hours, (equivalent to 108 days!) complying with the tax laws. As a result the country is firmly rooted to the bottom of PwC’s ‘time to comply’ ranking (second from bottom is Bolivia, where a business must spend 1,025 hours complying with the nation’s tax laws). To provide some kind of context, companies in the US, where tax code complexity is often complained about, make 11 tax payments per year, but spend on average 187 hours per year on compliance.

Although it is hard to quantify how much foreign investment is being deterred by Brazil’s Byzantine tax system, anecdotal evidence suggests that it represents a major hurdle for investors. Indeed, Ernst & Young’ 2012 Brazilian Attractiveness survey revealed that, for investors from the United Kingdom, taxation in Brazil was the most significant impediment to investment. The survey took into account the views of 250 global executives on Brazil as a place to do business, and of the 50 executives surveyed in UK companies, more than half said they are considering establishing or developing their business in Brazil in the near future. However, UK investors expressed a strong need for improvement in the business environment and operational conditions. When asked how the country could improve its competitiveness in the next year, 26% of UK investors cited improving the tax system, 24% infrastructure and 22% said improving the education system.

On a more optimistic note though, nearly 80% believed that the country’s attractiveness as an investment destination would improve in the next three years.

Nevertheless, the unfavourable tax climate is exacerbated by an inefficient regulatory environment including lengthy processes for launching a business and obtaining permits. It takes 13 separate procedures and a total of 119 days in order to start a company in Brazil (the OECD average is 12 days, and the Latin America average is 53 days), and the World Bank ranks the country only 150th out of 185 economies in its 2013 Ease of Doing Business Survey.

The International Monetary Fund (IMF) praised the Brazilian authorities in its 2012 report on the nation’s economy for ambitious short-term plans to make the nation's tax regime more attractive, with its stated policy objectives being to simplify the tax system and eliminate distortions. Nonetheless, as in previous reports, the IMF highlighted that the Brazilian tax system is particularly burdensome due to its complexity, fragmentation and changing provisions, which increase the costs of doing business.


Despite Brazil’s challenging tax and business regulations and its cultural differences, overall investor sentiment remains positive, and the outlook is one of optimism as the country continues its transition from an emerging economy to a high-income country. However, Brazil is not the sort of place where quick profits can be made, and investors should expect that it will likely take time for projects to come to fruition. Therefore contingency planning is going to be an essential part of any plan to invest in Brazil, and the services of a knowledgeable, independent local advisor to guide investors through the labyrinth of rules and practices will be equally as vital.


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