Brazilian Business Opportunities Under Updated Taxation System

Amongst the several advantages of doing businesses in Brazil, the most important are related to the Brazilian territorial size and its population.  Possessing an almost continental extension, being the fifth largest country of the world in area and with a population of approximately 200 million inhabitants, Brazil has a consuming market of more than 120 million people.  For this reason, many possibilities arise.

Considering this expressive population and consuming contingent, many local companies still demand capital, reorganisation and technology, in order to extend its field of action.  Most of these companies have an enormous potential to increase when compared to the present consuming market, which presents an extraordinary and linear phase of growth due to the massive increase in the options and easiness to obtain credit for the population in the recent years.  This is a result of the stability of the currency, obtained in the last two decades and the maintenance of a strong currency despite the global crises during this period.

Brazil has a broad industrial base and infrastructure, and a diversified economy, being currently the 6^th world largest economy, with a GDP estimated in USD 2.037 trillion.  The country has abundant agricultural, mineral and energy resources, and also a large labour force available, with a competitive cost basis but with certain lack of skills amongst technological areas.

With these elements, Brazil is a country that currently possesses great business opportunities, and also a large list of governmental incentives available for new projects in Brazil.

In theory there is no restriction or differentiation regarding a foreign investor from a Brazilian investor: both have the same access to tax incentives and credit.  However, there are specific areas with some restriction, which conceals market reserves to national residents.

Amongst the incentives that are most currently practiced as development and expansionist politics in Brazil, we find loans with subsidised taxes and exemptions or reductions of specific tributes, considering the existing tax burden in the country.  These are widely used by Federal, State and local authorities.

In recent years, as a way to tackle serious world-wide economic crisis that devastated some continents, the Brazilian Government elected a form of shield against the European and North American crisis of consumption, based in the massive exportation of  mineral and agricultural commodities to Asia, specially the “Chinese Double digit Growth”.

However, if the Asian economic growth is reversed, or if the international price of commodities decreases, whether by the suppliers’ side, Brazil may face some difficulties.

Brazilian Tax System is quite complex, with a large and sparse/scattered legislation regulating tax related matters.  There are also several ancillary obligations which aim to provide information to the Brazilian Revenue Service about the business activities performed by the tax payers.

The Brazilian tax payers are subject to various taxes which are levied on products throughout almost the entire manufacturing process, such as PIS (Employees’ Social Integration Program) , COFINS (Social Security Financing Contribution), IPI (Value Added Tax – Excise Tax), ICMS (State Governmental Value Added Tax), until they reach the final consumer.  There is also income tax obtained from the sale of goods and services, such as IRPJ (Corporate Income Tax), CSLL (Social Income Tax), ISS (Service Tax), which results in a heavy tax burden for internal businesses carried on by the companies.

We should also mention some relevant difficulties that exist when a foreign investor is doing business in Brazil:

(1) The Brazilian companies which maintain operations with related foreign companies need to keep control of transfer-pricing on the products negotiated with these companies, subjecting them to the limits of the legislation in order to calculate the value of reference for tax deductibility purposes.

Unfortunately, the Brazilian legislation regarding transfer pricing does not follow the international standards set by the OCDE (Organization of Cooperation and Economic Development), consisting in a "sui generis tax regulation”.

(2) Furthermore, there is some restriction by the Brazilian legislation, regarding the sub-capitalisation of national companies, which occurs when the level of capital of third parties, for example a loan finances a company in a much higher ratio than some standards set by the legislation, when compared with its own Capital Stock.  The consequence is the non deductibility of interests paid on these loans for the purpose of IRPJ (Corporate Income Tax) and CSLL (Social Income Tax) calculation.

(3) Likewise, there's some limitation as to the employment of the accounting technique of "carry forward", which consists in applying losses of past results on profits not yet realised, reducing the taxes to be paid.  Profits not yet obtain are submitted to a limit of 30% in the compensation of such past losses.

Our company acts exactly in this direction, in order to assist the foreign investor with the diversity of tax legislation in the country and to allow the investor to focus only in performing its activities.  Our Office renders services to companies which act in several and different segments, ranging from small companies with more simple corporate needs, to consolidated open market organisations, which demand a more complex system of formation.  Furthermore, in the corporate area, we offer legal support and advice, based on our extensive expertise. 

Confidor is a Law, Audit and Tax/Corporate Consulting Firm, with offices in São Paulo and in Porto Alegre, Brazil, focused to provide tax and corporate solutions for all size companies situated in Brazil, as well international groups situated abroad.  Gerd Foerster can be contacted via email on gfoerster@confidor.com.br