A country with a population of more than 190 million people is always going to seem an attractive proposition for investment. But Brazil, the largest country in South America and fifth largest on the planet, is a land which presents many unique challenges to overseas investors.
Overcoming those challenges is not without reward and while economic growth may not be performing as well as Brazil’s government has predicted – latest predictions suggest 2012’s growth will be just 1 per cent – it is still outstripping that of Europe, while low unemployment rates and the tourism and infrastructure boosts offered by the forthcoming Olympic Games and football World Cup are further causes for optimism.
But for many companies exploring expanding into Brazil, one factor can prove a major deterrent – the complex tax system. The complications are not restricted to foreign investors either. Domestic companies often employ huge tax departments to deal with the various nuances that affect what a company needs to pay.
Corporate tax is made up of both corporate income tax, at a basic rate of 15 per cent with a further 10 per cent on annual incomes of more than R$240,000 (approximately $110,000 USD), plus an additional 9 per cent social contribution on net profits – this gives an overall figure of 34 per cent.
But that two-tier tax rate is not all. There are then a further six taxes to be taken into account (known, for short, as PIS, COFINS, ICMs, IPI, ISS and IOF). And it doesn’t necessarily end there either, dependent on your line of work there may also be property tax, import tax and then industry-specific taxes. To add to the complications, taxes are collected by three different levels of government, municipal, state and federal, which can also make trading between states even more of a headache if different states deploy different tax breaks. Competition between different states to attract investment can lead to competing tax systems in different parts of the country, which is another complication for companies operating across multiple locations.
Moving goods and services locally or between states, for example, attracts taxes known as ICMs of 18 per cent for intrastate and 7 or 12 per cent for interstate business, with taxes levied on imports usually being between 18 and 25 per cent. Lower rates often apply when transferring goods and services to less developed states, while some areas may offer rate reductions as incentives for the development of industry infrastructure, such as building factories. Goods and services imported from abroad are also subject to transfer pricing based on Comparative Independent Price (PIC), Resale Price Less Profit (PRL), or Production Cost Plus Profit (CPL). COFINS, a social security contribution, is also charged on goods imported at a rate of 7.6 per cent of import value.
Brazil’s government is not averse to tweaking the tax laws on a seemingly regular basis for businesses and individuals, both to suit its own needs and to encourage spending. Payroll taxes have been cut to help address the slower than expected growth, but this has been something of a double edged sword for potential investors. Savings have often resulted in higher wages rather than reduced costs for businesses. The low unemployment rates could also be partly attributed to the fact that employment laws make staff cuts expensive, so keeping on staff rather than trimming down the workforce appears to be the cheaper route for many employers. And of course, companies hoping to benefit from a surplus of potentially cheap labour may be disappointed to learn that unemployment is just 4.9 per cent in the six biggest Brazilian cities.
Nevertheless, for those willing to tackle the complex laws and taxation system, there are undoubtedly profits to be made in Brazil. High employment should help push Brazil towards stronger economic growth and greater consumer spending, even if the latest figures appear gloomier than many had predicted. Analysts are now predicting 2013 to see inflation hit 6 per cent, with the economic growth figure predicted to be a less-than-impressive 3 per cent, a whole one per cent down on the government’s stated target, and certainly less impressive than some neighbouring Latin American countries. But there are still plenty of reasons for optimism and the government continues to roll out tax breaks designed to increase its attractiveness to investors. In October, new measures were outlined aimed at encouraging further corporate investment in the country’s car industry, for example, with tax savings for developments in automotive science, technology and fuel efficiency.
It is hoped the move will further increase the $22 billion being ploughed into the country by car makers over the next three years. Foreign manufacturers such as Fiat (Italy), Volkswagen (Germany) and General Motors (USA), already enjoy lucrative sales figures in the country while China’s Anhui Jianghuai Automobile Co has revealed plans for its first factory in Brazil, with work starting later this year. For those willing to understand and overcome the challenge of the tax system, Brazil can be a land of plenty.