doing business in brazil: common pitfalls and how to avoide them
DESCRIPTION
With a sophisticated technology sector, one of the largest workforces in the Americas, and one of the fastest growing economies in the world, it’s clear why Brazil is a popular choice for international expansion. But the labyrinthine Brazilian system can be confusing, and if your operations there are not set up optimally, you may face significant unexpected taxes or fines. Join us for this informative webinar to learn how to navigate it successfully.TRANSCRIPT
Doing Business in Brazil: Common Pitfalls & How to Avoid Them
The Opportunity – Why Brazil?
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Overview
• Average GDP growth rate of over 5%
• World’s 7th largest economy
• Population of 193 million
• Sophisticated technology infrastructure
• Currently the 11th largest export market for U.S. goods
• 197 of the Fortune 500 companies are direct investors in Brazil
But, Brazil is still a very peculiar emerging market…
High Street Partners Proprietary and Confidential 2011
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The Challenges
The Realities • General Taxes Overview
• Tax Schemes
Scenario #1: Tax Scheme for Brazilian Business
General Incorporation Guidelines
Scenario #2: S/A vs. Limitada
Getting Started
Real Life Situations
Questions?
Agenda
Overview • US offices: Annapolis (HQ), Boston, Atlanta, Miami, San Francisco, San
Jose, San Diego
• International offices : London, Hong Kong, Shanghai, Tokyo, Pune (India)
• Employees: 125
• Customers: 350+ in over 80 countries
How we are different • We get it – Founder opened 30+ overseas offices and is “our
customer”
• We do international business services, every day, everywhere
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About HSP
Has been helping companies expand into Brazil for over 10 years
Started his career with consulting firms focused on advisory, accounting, controlling, tax planning and mergers & acquisitions
Currently an investor and holds a seat in Investments Committee of IVP (Innova Venture Partners), an investment vehicle in partnership with Technology Center of Campinas State University
Extensive experience and background in the banking industry, specifically in treasury desk structuring investments for Multinational Corporations
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Guilherme Cruz, HSP’s In-Country Expert on Brazil
Introduction
The Challenges 6
Brazil has some of the most stringent laws in the world surrounding basic sales transactions and a highly complex tax system…
Brazil is a protected country
• For that reason there are huge opportunities for those who decide facing the challenges of investing
No EVA
Tax is collected in many different stages of business
Numerous tax Schemes and forms
Many “codes”
• Constitution (more than 300 articles)
• Tax Code
• Civil Code
• Commercial Law
Federal, State and Municipality tax authorities are not connected; different databases
Slow court system – 3 jurisdictions for tax matters
The Realities: General Taxes Overview 7
Corporate Taxation – Federal Corporate Income Taxes
Corporate Income Tax (IRPJ)
• Net taxable income, applied at 15% over collection basis
Social Contribution Tax on Profits (CSLL)
• Introduced to fund social and welfare programs, it is paid in addition to IRPJ at a rate of 9% over same collection basis of IRJP
The Realities: General Taxes Overview 8
Gross Revenue Taxes
Social Integration Program (PIS) • Cumulative: must choose real profit Scheme (1.65%)
• Non-Cumulative: presumed profit tax Scheme (0.65%)
Social Security Contribution (COFINS)
• Cumulative: must choose real profit Scheme (7.60%)
• Non-Cumulative: presumed profit tax Scheme (3.00%)
The Realities: General Taxes Overview 9
Indirect Taxes
Federal • Industrialized Tax Products (IPI)
• Import Tax (II)
State
• Tax on Distribution of Goods and Services (ICMS)
Municipal
• Service Tax (ISS)
Withholding Income Tax
• Applies for certain domestic transactions such as payment services, salaries and financial income of banking investments
The Realities: General Taxes Overview 10
Double Tax Agreements (DTA) • There is no DTA in place between Brazil and the US, only a
“Reciprocity Treatment”
Reciprocity Treatment • Income taxes withheld by customers in Brazil are available as
foreign tax credits in the US by the US supplier
• Only meaningful to the extent that they will actually lower federal US tax payments for the supplier
The Realities: Tax Scheme 11
Actual (or Real) Profit System: Net taxable income is equal to net book profit applying Brazilian GAAP and appropriate inclusions and deductions according to regulation.
Presumed Profit System: Taxable income based on net profit. Restrictions: (a) up to 48 million revenues preceding year (b) are not financial institutions (c) do not earn foreign profits, income or gains and (d) do not qualify for an exemption.
Arbitrated System: under inadequate circumstances of accounting records, tax authorities may arbitrate profits. Taxable income based on net profit.
Key Considerations: • Tax Schemes can be changed annually in the beginning of the fiscal year as of
January 1st to December 31st. • Most companies present a pre-operational period of accumulating expenses and
consequently, losses.
The Situation:
The VP of Finance learns that Brazil presents two tax schemes for fiscal purposes and needs to decide whether the company should choose Presumed Profit or Actual Profit.
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Scenario #1: Tax Scheme for Brazilian Business
Key Consideration: Understanding the maturity and operational margin for its
business abroad will support the decision of tax scheme.
The Solution:
Step 1: Determine the gross margin and pre-operational period
In the Business Plan process, viability analysis will present financial projections to be used for local tax planning.
Margin comparison
• Presumed Profit will determine margin for taxable income
• Generally, in case of services 32% and goods, 8%
• Comparing business margins with presumed margins is key for the proper choice
Business Maturity period
• Depending on company activity and permits required, it is possible to take a few months to get the business off the ground and running
• Accumulated expenses in Real Profit scenario is a great advantage
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Scenario #1: Tax Scheme for Brazilian Business
Step 2: Building scenarios for Real and Presumed profit
On a monthly basis, it is possible to create projections over financials. In our case the example refers to a goods business.
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Scenario #1: Tax Scheme for Brazilian Business
Real Profit Presumed Profit
Importation 1.500.000,00 Importation 1.500.000,00
ICMS 12,00% 180.000,00 ICMS 12,00% 180.000,00
IPI 0,00% IPI 0,00%
II 14,00% 210.000,00 II 14,00% 210.000,00
Tax Credit (PIS) 1,65% 24.750,00 PIS 1,65% 24.750,00
Tax Credit (COFINS) 7,60% 114.000,00 COFINS 7,60% 114.000,00
Revenues 3.315.000,00 Revenues 3.315.000,00
ICMS 12,00% -397.800,00 ICMS 12,00% -397.800,00
IPI 0,00% 0,00 IPI 0,00% 0,00
PIS 1,65% -54.697,50 PIS 0,65% -21.547,50
COFINS 7,60% -251.940,00 COFINS 3,00% -99.450,00
Net Revenues 2.610.562,50 Net Revenues 2.796.202,50
COGS -1.181.250,00 COGS -1.320.000,00
Deductable Expenses -1.064.076,97 Deductable Expenses -1.064.076,97
Other costs -100.034,99 Other costs -100.034,99
Profit Before Taxes 265.200,54 Profit Before Taxes 312.090,54
Income Tax Presumption 8,00% 265.200,00
Social Contribution Presumption 16,00% 530.400,00
Income Tax 15,00% -39.780,08 Income Tax 15,00% -39.780,00
Aditional Income Tax 10,00% -2.520,05 Aditional Income Tax 10,00% -2.520,00
Social Contribution 9,00% -23.868,05 Social Contribution 9,00% -47.736,00
Total Corporate Tax -66.168,18 Total Corporate Tax -90.036,00
Net Profit -66.168,18 Net Profit 222.054,54
Total Tax Burden 451.855,68 Total Tax Burden 428.833,50
Operational Margin 8,00% Operational Margin 9,41%
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Doing business in Brazil can be structured in different formats for international investors…
General Incorporation Guidelines
Less
Exportation
Commercial Representation
Country Ccommercial Distribution
Engagement Franchise
Establihsment of Brazilian Subsidiary
More
Alternatives for Structuring Business
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Scenario #2: S/A vs. Limitada
The Situation:
The VP of Finance learns that Brazil presents two different types of company structures (S/A and Limitada) and needs to decide which type best aligns with their corporate strategy.
Key Consideration: Choosing which type of company is a trade-off between
flexibility for more complex operations and limited liability and cost.
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Limitada
Similar to a Limited Liability Company
•No stipulated minimum corporate capital
•Capital divided in quotas
•Amendments of Articles of Association demands ¾ of corporate capital
•Possibility of claim for exclusion of minority shareholder for a fair cause
•Less protection for minority shareholder
•Easier path for the shareholder that intends to leave the company
•Fewer formalities
S/A
Similar to a Corporation
•General rule, no minimum capital is required however 10% of capital paid prior to filing
•Capital divided in shares
•Bylaws amendment demands 50% + 1 of voting capital
•Exclusion of minority shareholder is rare and very controversial
•Possibility of subscription for raising capital via new shares issuance
•Possibility of using goodwill, debts, and other structured instruments
•Publishing corporate bylaws and audit of financial statements is required
Scenario #2: S/A vs. Limitada
The Solution:
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Step 1: Type of Company
• Choose between a Limitada or a S/A
• For both minimum of 2 shareholders – can be entities and/or individuals
Step 2: Mandatory Representatives
• Appointment of an attorney-in-fact for representing the offshore shareholders
• Individual that holds POA must be Brazilian resident or foreigner with permanent VISA
Step 3: Documentation
• By-laws/articles or associations must be notarized and approved by the Brazilian Consulate/Embassy
• Registration with the central bank and obtaining tax payer/social security number
Getting Started
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Step 4: Legal Representative/Statutory Director
• Brazilian citizen or a foreigner with permanent VISA must be nominated as legal representative
• Two Statutory Directors in the case of a S/A
Step 5: Subsidiary Set-Up
• Company’s corporate purpose, corporate name and registered address
• Definition of stated capital and shareholders shares division
• Definition of company’s bylaws or articles of association and proof of filing on Commercial Boards
• Filing municipality, state and federal licenses/registration
• Opening bank account
Getting Started
Offer Letter & Payroll Registration
Local Incorporation: Corporate Address & Bylaw’s Activity
Legal Representative: Administration Issues
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Real Life Situations