Doing Business in Brazil Perception vs Reality Perception x Reality - - PowerPoint PPT Presentation

DOING BUSINESS IN BRAZIL Perception vs Reality

Doing Business in Brazil Perception x Reality

March, 2019

• BRAZIL AT A GLANCE
• TAX SYSTEM
• TAX COMPLIANCE
• INNOVATION AND ENTREPENEURSHIP
• PERCEPTION AND REALITY
• FORWARD LOOKING STRATEGIES
• FINAL COMMENTS
• PFM

CONTENT

BRAZIL AT A GLANCE

The country

Population*

207 + million (2016)

1

Territory*

8.514.876,599 km2

2

Nominal GDP**

$ 1,796 Trillion (7th largest)

3

Sources: **IBGE **World Bank

4 5 6 7

POLITICAL DIVISION 26 states, 1 federal district 5,500 + cities CAPITAL CITY Brasília CURRENCY Brazilian Real (BRL) LANGUAGE Portuguese

Regional characteristics

NORTH MIDWEST NORTHEAST SOUTHEAST SOUTH Free trade zone CIT reduction Agriculture (Special Tax Provisions) CIT reduction Most important ports Higher VAT Important ports Higher VAT

São Paulo - the largest city

Population: 12 + million (2016)

90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00

SOUTHEAST NORTHEAST SOUTH NORTH MIDWEST SOUTHEAST NORTHEAST SOUTH NORTH MIDWEST

41.94% 27.66% 7.55% 8.55% 41.94% 80.75 56.56 29.23 17.47 15.44

Population in Millions

Source: IBGE

Brazil - back on track...

In 2017, The Economist stated “The Brazilian economy has been shrinking for eight quarters but, with inflation expectations tamed, interest rates are now falling. Brazil and Russia are likely to add to global GDP this year, not subtract from it.”

• Due to our currency decrease, it is cheaper to invest

and buy business in Brazil;

• The new government is expected to boost Brazil’s

international credibility;

• The government has publicly stated that it intends to

incentivize public and private partnerships, a relevant privatization program and, very importantly, introduce a social security reform to hep tackle public deficit.

Back on track (cont.)

INDICATORS MAY 2016 2018 (CALENDAR YEAR)

Inflation (IPCA) Source: IBGE Interests (SELIC) BACEN Industrial Production Source: IBGE Vehicles Production Source: ANFAVEA Grain Harvest Source: LSPA/IBGE IBOVESPA Source: Uol GDP Source: IBGE Trade Balance (Balance) Source: MDIC Exportations Source: MDIC Imports Source: MDIC Employment Creation Source: CAGED Direct Foreign Investment Source: BACEN/Unctad 9.28% (12 months until April 2016) 14.25% –9.8% (accrued Jan-May 2016) –24.3% (accrued Jan-May 2016) 184,7 Million Ton. (total production in 2016) 57,901 Points –5.4% (GDP variation 1°Q 2016 x 1º Q 2015) US$ 19,682 Billion (accrued Jan-May 2016) US$ 73,512 Billion (accrued Jan-May 2016) US$ 53,830 Billion (accrued Jan-May 2016)

• 448,101 Thousand

(accrued Jan-May 2016) US$ 75 Billion (total of IED in 2015) 3,75%% 6,5% 1,5% (until November) 8,8% (until November)

• Approx. 230 Million Ton.

95,100 Points 1,3% US$ 58,3 Billion (Record) US$v239,523 Billion US$ 181.225 Billion 530 Thousand US$ 59 Billion (World’s #9)

Brazil is the regional powerhouse

And also a global powerhouse…

• Brazil has been a world’s top ten economy for a relevant

period of time

• Economic prediction of major forecasts indicates that such

position will remain for the foreseeable future (currently #7 and expected to be #6 by 2030 – just 11 years from now)

• This means that, in addition to its natural advantages in

agriculture, natural resources and energy, the country will be a relevant spot for expansion of consumer business, technology and services.

Brazil is a global powerhouse

• Brazil is already a world’s top ten oil

producer

• Pre-salt and regular concession bidding

rounds expected to bring back momentum to the industry and also billions in investments

• Interesting note to US investors: in just two

bidding rounds (17/18), Exxon acquired enough acreage to become the #1 foreign company in exploration acreage in Brazil

Current Political & Economic Situation

GDP growth 2.0-2.5%

Current Political & Economic Situation

TAX SYSTEM

The statutory rate is high x other jurisdictions

• Corporate Income

Tax: 25%

• Social Contribution

Tax: 9%

• PIS:

0.65% or 1.65%

• COFINS:

3% or 7.6%

• IPI:

Average rate 14%

• ICMS: 0% to 25%
• ISS: 2% to 5%
• II (Import duty)

0% to 35%

• IE (Export tax)

Potentially high, varied rates

• INSS

(Social Security Tax):

20% to 28.8%

• FGTS: 8%
• 13th Salary:

8.33%

• Vacation: 11.11%
• IOF: 0% to 25%
• ITBI (Real Estate

Transfer Tax): 2% to 6%

• IPTU and ITR:

Property taxes

Tax system - complex and counter-intuitive

FEDERAL STATES MUNICIPAL

• II - Import Duty (not VAT)

Rates:

• 0% to 35%. Average: 14%
• IPI - Federal VAT

Rates:

• 0% - 330%. Average: 14%
• PIS/COFINS

Regimes/Rates:

• Non-cumulative: 9.25%
• Cumulative: 3.65%
• ICMS - State VAT

Rates:

• Intrastate operations:

17% to 19%, depending

• n the State
• Interstate operations:

12% (standard), 7% or 4%

• Tax benefits granted by

certain States to import and local outputs

• ISS - Tax on services
• Tax rates range 2% to 5%,

depending on the nature

• f service and

municipality involved

• Cumulative tax

(no tax credit on inputs)

• Imposed on importation
• f services
• Equipment rentals are

not subject to ISS

Incentives that can be applied

F E D E R A L S TAT E M U N I C I PA L I N D U S T R Y

• Suspension/Reduction of PIS and COFINS
• IPI reduction to 0%
• Suspension of PIS/COFINS/IPI on imports
• Reduction of ICMS calculation basis
• ICMS deemed credits
• Tax financing with lower rates
• ISS and IPTU exemption
• Land Yield
• Infrastructure

Specific benefits granted for key sectors considered essential for the country development

TAX COMPLIANCE

Time taken to comply - Brazil

Time taken to comply, 2016 (hours/year)

URUGUAY PARAGUAY ECUADOR BOLIVIA VENEZUELA PERU COLOMBIA CHILE BRAZIL ARGENTINA 27 1 31 378 384 664 654 102 5 102 5 792 792 260 293 239 203 291 291 2038 2600 359 405

500 1000 1500 2000 2500 3000

2016 2013

Sources: World Bank

Federal taxes collection

Total Federal Taxes Collected

(in BRL Millions)

1,400,015 1,200,015 1,000,015 800,015 600,015 400,015 200,015 15

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Taxes in 2016 5 % 25 % 29 % 41 %

INCOME TAXES OTHER TAXES PIS/COFINS IPI

Source: Brazilian Federal Revenue

Technology - investing to increase collection

200,00 180,00 160,00 140,00 120,00 100,00 80,00 60,00 40,00 20,00 0,00 2009 2010 2011 2012 2013 2014 2015 2016

Total tax assessments issued by the Federal Revenue Service (RFB) - in BRL Billions

Period Total Tax Audits Increase

2009 / 2012 R$ 382.865.096.656,00 2013 / 2016 R$ 569.194.853.576,00 48,67%

Factors responsible for leveraging tax collection and audit mechanisms:

• Improvements on the quality of

the criteria used to select taxpayers for auditing procedures, along with new approaches on the detection of tax evasion structures;

• The cross-checking of a great

volume of tax data from the taxpayers;

• Use of effective measures to

fight tax evasion structures;

• Increase on tax auditors

specialization and training.

Source: Brazilian Federal Revenue

SPED program to combat tax evasion

SPED

Digital Bookkeeping

• f Accounts (ECD*)

Digital Tax Bookkeeping (EFD/ECF**) E-Invoice (NF-e***)

* Escrituração Contábil Digital ** Escrituração Fiscal Digital *** Nota Fiscal Eletrônica ** Escrituração Contábil Fiscal

Electronic audit paradigm

Source: Brazilian Federal Revenue

SPED Benefits in numbers: PAST CURRENTLY

• Isolated
• Retrospective audit
• Manual conference
• Audit on distance
• Integrated data flow
• Prospective review (tax distortions)
• Electronic Audit of all operations
• Reduction of time spent with auditors presence in the

company

• The average of tax audits increased by double digits on

yearly basis

• 10+ Million trees was spared since its implementation

A broad view of the problem

• Three levels of government

(Constitution drives the tax system)

• Growing electronic filing and potential
• f information/data cross checking
• Court procedures are still time

consuming and do not have specific chambers specialized in tax matters

• Result: challenging environment

Innovation and Entrepreneurship

Innovation and Entrepreneurship

Private Equity & Venture Capital

Performance of the Private Equity and Venture Capital Industry in Brazil: This report commissioned by ABVCAP and INSPER presents an overview

• f the Brazilian PE and

VC Industry between 1994-2017 Source: ABVCAP

Venture Capital

In 2017, Venture Capital tech investment in Latin American countries had an all time high of USD$1.1 billion. Although 100% of the largest technology companies of the world (Market cap criteria) are currently in the US and China, we believe that it will not take more than medium term for Latin unicorns to pop up. Note that Brazil already account for more than 50% of the regional investment. Source and graph: https://lnkd.in/e-U8svn (nathanlustig)

Regional Leadership

Fintechs as one of the new trends

Perception x Reality

Brazil - Perception versus Reality

Brazil has a very complicated tax system Nobody can make money with this tax system Everything in tax is electronic, so compliance should be easy If you knew all the facts you would be sure

• f that.

Many companies show higher profitability in Brazil than in other markets. Electronic compliance increased the level

• f scrutiny of most transactions, regardless
• f the size and location of the taxpayer.

PERCEPTION I heard that… REALITY The truth is…

Brazil - Perception versus Reality

Compliance cost is expensive in Brazil Internal market is huge so the easy way to do business is to export to Brazil Cash out from Brazil is difficult The number of tax professionals needed is typically much higher than in other countries, plus investment in hardware and software. Historical protectionism imposes several limitations to direct foreign competition. There are no restrictions to foreign

• remittances. Exchange controls and taxation

do not impose limitations in terms of the amount to be transferred.

PERCEPTION I heard that… REALITY The truth is…

FORWARD LOOKING STRATEGIES

Challenging Environment

• Complex tax environment
• High fines and interest provided by

tax legislation;

• Brazilian mindset is focused on

local content requirements.

I s s u e

• Opportunity to design contractual

structures towards assuring tax compliance and optimization;

• Modeling alternatives is

recommended prior to entering in the Brazilian market;

• Tax Incentives can be applied.

S t ra t e g y

Compliance

• Significant number of filings;
• Information Technology (IT)

tools for the e-filings;

• Electronic crosscheck made

by IRS.

I s s u e

• Tax Management Compliance

(TMC) is currently a trend;

• Governance and internal controls

improvement;

• Preparation/review of the

electronic filings/returns might be co-sourced.

S t ra t e g y

Bureaucracy

• Redundancy on the ancillary
• bligations filing;
• SPED is very much like a Tax

ERP , which implies in companies’ changing its invoicing (NF-e) and inventory control (EFD.

I s s u e

• Companies can use the compilation
• f data/information required to

review its business performance indicators;

• Opportunity to review its

information flows and potentially

• ptimize them.

S t ra t e g y

FINAL COMMENTS

Final Remarks!

• Do not underestimate or overestimate the complexity
• Plan in advance
• The main issues in Brazil are related to taxes’ compliance
• There are several opportunities to be explored

Paulo Fernando Melo

• Paulo is the Managing Partner of PFM Associados, firm that he founded in 2017. His advisory

career began in Arthur Andersen in the late nineties and he has 20+ year consulting experience, having led practices in Big Four and Middle-market focused networks.

• Leads business and strategic consultancy, tax advisory and outsourcing for several clients,

especially those in the Oil & Gas, Energy, Natural Resources, Manufacturing and Private Equity

• industries. Activities comprise tax advisory, corporate restructuring, foreign investment, M&A,

due diligence processes, tax incentives, review of tax procedures and advisory regarding compliance with tax obligations. He is also a member of the Risk Committee in an Oilfield Services firm, with focus on compliance and internal controls.

• Frequently invited to be a speaker on Brazil Business Environment and Tax Framework to a

number of audiences, in Brazil and overseas. Over the last years, workshops were presented in the USA (10+ states), Canada, China, United Kingdom, Portugal, The Netherlands, Luxemburg, Austria, Germany, Italy, Australia, Argentina and Puerto Rico.

• Also requested for speeches and presentations on Investing in Brazil to MBA classes of US and

international universities, among which Auburn University, Bay Path College, Belmont University, Baruch College, Dublin College, George Mason University, Imperial College London, Rice University, Rutgers University, Texas Tech University, University of Florida, University of Stellenbosch, University of Tennessee, University of Virginia and University of Wisconsin.

• Received awards for client accomplishments. Authored articles published in the International

Tax Review and Oil & Gas Tax Newsletters. In 2018, he received from the British publication Acquisition International the recognition as “Leading Energy & Resources Consultant of the Year – Brazil”.

paulo.melo@pfmassociados.com.br

+55 21 99142 0699

CONTACTS

contato@pfmassociados.com.br +55 21 99142-0699 @pfmassociados