Brazil is a nation rapidly on the rise. In 2010, the country’s economy grew 7.5%, making it the seventh-largest in the world, according to the World Bank. In 2011, Brazil’s GDP is expected to grow 4.5%, slower than last year but still a healthy pace. And growth over the next few years also is projected to be robust as the country gears up to host two blockbuster events—the 2014 World Cup and the 2016 Olympic Games—that require huge investments in urban infrastructure, such as airports and public transportation.
With its large, expanding domestic market (the fifth most populous in the world, with a substantial middle class), wealth of natural resources and stable democracy, Brazil is a thriving destination for foreign investors. According to the United Nations Conference on Trade and Development, Brazil ranked fifth among all countries in foreign direct investment inflows in 2010, rising from 15th the year before.
In recent years, reported The Economist, “Brazil has been transformed from ‘country of tomorrow’ to ‘once-in-a-lifetime opportunity.’”
Despite these bright prospects, however, Brazil remains a complicated place to do business for foreign-based companies. Challenges include a highly complex and expensive tax and labor environment, burdensome bureaucracy, costly credit, lingering corruption and deep social imbalances. On the World Bank’s Doing Business Index, Brazil ranks 127th among 183 countries in the ease of doing business, which it defines as having a regulatory environment that is conducive to the startup and operation of a local company.
To gain insight into emerging opportunities, the JofA asked two top accountants with direct experience in Brazil to provide their perspectives about the country’s business and accounting environment. Sharing their views were Eduardo Pestarino, regional executive for The Americas at Crowe Horwath International; and José Bendoraytes, managing partner of Horwath Bendoraytes Aizenman & Cia., a member firm of Crowe Horwath International in Brazil. Their answers are presented jointly.
LEGAL / REGULATORY
JofA: What are the available forms of organization for a U.S. investor to do business in Brazil?
Pestarino/Bendoraytes: A foreign company can apply to open branches in Brazil by submitting an application to the Brazilian government. There are several formalities that have to be fulfilled, including the filing of documentation with the National Department of Registry of Commerce (DNRC). The process of registering a new business can be lengthy, since it involves as many as 15 different procedures. Foreign companies must appoint a representative (who does not need to be a native Brazilian but must be a resident in Brazil) to act on their behalf.
The two main types of business organizations in Brazil are the limited liability company (LTDA) and the corporation, known as “Sociedade Anónima” or “SA.”
The LTDA is the simplest, least expensive and most popular form of organization in Brazil. It is similar to U.S. limited liability companies, limited partnerships and closely held companies. At least two partners are required to form an LTDA.
The Brazilian corporation resembles a U.S. corporation. It also must have at least two shareholders, who are liable only to the extent of the stake they hold in the company.
A Brazilian corporation may be publicly held or closely held. A publicly held company must be registered at the Comissão de Valores Mobiliários (CVM, Brazil’s version of the SEC), along with the securities it issues, which may be traded on the stock exchange or on the over-the-counter market. The securities of a closely held company are not available to the general public.
At this point in time, Brazil only has around 1,000 public companies. Most of the country’s 6.2 million businesses are small and medium-size enterprises.
JofA: What do companies need to understand about protecting intellectual property in Brazil?
Pestarino/Bendoraytes: Since 1994, Brazil has been a signatory of the World Trade Organization’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement. TRIPS establishes a minimum protection standard to property rights and requires signatory countries to review and adapt national laws that meet that standard.
Over the years, Brazil has issued several property rights laws that assure protection to the holders of industrial property rights. These laws prevent others from producing, using or selling products or providing services that infringe patents, trademarks, industrial designs or secrets. These laws also protect the intellectual property rights relating to the development of new plant varieties, recognizing Brazil’s rich biodiversity and the high costs of research and development.
Software property rights also are protected for 50 years in Brazil, and authors—both domestic and foreign—have copy rights protected for 70 years.
While there are still areas of concern, particularly with respect to pirated audiovisual goods, pharmaceuticals and medical devices, much progress has been made in intellectual property protection.
JofA: How effective is Brazil’s legal system, and can companies get disputes resolved fairly and within a reasonable amount of time?
Pestarino/Bendoraytes: Brazil’s legal system is effective, and companies can expect fair resolutions of disputes. Although effective, the system is slow as a result of legal instruments used by the attorneys to delay judgment and final sentences and force unappealing decisions. For that reason, the majority of international contracts entered into in Brazil have a provision relating to arbitration procedures.
JofA: What are the key aspects of the local labor environment to consider?
Pestarino/Bendoraytes: Brazil’s labor system is complex and costly. It is governed by the CLT (Consolidation of Brazilian Labor Laws), and its principles are grounded in the country’s federal constitution, which makes changes extremely difficult.
Compared to the United States, Brazilian labor law involves a high level of state intervention. For example, while American labor law allows employers and employees to set labor agreements and use private arbitration for disputes, Brazilian disputes always end up in a court of law.
It is not uncommon for Brazilian companies to have an extensive written contract with employees. Additional costs for workers, such as taxes, health insurance, meal and grocery stipends, transportation stipend, vacation pay and a “thirteenth salary” (an additional month’s pay every December) can add up to more than 70% of base pay. Laying off employees also can be expensive. An FGTS (Unemployment Compensation Fund)-opting employee unfairly dismissed is entitled to withdraw the total deposits made by the employer in his FGTS account, plus interest, monetary adjustment and a 50% fine figured on the total amount deposited. Collective employment conventions may provide for an additional indemnity.
JofA: Can you share some basics on Brazilian currency laws?
Pestarino/Bendoraytes: Brazil’s currency, the real, is nonconvertible, so it is not available for trade on the forex market and cannot be bought or sold outside Brazil.
The Banco Central do Brasil maintains close control of the Brazilian currency market through Sisbacen, the Central Bank’s information system. The system functions as a virtual environment where currency transactions and operations are officially authorized and conducted.
Import and export operations must follow specific rules with regard to currency transactions. They include preparing contracts, documenting transactions and getting approval from Sisbacen. Almost all types of currency operations can be handled through a commercial bank or by local exchange brokers.
JofA: How is Brazil’s transition to IFRS progressing? What are the key challenges and benefits?
Pestarino/Bendoraytes: In 2007, Law 11,638 was enacted, and Brazil fully committed to the IFRS convergence process under the direction of the CPC (Accounting Pronouncements Committee), an offshoot of the CFC (Federal Accounting Council), the main accounting authority in Brazil. The CPC has issued more than 40 pronouncements relating to convergence since that time.
In December 2010, the CFC instituted the standards issued by the CPC as mandatory for all types of organizations, including:
- Large enterprises and listed companies, defined as any national or foreign company that has more than R$240 million (US$151 million) in assets or more than R$300 million (US$189 million) in revenues.
- Regulated organizations, including banks, insurance companies and investment funds, which must also follow the rules issued by the CVM, the Central Bank and SUSEP (Superintendência de Seguros Privados, a division of the Ministry of Finance that regulates insurance).
- Small and medium enterprises (SMEs).
- Foreign-owned companies.
Training is the main challenge relating to IFRS implementation, because the adoption of principles-based standards requires a change of mindset and approach. For example, the previous Brazilian accounting system was designed to provide information to tax authorities, while IFRS is intended to serve investors. The IFRS rules also are less detailed and, as a result, generally require a higher level of professional judgment. Emphasis is given to the “substance” of transactions rather than simply the legal “form.”
The benefits in adopting IFRS in Brazil include reduced complexity, greater transparency, comparability and efficiency.
JofA: Could you provide an overview of Brazil’s tax compliance and reporting system?
Pestarino/Bendoraytes: The Brazilian Constitution attributes taxing powers to federal, state and municipal governments. Brazilian taxation may take the form of taxes, fees, betterment fees, other contributions and compulsory loans (see Exhibit 1 for a list of the main types of taxes in Brazil).
(Click here to open Exhibit 1 in a new window.)
The federal tax administration agency in Brazil is the Receita Federal do Brasil (RFB or Brazilian Revenue Service). The Brazilian Revenue Service is also in charge of inspection activities and the collection of social security contributions. States and municipalities also have their own tax administration agencies.
Corporate taxpayers are subject to corporate income tax (IRPJ) and social contribution on net profits (CSLL) tax, which finances social programs. In addition to IRPJ and CSLL, the federal government levies taxes on foreign trade (import and export taxes), a value-added tax on industrial production (IPI) and a tax on financial transactions (IOF).
The federal government also imposes social contributions on the gross income derived by resident legal entities (PIS and COFINS contributions). There is also a federal contribution imposed on crossborder payments of royalties and certain technical, administrative and scientific services (CIDE, or Contribution on Economic Activities).
In addition, state governments levy a value-added tax (ICMS) on the distribution of goods and services. The ICMS is payable at all stages of the chain of sales, from the manufacturer to the end consumer. Municipal governments also levy a tax on services (ISS) provided by a company, contractor or professional.
The Brazilian tax system is complicated and time-consuming. The World Bank calculates that it takes a typical limited liability company that is domestically owned with 10 to 50 employees nearly 2,600 hours per year to comply with tax regulations in Brazil, compared to 187 hours in the U.S. And the average Brazilian company pays about 69% of its net profits to the government, compared to a total tax rate of 46.8% in the U.S., according to the World Bank.
JofA: Can you explain the difference between the “actual profit regime” versus the “presumed profit regime?”
Pestarino/Bendoraytes: Under the actual profit regime, companies calculate annually or quarterly their income tax liability on net profits for the taxable period, adjusted by additions and exclusions provided by tax law.
Certain companies are required to calculate their income tax liability under this regime, including those with total gross income in the previous year exceeding R$48 million (US$30.2 million); financial institutions, insurance companies and similar entities; and legal entities that derive profits, income or capital gains from abroad.
Corporate income tax (IRPJ) is due at the 15% rate on net profits. The portion of net profit that exceeds R$240,000 (US$151,000) per year is subject to an additional income tax of 10%. The social contribution on net profits (CSLL) is imposed at a 9% rate.
Companies that are not required to adopt the actual profit regime may calculate their tax liability under the presumed profit regime. This is a simplified tax method under which the company chooses to calculate its taxable base by applying a percentage of its total gross income earned during the quarter (presumed profit). The applicable percentage ranges from 1.6% for income from the sale of fuel and natural gas to 32% for income from the rendering of services, such as factoring and real estate rentals. Sales of goods are taxed at 8%. Income tax is imposed at the rate of 15% on the presumed profit, with additional taxes that include CSLL.
JofA: What is the rationale behind the transitional tax regime that was created in response to the implementation of IFRS?
Pestarino/Bendoraytes: Provisional measures established the RTT (Transitory Tax Regime) in 2009 in order to neutralize the impact of new IFRS accounting methods, given that pre-IFRS tax rules still apply in the country. Under the RTT regime, companies can calculate their main federal taxes on the basis of accounting rules in force until December 2007 (when the transition from the former Brazil GAAP to IFRS began). This approach will continue until a new tax law that considers the current Brazil GAAP effects is issued.
JofA: Are there financial and tax incentives available for foreign investment?
Pestarino/Bendoraytes: The Brazilian government encourages long-term investment through its tax system. Aside from tax and financial incentives granted at the federal level, state governments and municipalities also make grants available.
The most important incentives include:
- Reductions on import tariffs or tax deductions for imported capital goods not available locally.
- Special Regime for the Acquisition of Capital Goods by Exporting Enterprises (RECAP), which suspends taxes on new machines, instruments and equipment imported by companies that commit for a period of three years to export a certain level of goods and services.
- Incentives for technological innovation.
JofA: Have there been any recent developments on the tax scene?
Pestarino/Bendoraytes: In August, President Dilma Rousseff announced a plan to provide R$25 billion (US$16 billion) in tax breaks over the next two years to protect manufacturers from a surge in imports from China fueled by the rising value of Brazil’s currency. The plan also eliminates a 20% payroll tax on four industries, including shoes and software. A portion of the tax cuts will be offset by an additional tax that these companies will pay on sales.
JofA: Are there restrictions on dividends and other fund flows out of Brazil?
Pestarino/Bendoraytes: There are no restrictions on remittances of dividends out of Brazil to shareholders domiciled abroad. Dividends paid out of profits are not subject to withholding tax or income tax.
Interest and royalties are subject to withholding tax—royalties at a 15% rate and interest at a rate of 15% to 25%. Remittances of royalties and fees through the official market to foreign licensors are generally limited to 1% to 5% of sales. The maximum amount deductible on the remittance is 5% of net receipts from the product manufactured or sold.
The remittances of profits must be registered at the RDE (Electronic Declaratory Registration). The foreign funds registered at the Central Bank of Brazil can be repatriated without previous authorization.
JofA: What does a company need to understand about transfer-pricing regulations in Brazil?
Pestarino/Bendoraytes: Brazil is not a member of the Organisation for Economic Co-operation and Development (OECD), but it has its own regulations on transfer pricing, including a convention to avoid double taxation. Brazil has no treaty to avoid double taxation with the U.S. Brazilian law considers that companies are related when they are under a common control, and transfer-pricing rules apply when one of the parties is located in a country that provides a privileged tax regime.
When products are imported by a Brazilian company, transfer-pricing rules verify whether the company is making excess payments to the foreign supplier. To that end, certain deductibility limits apply to payments made by the Brazilian company to its foreign supplier. Any amounts above such limit are added to the company’s taxable income.
As for exports, the Brazilian tax authorities check whether prices are not lower than those determined by comparability methods. The Brazilian company must report a minimum taxable income when selling goods and providing services to foreign-based related companies.
Calculation methods specified by the regulation on imports include:
- PVL—Market sale price minus profit
- PRL—Market resale price minus profit
- PIC—Market resale price
- CPL—Cost plus profit
Calculation methods for exporting goods and services include:
- PVEX—Export sales price
- PVA—Wholesale sales price minus profit
- PVV—Retail sales price minus profit
- CAP—Acquisition cost plus profit
To qualify, a company must choose one or more calculation methods, prepare a study in order to demonstrate related-party transactions and transfer-pricing calculations, and then disclose this information in its annual tax return. Adjustments can be done until five years from the filing date. Disputes are common due to the complexity of the law.
JofA: What are the rules for tax loss compensation in Brazil?
Pestarino/Bendoraytes: Tax losses may be carried forward and offset against pretax income up to an annual limit of 30% of that income. Nonoperating revenue and losses, subject to identical limits, must be controlled separately.
JofA: What are some basic strategies for managing exchange rate risk?
Pestarino/Bendoraytes: The basic strategies to manage exchange rate risks in Brazil are similar to those used all over the world. Companies are subject to exchange rate fluctuations that can impact profitability and cash flows. But this currency volatility usually can be managed through derivatives, especially hedge contracts.
The most common contracts are future, forward, options and swaps. Operations with derivatives can be done through major banks. The main Brazilian provider of this type of financial services is BM&F-BOVESPA, the Brazilian stock exchange.
In late July, the government took steps to curb foreign exchange speculation in an effort to reduce the Brazilian real from a 12-year high against the U.S. dollar. The government imposed a 1% transactions tax on currency derivatives and introduced new legislation that would enable the tax to be increased up to 25%. The legislation could impact hedging costs, according to analysts, since many companies buy Brazilian currency in the futures market to balance out their U.S. dollar exposure. According to the government, the measure is directed at speculators and would leave genuine hedgers unaffected.
JofA: How difficult is it to sell a Brazilian company?
Pestarino/Bendoraytes: The merger-and-acquisition market has been heating up. There are no requirements imposed by the government to sell or buy a business, unless a transaction interferes with the concentration levels of a specific market as defined by CADE (Administrative Council of Economic Protection). However, some M&A factors such as goodwill recognition can entail tax adjustments that must be disclosed and submitted to tax authorities.
Companies are constantly searching for good investments in Brazil. As a result, there are always good opportunities to sell businesses.
Capital is most commonly repatriated through the sale of shares. A foreign investor’s capital gain on a sale to a local resident is the excess of the sale price over the foreign capital registered with the Central Bank. That gain is subject to a 15% withholding tax.
JofA: What are some basics that Americans need to understand about Brazil’s business culture?
Pestarino/Bendoraytes: Americans interested in doing business in Brazil need to recognize the importance of developing good relationships, which takes time. Everything isn’t all business, even during meetings, where the ability to discuss popular topics such as soccer, literature, culture or your hometown is very useful to “break the ice.”
Punctuality is not as important as in other cultures, so 10- to 15-minute delays can be expected for meetings. Interruptions, particularly at the highest levels, are common. So it is advisable to demonstrate patience.
The most common type of hierarchy in Brazil is vertical. Decisions usually are made at the highest level, but relationships between individuals are as important as any organizational chart.
An effective, personal style of management is valued as highly as strong technical skills. Employee loyalty often depends closely on a manager’s personality and ability to relate to people.
Other good tips: Provide documentation translated to Portuguese when possible, and never mix up Portuguese with Spanish. And recognize that Brazil is a diverse country with 26 states and one federal district. Customs and communication styles can vary greatly from region to region. Much of the current economic activity is centered in the south and southeast regions, so those are important regions to get to know. But “one size fits all” definitely won’t work in Brazil.
JofA: Is government “red tape” or bureaucracy a challenge? How about corruption?
Pestarino/Bendoraytes: Beyond the standard costs related to the establishment of an enterprise in Brazil comes “Brazil’s Cost”—a term used to describe all the difficulties associated with red tape, corruption, elevated interest rates, burdensome taxes and an inefficient labor law.
A study issued by the ABIMAQ (Brazilian Association of Machinery and Equipment Producers) measured the “Brazil’s Cost” for eight agricultural and machinery products. The research found that “Brazil’s Cost” raises the price for these products by 36% on average, when compared to the U.S. or Germany.
Some aspects of doing business in Brazil involve very bureaucratic procedures that are burdensome. To succeed, it is very important to have skilled, locally based legal advisers and accountants in place before setting up a business in Brazil.
JofA: What is the commercial lending environment like?
Pestarino/Bendoraytes: Credit is currently abundant in Brazil, but interest rates are extremely high compared to the U.S.
The Brazilian banking system is very conservative, and borrowing money can be difficult in cases where no real guaranties are available. Many American companies looking to do business in Brazil face this situation because, even when they are financially sound in the U.S., they do not have local assets to offer as collateral.
JofA: How does trade credit work in Brazil? What are the standard terms and conditions of buying and selling?
Pestarino/Bendoraytes: Trade credit is vital for the survival of the companies in the Brazilian economy. This arrangement is probably the most important source of capital for business in Brazil.
The most common trade credit occurs between industry and commerce or among other B2B groups, when segments define their own terms and conditions for buying and selling, according to current market conditions.
Partnership and trust among parties establish the foundation for a good financial relationship, but in cases of new business relationships, organizations like Serasa Experian play an important role. They provide access to a large database of credit information that helps companies in their decision-making process.
Large companies concerned about developing and protecting their supply chains also have begun offering credit directly to key business partners. For instance, Petrobras (a Brazilian-based multinational energy company) provides competitive lending to its suppliers.
JofA: What are the leading professional organizations in Brazil?
Pestarino/Bendoraytes: Accountants are regulated by Conselho Federal de Contabilidade (CFC, or the Federal Accounting Council), through each regional entity for each state. Auditors are regulated by Instituto dos Auditores Independentes do Brasil (IBRACON, or the Institute of Independent Auditors of Brazil). Both the CFC and IBRACON are full members of the International Federation of Accountants.
JofA: Have your U.S. clients who have opened operations in Brazil made the money they expected?
Pestarino/Bendoraytes: Our U.S. clients doing business in Brazil are happy with their results. They have reached their goals since they set reasonable projections for their return on investment and took the time to learn about Brazilian culture.
We are currently facing an appreciation of the Brazilian real vis-à-vis the U.S. dollar. This makes initial investments more costly but also provides higher profitability and dividends in return.
Gary James is a former JofA senior editor. To comment on this article or to suggest an idea for another article, contact Kim Nilsen, executive editor, at email@example.com or 919-402-4048.
Accounting, Auditing Groups Aim to Raise Profession’s Profile
Brazil’s two major accounting and auditing organizations are working to raise the profile of the profession domestically and internationally.
Accounting is a growing profession in Brazil, said Juarez Domingues Carneiro, president of Conselho Federal de Contabilidade (CFC, or the Federal Accounting Council), which oversees the accounting profession in Brazil. The country is home to 493,000 accounting professionals, and 78,000 accounting organizations are registered with the CFC and nearly 1,200 higher-education institutions teach accounting in the country.
The CFC, through its 27 regional councils of accounting, “has worked hard to enhance and dignify” the profession’s role in society, he added.
IBRACON (the Institute of Independent Auditors of Brazil), which is celebrating its 40th anniversary this year, also is striving to enhance the image of Brazil’s auditing profession through a major new communications initiative, said Ana Maria Elorrieta, president. “We are highlighting the importance, relevance and excellence of the profession.”
Another goal of the effort, she said, is to make the public aware of “how much the profession can contribute to the sustainable development of the country.”
U.S. companies thinking of doing business in Brazil should keep in mind the deep pool of talented accountants and auditors the country has, Elorrieta added. “We have a significant number of professionals who are well prepared to work with them on their projects.” (For more insights into Brazil’s transition to IFRS and other hot topics, click here for two video interviews with Elorrieta).
The implementation of IFRS by Brazil will create new business opportunities for the country’s huge base of small and medium-size enterprises (SMEs) in the years to come, according to the CFC’s Carneiro.
“Brazil finds itself in a process where the growth opportunities (will) open up in the international market,” Carneiro said. “The benefits (of IFRS adoption) are many, including reduction of complexity, greater transparency, comparability and efficiency.”
In Brazil, where the overwhelming majority of companies are micro, small and medium-size enterprises, entrepreneurs are becoming increasingly aware of the importance of complying with international standards, Carneiro said. To ease the transition to IFRS, both the CFC and IBRACON have been conducting training seminars for local companies and professional associations throughout Brazil.
“The adoption of IFRS for SMEs (International Financial Reporting Standard for Small and Medium-sized Entities) will migrate from a situation of informality to a standard high level of accounting transparency,” Carneiro said. “The great challenge reserved for the CFC is now running the training (for the) SME market and for the thousands of professionals registered in the regional councils.”
Established in 1946, the CFC is charged with promoting the development of the accounting profession, registering and supervising the nation’s accounting professionals and organizations, and striving for ethics and quality in service delivery.
In addition to its current work on IFRS, other key CFC projects include Accounting for Success, an education program aimed at giving accountants better tools with which to help their clients survive and prosper; and GLASS (Group of Latin American Accounting Standard Setters), a new cooperative effort involving South America and the Caribbean. Carneiro was selected to chair the first board of the group, which was formed June 28 of this year.
The CFC also is working on a joint project in Angola and Mozambique, contributing to the development of accounting in those countries.
“Business Basics in China,” May 2011, page 42
- U.S. Taxation of International Operations: Key Knowledge (#091102, paperback; #091103PDF, on-demand)
International Taxation: To and From the United States (#731897)
For more information or to make a purchase, go to cpa2biz.com or call the Institute at 888-777-7077.
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