What to think about when setting up shop in Brazil What to think about when setting up shop in Brazil

What to think about when setting up shop in Brazil
11 May 2018

Brazil has moved on a lot since being categorised a decade ago as one of the “BRIC” economies, which at the time were among the world’s fastest growing. But more recently too, the Latin American powerhouse has also benefitted from fast growth.

Plenty of foreign companies have come to do business in the country, buoyed by a commodities boom and an increase in domestic consumption. Playing host to both the football World Cup (2014) and the Olympic Games (2016) did nothing to hurt its appeal either.

But while the resultant government investment may have helped lift more than 30 million people out of poverty, these major sporting events also generated controversy, especially around how much they cost. Government budget deficits  now amount to 10% of economic output, up from around 3% in 2013 – and this situation inevitably has an impact when doing business in the country.

It is not all doom and gloom though. Brazil’s consumer confidence is growing, with households generally feeling more optimistic about inflation, unemployment, personal incomes, their own financial situation and debt. Moreover, following the impeachment of then-president Dilma Rousseff in August 2016, President Michel Temer of the centrist Brazilian Democratic Movement Party has set out to restructure the economy. His government has also formally applied for membership of the Organization for Economic Cooperation and Development.

Moreover, after almost three years of economic recession, the Brazilian economy is now slowly heading towards a recovery. International Monetary Fund predictions had it growing by 0.5% in 2017, along with a drop in interest rates.

But will this air of optimism last? Even without the aforementioned economic twists and turns, doing business in Brazil remains notoriously complicated. In fact, the country was named the second-most complex jurisdiction for accounting and tax in our 2017 Financial Complexity Index. So here are some things to think about before starting to do business here:

Developing nation

Brazil is still considered a ‘developing nation’ and, although the term is often understood to mean a precursor for high growth levels, it also means that a number of areas of its economy remain underdeveloped. The consumer base, regulatory environment and investment sphere are not as mature here as those of developed nations, and this situation must be taken into consideration.

Bureaucracy

Reform of the laws and regulations around opening and running a business in Brazil has not taken place at the same rate as economic growth, placing many hurdles in the way of overseas corporations as a result.

Brazil ranked 125th out of 190 countries in the World Bank’s latest annual global report, which evaluates the ease of starting a business, dealing with construction permits, registering property and paying taxes. On average, starting a business in the country takes around 90 working days - although it used to be almost 120 - and involves 11 different procedures. Sorting out construction permits, on the other hand, takes 404 working days and involves an average of 20 procedures. 

Corruption

While Brazil is one of the world’s leading foreign investment destinations and is ostensibly a well-functioning business environment, corruption and bribery are still serious obstacles to trade. The federal structure of the political system means there are a wide range of regulatory agencies, which can lead to demands for bribes from public officials.

This year, Brazil was ranked 96th in Transparency International’s corruption perception index, and organised crime is still seen as a significant problem in some parts of the country. The government is fighting hard to rectify the situation with a so-called integrity programme, however.

Financial conditions

Credit risks in Brazil are growing, and insolvencies are forecast to increase again as financial conditions tighten. But this situation tends to have a knock-on effect on payment behaviour and the way that businesses protect themselves against risks.

Brazil’s overall country risk has been considered medium in severity terms for 13 consecutive quarters, although the improving political situation is expected to have a positive effect on economic growth. But the fact that this growth is slowing may also provide foreign investment opportunities, particularly in sectors such as IT, pharmaceutical, insurance, mining, energy, oil and gas.

Taxes

Brazil’s tax regime is one of the reasons it ranks so highly in terms of financial complexity. The state imposes more than 90 taxes, duties and contributions, and there is taxation at the federal, state and municipal level.

The launch and roll-out of eSocial has created a single reporting system, which means that employers no longer have to provide separate reports to Social Security, the Internal Revenue Service and Brazil’s Ministry of Labour and Employment. But its introduction has increased complexity for employers in the short-term at least. 

Corporate transparency

The country’s diverse and varied economy means that companies moving there often choose to do so in partnership with local organisations. Not only does this makes the transition less disruptive for customers, but it also gives employers an insight into the local economy.

There is still a slew of regulations aimed at controlling foreign direct investment in Brazil though. One such obligation is Normative Instruction 1634, which is intended to bring more transparency to the corporate market and clearly defines the concept of ‘Ultimate Beneficial Owner’. 

Infrastructure

Being on the international stage during the World Cup and Olympic Games pushed the Brazilian government to improve the country’s infrastructure. To this end, it auctioned road, railway and airport concessions and cut the financial transaction tax on several major projects.

According to the World Economic Forum, Brazil now ranks 107th out of 144 countries in terms of infrastructure development. That said, building this infrastructure was fraught with controversy - and the long-term impact has yet to be properly assessed.

Technology

As Brazil has developed, it has been hampered by a lack of suitable technology to help, although concerted efforts are now being made to improve the situation. Indeed, many technology start-ups have grabbed the headlines of late, and large corporations have also made a commitment to the economy. For example, Microsoft invested US$100 million in Rio de Janeiro in the lead-up to the Olympics.

Smart technologies are also now being implemented in the country to:

  • Manage the use of resources in cities more effectively;
  • Facilitate the movement of people;
  • Improve emergency services coverage; and
  • Make it easier to shop online.

Big data, security and surveillance applications, risk assessment and 3D modelling software are all considered to offer big opportunities.

Local labour force

The labour participation rate in Brazil is increasing and, by the end of 2017, was approaching 62%. Unemployment is almost 12%, but labour costs are falling while wages are rising quarter on quarter. As a result, some experts are warning that the labour market could implode - and so businesses should seek expert advice before taking on staff.

Trade unions also have a lot of influence in the country, and although this situation means the labour market is more developed than it would otherwise be, employers should understand how things work. It is all too easy to fall prey to Brazil’s labour laws, which are laid out across 900 articles and are tricky to navigate. Non-compliance can lead to fines and a damaged reputation, however.

Export and import barriers

Brazil is the 21st largest export economy in the world. In 2017, the country exported US$217.7 billion-worth of goods around the world and imported $150.7 billion-worth, resulting in a positive trade balance of US$66.3 billion.

But businesses can often face complications when exporting and importing. Most imported goods are held in port for some time while the correct procedures take place, and average per container costs are relatively steep. Ensuring export compliance can take as much as 71 hours and cost up to US$1,185. High duties may also make exporting prohibitively expensive.

 Marco Sottovia 

Marco Sottovia is TMF Group’s sub-regional director for Brazil. He has more than 26 years’ experience in management and corporate strategy and has worked at Cargill, Chrysler, Origin, Tidexa and PwC. Marco was also a co-founder of Apriori and is certified by the International Association of Outsourcing Professionals.

 

 

 

Brazil has moved on a lot since being categorised a decade ago as one of the “BRIC” economies, which at the time were among the world’s fastest growing. But more recently too, the Latin American powerhouse has also benefitted from fast growth.

Plenty of foreign companies have come to do business in the country, buoyed by a commodities boom and an increase in domestic consumption. Playing host to both the football World Cup (2014) and the Olympic Games (2016) did nothing to hurt its appeal either.

But while the resultant government investment may have helped lift more than 30 million people out of poverty, these major sporting events also generated controversy, especially around how much they cost. Government budget deficits  now amount to 10% of economic output, up from around 3% in 2013 – and this situation inevitably has an impact when doing business in the country.

It is not all doom and gloom though. Brazil’s consumer confidence is growing, with households generally feeling more optimistic about inflation, unemployment, personal incomes, their own financial situation and debt. Moreover, following the impeachment of then-president Dilma Rousseff in August 2016, President Michel Temer of the centrist Brazilian Democratic Movement Party has set out to restructure the economy. His government has also formally applied for membership of the Organization for Economic Cooperation and Development.

Moreover, after almost three years of economic recession, the Brazilian economy is now slowly heading towards a recovery. International Monetary Fund predictions had it growing by 0.5% in 2017, along with a drop in interest rates.

But will this air of optimism last? Even without the aforementioned economic twists and turns, doing business in Brazil remains notoriously complicated. In fact, the country was named the second-most complex jurisdiction for accounting and tax in our 2017 Financial Complexity Index. So here are some things to think about before starting to do business here:

Developing nation

Brazil is still considered a ‘developing nation’ and, although the term is often understood to mean a precursor for high growth levels, it also means that a number of areas of its economy remain underdeveloped. The consumer base, regulatory environment and investment sphere are not as mature here as those of developed nations, and this situation must be taken into consideration.

Bureaucracy

Reform of the laws and regulations around opening and running a business in Brazil has not taken place at the same rate as economic growth, placing many hurdles in the way of overseas corporations as a result.

Brazil ranked 125th out of 190 countries in the World Bank’s latest annual global report, which evaluates the ease of starting a business, dealing with construction permits, registering property and paying taxes. On average, starting a business in the country takes around 90 working days - although it used to be almost 120 - and involves 11 different procedures. Sorting out construction permits, on the other hand, takes 404 working days and involves an average of 20 procedures. 

Corruption

While Brazil is one of the world’s leading foreign investment destinations and is ostensibly a well-functioning business environment, corruption and bribery are still serious obstacles to trade. The federal structure of the political system means there are a wide range of regulatory agencies, which can lead to demands for bribes from public officials.

This year, Brazil was ranked 96th in Transparency International’s corruption perception index, and organised crime is still seen as a significant problem in some parts of the country. The government is fighting hard to rectify the situation with a so-called integrity programme, however.

Financial conditions

Credit risks in Brazil are growing, and insolvencies are forecast to increase again as financial conditions tighten. But this situation tends to have a knock-on effect on payment behaviour and the way that businesses protect themselves against risks.

Brazil’s overall country risk has been considered medium in severity terms for 13 consecutive quarters, although the improving political situation is expected to have a positive effect on economic growth. But the fact that this growth is slowing may also provide foreign investment opportunities, particularly in sectors such as IT, pharmaceutical, insurance, mining, energy, oil and gas.

Taxes

Brazil’s tax regime is one of the reasons it ranks so highly in terms of financial complexity. The state imposes more than 90 taxes, duties and contributions, and there is taxation at the federal, state and municipal level.

The launch and roll-out of eSocial has created a single reporting system, which means that employers no longer have to provide separate reports to Social Security, the Internal Revenue Service and Brazil’s Ministry of Labour and Employment. But its introduction has increased complexity for employers in the short-term at least. 

Corporate transparency

The country’s diverse and varied economy means that companies moving there often choose to do so in partnership with local organisations. Not only does this makes the transition less disruptive for customers, but it also gives employers an insight into the local economy.

There is still a slew of regulations aimed at controlling foreign direct investment in Brazil though. One such obligation is Normative Instruction 1634, which is intended to bring more transparency to the corporate market and clearly defines the concept of ‘Ultimate Beneficial Owner’. 

Infrastructure

Being on the international stage during the World Cup and Olympic Games pushed the Brazilian government to improve the country’s infrastructure. To this end, it auctioned road, railway and airport concessions and cut the financial transaction tax on several major projects.

According to the World Economic Forum, Brazil now ranks 107th out of 144 countries in terms of infrastructure development. That said, building this infrastructure was fraught with controversy - and the long-term impact has yet to be properly assessed.

Technology

As Brazil has developed, it has been hampered by a lack of suitable technology to help, although concerted efforts are now being made to improve the situation. Indeed, many technology start-ups have grabbed the headlines of late, and large corporations have also made a commitment to the economy. For example, Microsoft invested US$100 million in Rio de Janeiro in the lead-up to the Olympics.

Smart technologies are also now being implemented in the country to:

  • Manage the use of resources in cities more effectively;
  • Facilitate the movement of people;
  • Improve emergency services coverage; and
  • Make it easier to shop online.

Big data, security and surveillance applications, risk assessment and 3D modelling software are all considered to offer big opportunities.

Local labour force

The labour participation rate in Brazil is increasing and, by the end of 2017, was approaching 62%. Unemployment is almost 12%, but labour costs are falling while wages are rising quarter on quarter. As a result, some experts are warning that the labour market could implode - and so businesses should seek expert advice before taking on staff.

Trade unions also have a lot of influence in the country, and although this situation means the labour market is more developed than it would otherwise be, employers should understand how things work. It is all too easy to fall prey to Brazil’s labour laws, which are laid out across 900 articles and are tricky to navigate. Non-compliance can lead to fines and a damaged reputation, however.

Export and import barriers

Brazil is the 21st largest export economy in the world. In 2017, the country exported US$217.7 billion-worth of goods around the world and imported $150.7 billion-worth, resulting in a positive trade balance of US$66.3 billion.

But businesses can often face complications when exporting and importing. Most imported goods are held in port for some time while the correct procedures take place, and average per container costs are relatively steep. Ensuring export compliance can take as much as 71 hours and cost up to US$1,185. High duties may also make exporting prohibitively expensive.

 Marco Sottovia 

Marco Sottovia is TMF Group’s sub-regional director for Brazil. He has more than 26 years’ experience in management and corporate strategy and has worked at Cargill, Chrysler, Origin, Tidexa and PwC. Marco was also a co-founder of Apriori and is certified by the International Association of Outsourcing Professionals.