Investing-in-Brazil-2012.KPMG

Investing in Brazil ‘A land of opportunities’ November 2012

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2 | Section or Brochure name

Investing in Brazil | 3

Introduction

Since last year’s publication global economic conditions have not improved and although economic growth has also lost some traction in Brazil, it remains an attractive high growth economy.

Contents 1. An introduction to Brazil

Underlying drivers of Brazilian growth

FDI in Brazil

Brazil and the BRICS

2. Contingencies in Brazil

Regulatory environment

Tips and tricks for successful investments

The tax environment

People and Culture

3. KPMG contacts

Brazil‘s GDP growth slowed down to 2.7% in 2011, but the medium and long-term outlook remain robust with major sports events planned for 2014 and 2016, a growing middle class, a developed services sector and an abundance of natural resources.

Indicative of its attractiveness, FDI in Brazil is rapidly increasing and actively stimulated by the government. The country appears to have critical success factors, such as natural resources, a relatively attractive business climate and a supportive government. This is reflected by last year’s strong increase in FDI up from USD 52.7 billion in 2010 to USD 69.5 billion in 2011.

This publication provides a brief background of the Brazilian economy, its main characteristics and key growth drivers. Also, it explores the most important inhibitors for setting up shop as recognised by market participants and summarises their tips & tricks for success in Brazil. In summary, the aim of this paper is to highlight the opportunities for foreign companies in Brazil, while simultaneously discussing the contingencies that come with potential investments. We would like to thank the Ambassador of the Netherlands to Brazil, Kees Rade, for his kind cooperation and valuable insights.

Yours Sincerely,

The consensus view on Brazil remains positive, being a country that offers a high potential return if the appropriate contingency planning is applied and expectations are realistic. However, we notice that organisations remain hesitant to invest in Brazil due to several potential pitfalls, such as a complex regulatory and fiscal environment and a distinct culture.

Rob Wilmink Chairman Brazil Practice, KPMG The Netherlands

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1. An introduction to Brazil

Brazil, the land of opportunities In the past decade, Brazil’s economy has grown to such extent that Brazil is now labelled an economic superpower. With an average annual GDP growth of 4.2% over the past five years, increasing wealth of the home market and a vast amount of natural resources, Brazil’s future is looking bright. The principal economy of South America overtook the UK in 2011 to become the 6th largest economy in the world and is expected to become the world’s 5th largest economy by 2017a. “Brazil is an exciting country for Dutch companies with its large middle class and stable democracy. Yet, complex regulation and limited knowledge of the English language make doing business in Brazil challenging.” Kees Rade, Dutch Ambassador to Brazil

Brazil factsa:

Brazil

• • • • • • • •

Population: 196.7 million Official language: Portuguese Size: 8,514,877 km2 Currency: Brazilian Real (BRL) GDP (PPP): USD 2,324 trillion (2011) GDP per headb: USD 12,830 (2011) Inflation rate: 6.6% (2011) Proportion of population below national poverty line: 21.4% (2009) • Life expectancy at birth: 73 years (2011)

Despite the low growth in 2011, it seems that Brazil has not lost its attractiveness for foreign direct investors, as FDI inflows have remained strong. In 2011, the total inflow of foreign direct investment amounted to USD 69.5 billionb. Foreign firms invested in several areas such as commodities, infrastructure and energy. The Brazilian government is further attempting to improve these investments through investment programmes such as

Source: a CIA World Factbook, 2012 b EIU, 2012

Brazil’s economic growth decelerated in 2011, with the growth rate falling from 7.5% in 2010 to 2.7% in 2011b. In particular, industry has been under pressure. However, the government acted swiftly by setting up various initiatives to counter the slowdown in growth.

Source: a CNN, 2012 b EIU, 2012

the continued Growth Acceleration Programme (PAC). The recent positive performance of Brazil’s market is in stark contrast with the economic and the political situation as it was a decade ago. Whereas Brazil now has a relatively stable financial and political climate, previously, Brazil’s economy suffered from negative influences such as oil crises and hyperinflation. Therefore, despite the long-term positive outlook of the Brazilian economy, it remains important to consider the risks that come with potential investments in this booming economy.

Note: This publication is predominately based on KPMG’s secondary research and interviews with Brazil experts

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Underlying drivers of Brazilian growth Drivers of Brazil’s economic growth • Level of welfare of the home market • Infrastructure investments • International demand for commodities • Public policy

The expansion that the Brazilian economy has displayed and is likely to exhibit in the future is driven by several different growth factors. These factors include the level of welfare of the population, infrastructure investments, international demand for commodities and public policy. “Despite the recent decline in economic growth, Brazil remains a market full of opportunities”

Level of welfare in the home market One of the key drivers of the growth of Brazil’s economy is the level of welfare of the home market.

Kees Rade, Dutch ambassador to Brazil

Exhibit 1. Government response to decelerating growth in 2011c In 2011 Brazil’s economy grew by only 2.7%, after the high growth of 7.5% in 2010a. In particular industry has been under pressure, as the appreciation of the real diminished the competitiveness of the sector. The government has tried to counter the slowdown in growth in various ways. Firstly, the government attempted to boost export, control inflation and improve borrowing conditions through Central Bank intervention.

Brazil has a relatively large home market with a population of almost 200 million people and the overall welfare of the population is strongly increasing. The World Bank now classifies Brazil as an upper middle income country with the likes of Russia, Argentina and Mexico. In the five years leading up to 2011, Brazil’s GDP per head more than doubled from USD 5,970 to 12,830 per annuma. The increase in welfare is also reflected in a larger amount of middle class Brazilian families. Between 2005 and 2011 over 40 million people have entered the middle class, which comprised 54% of the population in 2011b.

Note: Source estimates differ per source and per measurement method Source: a EIU, 2012 b Cetelem BGN, 2012 c Country Report Brazil,Rabobank, Sept 2012 d Brazilian Economic Outlook, Ministry of Finance, April 2012

“Brazil is planning for heavy investments in infrastructure not only in the more mature parts of Brazil but also in the northern and north eastern parts”

“The demographic phenomenon where the middle class is increasing in size is considered one of the main drivers of Brazilian growth. This middle class boosts consumer markets”

International demand for commodities An additional driver for the growth of the Brazilian economy is international demand for agricultural and energy commodities. Brazil benefits from increasing international demand of commodities as it possesses a vast amount of natural resources. Its export products include soybeans, oil and steel products.

Augusto Sales, KPMG Brazil Additionally, consumers are increasingly utilizing consumer credit and long- term financing. This enables many Brazilians to buy property or to start a business.

Drivers of economic growth in Brazil Other growth factors Public policy

Secondly, the government implemented a number of tax initiatives, such as a scheme to promote the sale (and production) of vehicles. The launch of a new infrastructure initiative, Plano Nacional de Logística Integrada, deals more with Brazil’s structural issues and envisions a more extensive role for the private sector. About USD 65 billion should be generated under this scheme of which 60% is projected in the coming 5 years.

The increasing welfare of the population has had and will have a profound effect on the Brazilian economy. The average Brazilian will increasingly demand more and higher quality goods and thus drive further economic growth.

International demand for agricultural and energy commodities Infrastructure investments Level of welfare of the home market Source: KPMG Analysis

Infrastructure investments A second principal driver for growth is infrastructure investment. Infrastructure being a critical constraint to economic growth in Brazil, initiatives in recent years signal that the government is willing to address these structural constraints to growth. Brazil’s facilitation of the World Cup 2014 and the Olympic Games of 2016 have

prompted an increase of infrastructure investments with a total of BRL 33 billion allocated to the implementation of infrastructure projectsd. Infrastructure investment is also one of the key investment areas of the Growth Acceleration Programme (PAC) (Exhibit 2).

Exhibit 2. The Growth Acceleration Programme In the past years, the Brazilian government has introduced several initiatives to promote foreign direct investments in Brazil. One of the key initiatives to boost Brazil’s economic growth is the Growth Acceleration Programme (PAC). This programme was set up to combine management initiatives with public works.

Rob Wilmink, KPMG The Netherlands

The PAC programme, which currently consists of two phases, was first launched in 2007. The first phase, PAC 1, focused on improving Brazil’s logistics sector, its power segment and its social and urban development. This first phase aimed to attract investments of USD 349 billion. PAC phase 2, which was announced in 2010, is expected to see a total public and private investment of USD 526 billion towards 2014. After 2014, additional investments of USD 346.4 billion are budgeted by the programme.

With the world population currently close to 7 billion people and a further increase of 3.6 billion people forecasted towards 2050a, demand for the world’s commodities is likely to further increase. In addition, the anticipated increase in welfare of developing countries, and China and India in particular, will further increase the demand for Brazil’s natural resources.

PAC phase 2 focuses on six key initiatives: • “Better city”: improving the quality of life in cities Investment to 2014: USD 31.3 billion • “Bringing citizenship to the community”: increasing the availability of state services in less economically developed districts Investment to 2014: USD 12.6 billion • “My house, my life”: reducing housing deficit, stimulating the construction sector and creating jobs and income Investment to 2014: USD 152.5 billion

“Brazil’s economy is commodity driven but we see a shift in focus from raw materials to products with more added value“

• “Water and light for all”: providing general access to water and electricity Investment to 2014: USD 16.6 billion

Rob Wilmink, KPMG The Netherlands

• “Transportation”: consolidating, expanding and integrating the logistics network to ensure quality and safety Investment to 2014: USD 57.3 billion Investment after 2014: USD 2.47 billion

Public policy Finally, public policy is key to further growth of the economy. Going forward, a public focus on enhancing foreign investment is necessary to further induce economic growth. By introducing the first phase of the Growth Acceleration Programme (PAC 1) (Exhibit 2), in 2007, Brazil’s government initiated its active encouragement of foreign direct investment. The instatement of Dilma Roussef, one of the lead responsibles of PAC 1, as Brazil’s new president in 2011, emphasizes that foreign direct investment will remain on the public agenda in the years to come. © 2012 KPMG Advisory N.V.

• “Energy”: securing a reliable supply of energy through a mix of clean, renewable sources; expanding production of oil in the pre-salt region Investment to 2014: USD 255.3 billion Investment after 2014: USD 343.9 billion Source: World Bank

Source: a Medium scenario, United Nations, 2011

Source: World Bank

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Investing in Brazil | 9 1

Foreign direct investment in Brazil On a global scale, Brazil is ranked as a top destination for foreign direct investment. It accounts for more than half of total FDI inflow in Latin America. In 2011 alone, almost USD 70 billion was routed to Brazil. The country saw a record amount of incoming investments due to a combination of the upcoming World Cup in 2014, the 2016 Olympic Games and the discovery of very large deep-sea oil fields on top of economic growth.

The origin of FDI FDI mainly stems from The Netherlands (mainly for tax purposes), the United States and Spain. However, other countries, especially China, are swiftly increasing their investments in Brazil. China’s FDI into Brazil is mainly resource-driven, though slowly expanding into other sectors.

FDI per sector • Recent rush of FDI in industry and services, while agriculture and mineral extraction also remain attractive

bn USD

FDI in Brazil per segment 2006 - 2011 35

32.0

26.8

25 20 15

12.1

19.3 18.2 13.6 15.1 13.5 10.3

8.6

10 5

17.4 16.1 14.0 13.5 13.0

4.8

4.6

1.5 2006

2007

2008

2009

CAGR (%)

2010

2006-2009

2011

2009-2011

 Agriculture and mineral extraction

44%

50%

 Industry    Services

16%

41%

53%

13%

48%

Total

Note: 2011 data excludes FDI from Acquisition and sale of property (USD 0.4 bn) Source: Annual reports Brazil Central Bank, 2006-2011

Source: a EIU, 2012 b Annual reports Brazil Central Bank, 2006; 2008; 2010, 2011 c Reuters, 2012 d ThyssenKrupp, 2012 e Reuters, 2012

FDI per sector The growth of inward FDI is sector-bound. Both the primary sector (agriculture and mineral extraction), and industry have seen double-digit growth in the previous five years. FDI in services more than doubled between 2010 and 2011. Agriculture and mineral extraction investment From 2006 to 2011, foreign agriculture investments increased from USD 1.5 to 10.3 billionb. FDI in agriculture and mineral extraction showed fluctuating levels. As the demand for mineral resources and commodities will further rise going forward, foreign investments are expected to increase. Investment in industry Brazil has one of the largest industrial sectors of the Americas. From 2006 to 2011 foreign industry investments increased from USD 8.6 to 26.8 billionc. This is attributable to increased Chinese investment in the technology sector as well as infrastructure investments towards the World Cup and Olympic Games. With the increasing welfare of the domestic and world population, the demand for Brazil’s automobiles, machinery and equipment and other consumer products is likely to increase. The automotive industry has seen a particular boost. A large contributor is German-based ThyssenKrupp, investing EUR 5.2 billion into building a steel mill in the state of Rio de Janeirod.

FDI from the Netherlands Historically, the Netherlands is an important investor in Brazil. FDI from the Netherlands has grown very strongly in the previous 5 years. The Brazilian Central Bank has estimated FDI inflow from the Netherlands to have grown from USD 3.5 billion in 2006 to reach an annual flow of USD 17.6 billion in 2011.

FDI in Brazil, 2006 - 2011 bn USD

The Central Bank of Brazil estimated that FDI in Brazil has increased from USD 22.2 billion in 2006 to reach USD 69.5 billion in 2011. This amount is further expected to grow towards 2016, to an estimated amount of USD 74.0 billion, equalling a steady annual increase of 2%a.

Origin of Foreign Direct Investment (FDI) in Brazil • 2011 level: USD 69.5 billion • Top-3 countries of origin: The Netherlands, The United States and Spain • China’s FDI is expected to strongly increase

69.5

70 60

52.6

50 40

34.3

8.1

22.2 3.5

18.7

6.7

44.5 4.6 31.7 6.5 39.8

26.2

45.9

51.9

25.2

0 2005

Several Dutch companies have recently placed large investments in Brazil. These investments have been spread over various segments of the Brazilian economy. For instance, in 2011, Fagron acquired Pharma Nostra for EUR 57 million, Univar acquired Arinos Chemicals for an undisclosed amount, and Shell and Cosan launched a multibillion dollar joint venture that will become a leading producer of the low-carbon biofuel ethanol, made from sugar cane.

17.6

2006

2007

CAGR (%)

2008

2009

2011

2005-2008

2008-2010

 Netherlands

13.1%

20.1%

 Other countries

29.3%

(3.3%)

Total

27.1%

(0.6%)

Source: Annual reports Brazil Central Bank, 2006-2011

Dutch companies are well positioned for investments in Brazil “Dutch companies can fill some of the gaps in Brazil, where the Dutch can differentiate is in logistics, infrastructure and oil & gas”

“The Dutch are very strong in certain sectors that have good prospects in Brazil; such as energy, logistics and infrastructure, chemicals and agriculture”

Augusto Sales, KPMG Brazil Kees Rade, Dutch ambassador to Brazil

“Dutch companies have an outstanding reputation, they have a lot of knowledge and know-how, and there is a cultural fit between the Dutch culture and the Brazilian culture”

Investment in services The tertiary sector, or the service sector, is Brazil’s largest business segment and the largest sub-segment for FDI in 2011. This is mainly attributed to investments in commerce and telecommunications and financial servicese.

Rob Wilmink, KPMG The Netherlands

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2. Contingencies in Brazil

Brazil and the BRICs

The regulatory environment FDI stock BRIC countries – 2006-2016F

Key Regulatory issues to consider • Bureaucracy • Corruption • Complex and time consuming import procedures • High import tariffs • Complex and time consuming procedures for starting a business and registering property and land

2,000 1,800 1,600

1,400

US$ bn

1,200 1,000 800 600

400 200 0

309.7

220.6

2006

539.2

472.6

400.8

658.2

595.9

794.9

724.9

868.5

287.7

2007

2008

CAGR (%)

2009

2010

2011

2012F

2013F

2014F

2006-2011

2010-2011

2012-2016

Brazil

19.6%

14.1%

7.8%

China

19.5%

21.1%

14.6%

India

26.8%

17.3%

9.8%

Russia

15.5% 20.3%

10.7%

7.4%

15.8%

9.9%

Average

2015F

2016F

The main consensus is that Brazil has been underachieving compared to

This policy has resulted in some protective measures for domestic sectors considered as strategically important, such as oil and gas. Consequently, those sectors are highly guarded with protectionist import taxes. Nevertheless, government intervention has diminished in the recent years.

the other BRIC countries. However, whereas Brazil’s FDI stock does not exhibit the largest growth of all BRIC countries, it does display a comparatively large total FDI level. With its current FDI stock amounting to USD 539.2 billion Brazil outperforms India and is on par with Russia. Furthermore,

the growth of Brazilian FDI stock is expected to remain relatively consistent going forward. It is expected that total FDI stock will reach USD 868.5 billion in 2016, equalling an annual increase of 7.8 percent per year in the period between 2010 to 2015.

Next to protectionism, foreign investors in Brazil often encounter problems related to the import of goods, ownership titles of (in particular) land and to the permits needed to start a business. “Because of the complex regulatory environment, doing business in Brazil requires a lot of patience and is a longterm investment” Kees Rade, Dutch Ambassador to Brazil

has shown that Brazil is doing better than the other BRIC countries when it comes to corruption in business. Brazil has created several institutions that investigate corruption scandals, revolving around the public-prosecutor’s office, a semi-autonomous part of the federal government and its local equivalents.

Corruption Perception Index Country

World Ranking

Score (1-10)

Netherlands

8,9

Brazil

3.8

Russia

143

2.4

India

3.1

China

3.6

“Bureaucracy is a part of doing business in Brazil. Coping with bureaucracy and the Brazilian way of doing business results in high costs of entry for any business” Rob Wilmink, KPMG The Netherlands

Note: Cumulative stock of Foreign Direct Investment Source: Economist Intelligence Unit, KPMG analysis

Over the previous years, all BRIC countries have shown very strong growth of FDI. In the past five years, Brazil’s FDI stock has increased by 19.6 percent annually.

A background to Brazil’s regulatory environment The Brazilian government policy is focused on stimulating business activities of the public and private sectors toward rapid industrialization and economic growth.

Bureaucracy Although, Brazil’s business environment is more friendly than most other high growth markets, transparency is sometimes lacking and there are considerable bureaucratic rules for certain businesses and industries. Brazilian bureaucracy affects business and investments at all stages. The World Bank has reported that starting a business in Brazil takes an average of 13 processes and 119 days, which is much longer than it takes in the other BRIC countries and approximately 15 times the average time it takes in the Netherlands. However, due to increasing professionalism of the government the level of bureaucracy is becoming more manageable, although it remains an area that should be properly assessed and addressed.

Corruption Corruption is not uncommon in both the government and business. Despite several efforts to improve the situation, bribes and embezzlement are still common and accepted by society in general as the price of doing business. However, Brazil is probably no more corrupt than other countries of similar size and wealth. A poll by Transparency International with international businessmen from around the world

Note 1: Total index includes 183 countries Note 2: 1 = highly corrupt 10 = very clean Source: Transparency International 2011

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The regulatory environment

World Bank “Ease of Doing Business” Ranking

Selected World Bank Doing Business rankings

Regulation

Netherlands

Brazil

Russia

India

China

World Rank

126

124

132

Starting a business

120

111

166

151

Dealing with construction permits

Registering property

114

Getting credit

Protecting investors

111

Paying taxes

150

105

147

122

Trading across borders

121

160

109

Enforcing contracts

118

182

Resolving insolvency

136

128

127

178

181

179

Importing

Netherlands

Brazil (7) i

Russia

India

China

Documents to import (number)

Time to import (days)

975

2275

1800

1070

545

Starting a business

Netherlands

Brazil (2) h

Russia

India

China

Procedures (number)

Time (days)

119

Cost (% of income per capita)

5.5

5.4

46.8

3.5

Registering property and land

Netherlands

Brazil (8) i

182

Procedures (number)

Time (days)

6.1

2.3

0.2

7.3

3.6

Cost to import US$ per container)

Cost (% of property value)

Source: World Bank ‘Doing Business 2012’

Complex and time consuming import procedures Customs clearance in Brazil is a complex procedure. The Brazilian customs is very lengthy and controlling the invoices and the many other paperwork request slows down the process. Upon import customs clearance of parts, it is necessary for importers to complete the invoice in Portuguese, including weight, material, and the manufacturer’s name for each item. Moreover, it frequently happens that certain procedures and regulations change without prior notice.

To lessen the import duty, it is necessary to show that the imported products are not locally available. The result of the stringent import procedures is that it may take up to a few weeks, sometimes even a few months, before the cargo is released from the seaport or airport.

“In the port of Rotterdam it takes on average one day for goods to be cleared, in Brazil the average is five times higher”

High import tariffs Traditionally, Brazil is known for its extremely high import tariffs (up to 60%) which are higher than in most other countries in the world. Brazil’s government sets product classifications that determine rates for specific imports. Where exceptions meet the best interests of the Brazilian economy, import duty rates may be negotiated.

Kees Rade, Dutch Ambassador to Brazil

Importers must pay the import duties for federal and state value added taxes at ports and these could be (partly) recovered for goods to be manufactured or sold in Brazil. Certain sectors (e.g., petroleum products and weapons) require departmental or ministerial approval for imports. As member countries of MERCOSUL (Common Market of the Southern Cone), the three nations exempted from Brazil’s import duties are Argentina, Paraguay and Uruguay.

All other exporting nations must pay the Common External Tariff (CET), which averages 14% to 20%, depending on the imported merchandise. Brazilian authorities maintain a list of imported products exempted from the CET including computers, telecommunications equipment and some capital goods. On average, it takes 7 documents and 17 days to comply with all procedures to import goods. Between 2010 and 2011, the cost to import a container increased with approximately 30% to USD 2,275. Complex and time consuming procedures for starting a business and registering property and land In a study on business regulations of 183 countries , Brazil is positioned at place 126, leaving only India behind among the BRIC countries. The scores of Brazil on the individual rankings show that a lot of changes can be made to improve the business climate for both local and foreign firms in Brazil. Starting a business In Brazil, starting a business can be a long procedure. On average, it takes 13 procedures and 119 days to register a firm. However, between 2010 and 2011, the cost for starting a business has decreased from 13.5% to 5.4% of the income per capita. Registering property and land Since 2011, Brazil has become slightly less forthcoming concerning registering property and land. It takes an average of 13 procedures and 39 days to legally register property and land. Registering property, relative to the property value, is less costly than in India, China, and the Netherlands.

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Tips and tricks for successful investments

Investing InvestingininBrazil Brazil| 15 |1

The tax environment

Ensure thorough preparation • Do your homework: - The main pitfall of entering the Brazilian market is the fact that you must be (well) prepared. Know-how on taxation, labour law and your specific regulatory and industry requirements are crucial; - Key risks that need to be addressed when looking into investing in Brazil are related to complex regulatory frameworks and difficult tax regimes. • Get a foothold in the country through a sales office: - Through a representative office the company can manage risks and acquire local knowledge and intelligence while creating enough substance that would justify a larger presence; - By setting up a small office, a company can offer its clients support and establish a foothold in the market before entering the market on a larger scale. Project management • Work together with the government and involve other key stakeholders early in the process: - Starting a business is a learning process for both the entrepreneur and the government. An open dialogue during that process is a prerequisite to ensure that the results are satisfactory for both parties. • Planning control and governance: - In Brazil proper control over project timing minimises delays that will undoubtedly occur due to, for example, supply issues; - Delays in Brazil are inevitable as the infrastructure of Brazil is at maximum capacity. This means that, for example, imports take longer to clear in ports and this has to be taken into account in a realistic plan; - Governance of the investment is important, issues such as corruption and dealing with third parties is always slightly more difficult in foreign countries. However, Brazil is positively positioned when comparing to the other BRIC countries. Employ local staff • Obtain local knowledge: - Employing local staff is crucial as these professionals possess the know-how of the industry, working with the government, regulatory frameworks and other local policies; - An additional advantage of employing local staff is that it provides you with an instant network in Brazil; - Hiring locals creates a high level of buy-in from all Brazilian parties to work together with the foreign investor. • Training the staff: - Training of staff is crucial in achieving a successful investment. Staff in Brazil is becoming more educated and operates at a professional level but training of staff is still necessary; this also creates buy-in with staff members. • Invest in local expertise: - Investing in local expertise is crucial to ensure you understand and properly manage specific risks related exclusively to the local environment. That is fundamental to the success of any project in Brazil. Tax regimes and requirements related to local content, for instance, can easily make a profitable project uneconomic; - Employing local staff makes project progress quicker as locals are more adept to moving amongst the difficult regulatory frameworks present in Brazil. Source: Interviews with Dutch investors in Brazil, 2011 ‘Investing in Brazil” publication

Key Tax issues to consider • Double taxation prevention treaties • Complex transfer pricing • High corporate taxes

Background to Brazil’s tax environment Brazil is known for its highly regulated and extremely complex tax regime. One of the reasons is the number of taxes at federal, state and municipal level. ICMS (see page 17), which is a state tax charged on the trade of goods, plays an important role in most businesses. Rules differ between states and therefore complexity increases for transactions involving more than one state. Additionally, Brazil is not an OECD member country and, therefore, its tax rules on cross-border transactions, such as transfer pricing may differ from international standards. Another complexity relates to the frequent changes in tax laws. However, Brazil has made extensive progress in introducing a more favourable tax climate in order to attract foreign direct investments. Although, local and foreign investors are treated equally and no special federal tax incentives are in place to attract foreign investors, there are some significant tax incentives in Brazil at federal, state and municipal level. These incentives range from those related to the geographical location

of the investment (e.g. North and Northeast regions) or the sector of the investment (e.g. infrastructure and oil & gas). There are also some free trade zones, where the goods acquired in these zones have tax exemptions for PIS, COFINS, and IPI (see page 17) Therefore, planning the potential investment from a tax perspective is essential for the success of a company. “A lot of work is to be done on Brazil’s tax system as it is far too complex. Tax structures differ between states and cities” Augusto Sales, KPMG Brazil

Double taxation prevention treaties Brazil is a signatory to a treaty for the prevention of double taxation within in a network of around 30 countries, including the Netherlands. Brazil does not have tax treaties with the United States and the United Kingdom, but has reciprocity agreements entered with those countries instead. The double taxation prevention treaty enables offsetting tax paid in one country against the tax payable in the other, in this way preventing double taxation. Another important factor is the grant of an exemption or tax at a reduced rate on certain receipts such as interest, royalties, dividends, capital gains and others that are connected with a transaction carried out between parties associated with the double taxation prevention treaty.

When certain income is taxable under the Brazilian income tax ordinance but there is an exemption (reduced tax) under any taxation treaty, the income is taxed, if at all, but only according to the provisions of the taxation treaty. The current taxes to which the agreement between the Netherlands and Brazil applies are at the Brazilian side the federal income tax, and at the Dutch side the income tax, payroll tax, corporate tax, and dividend tax. Please note that the withholding tax rates currently applicable in Brazil are equal or lower than the ones provided in the double taxation prevention treaty with the Netherlands. However, some provisions may generate tax credits in the Netherlands above the actual tax amount paid in Brazil when such income is subject to taxation in the Netherlands as well (tax sparing).

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The tax environment

Brazilian tax treaties network

Main Corporate Taxes in Brazil

State

Municipal

25%

n.a.

9% or 15%

n.a.

0.65 or 1.65% (PIS) and 3% or 7.60% (COFINS)

n.a.

0%-300%

n.a.

10%

n.a.

1%-25%

n.a.

Value added tax on sales and services (ICMS)

n.a.

7%-25%

n.a.

Service Tax (ISS)

n.a.

2%-5%

Variable

n.a.

Argentina

France

Norway

Income Tax

Austria

Hungary

Peru

Social Contribution net profit (CSLL)

Belgium

India

Philippines

Canada

Israel

Portugal

Chile

Italy

Slovak Repuclic

China

Japan

South Africa

Czech republic

Republic Korea

Spain

Denmark

Luxembourg

Sweden

Ecuador

Mexico

Ukraine

Finland

Netherlands

Complex transfer pricing Transfer pricing in Brazil is highly regulated. Brazil intends to join the group of countries that protect the outflow of foreign exchange credits, through control of import and export operations between companies of the same group. However, the Brazilian system for the pricing of intra-group transactions is not

Social integration program contribution (PIS) and social financing contribution (COFINS) - the higher rates being applicable to the non-cumulative regime Federal tax on industrialized products (IPI) Contribution to the economic domain intervention (CIDE) Financial operations tax (IOF)

Import taxes and export taxes

Source: United Nations

Federal

Note: List is not exhaustive and additional taxes may be in place Source: KPMG analysis based on public documents

based on OECD guidelines and lacks a method based on income and instead uses a system based on fixed profit margins. There are maximum and minimum margins stipulated in legislation and the tax payer should prove that the prices fall within these margins.

High corporate taxes In Brazil, companies pay corporate taxes at federal, state and municipal levels. The federal income tax has a fixed rate at 25%. The corporate income tax is 15% plus a 10% surtax on taxable income exceeding BRL 240,000; making the final corporate income tax rate therefore 25%. Other taxes at federal, state and municipal levels vary and often depend on the business sector. For the majority of the companies the federal income tax should also consider the CSLL, which brings the federal income taxation to 34% (25% or 40% income tax plus 9% or 15% CSLL).

• CSLL is a social contribution on corporate net income, before income tax and after some deductions at a rate of 9%, except for financial and insurance institutions, for which the rate is set at 15%. • PIS and COFINS are charged on the gross revenue and may be calculated under two different regimes, cumulative and non-cumulative. The higher rates applies to the noncumulative regime in which input tax credits are allowed. • CIDE is the economic domain intervention contribution and it applies to royalty payments, technology transfers, compensation of technology supply, and technical assistance.

• IPI is a federal tax paid by the manufacturer and importer. Rates fall between 0% (e.g. food products) and 300% (e.g. cigarettes). • IOF is a federal tax levied at varying rates (1%-25%) on financial transactions, including foreign currency exchange and loans and credit. • ICMS is a state tax levied at varying rates (7%-25%) on sales and the movement of goods, freight, transport, communication services, and to electricity. • ISS is a municipal tax levied at varying rates (2%-5%) and applies to the import of services as well as the domestic provision of services.

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People and Culture

People & culture in Brazil • Language • Employer-employee relationships • Labour legislation • Foreign investors in Brazil • Foreign investor and worker acceptance

“Companies that think they can come to Brazil to make quick money are mistaken, it takes time and effort to make a business successful in Brazil” Eric van Deursen, KPMG Brazil

Language When doing business in Brazil, a language barrier may exist. A vast majority of the population does not speak an additional language. However, foreigners may also employ Spanish instead of Portuguese, and for the younger generation, the use of the English language is more common. “If you use a Portuguese accent over your Spanish, you can come a long way. Of course we Brazilians are proud of our Brazil and our Portuguese language, but we do understand that the Spanish language is more widespread in the rest of the world” Guilhermo Andrade, Brazil expert

Availability of skilled labour According to one of the experts interviewed for last year’s edition of Investing in Brazil, Brazilian professionals are highly valued as they tend to be extremely adaptable. However, Brazil is currently facing a shortage of qualified labour across industries which is especially pronounced for firms in need of technicians and engineers. The main cause is limited government attention for education in recent decades. In response, corporates are setting up their own training facilities and foreign workers fill the gaps.

However, the business language in the main economic capitals in Brazil is likely to be English, especially in a multinational environment. With the continued development of the education system in Brazil, the English language has become a common second language for the highereducated labour force. Employer-employee relationships Brazil has a strong hierarchical culture and this is reflected in the relationship between employer and employee. The hierarchy of Brazilian companies tends to be dominated by men and decisions are made by top personnel only. This may mean that where in the Netherlands it is common that simple decisions are made by lower personnel, in Brazil a process whereby the management layer authorises both large and small decisions is more common.

Secondly, there is still subtle classgap in Brazilian society and business culture whereby status is derived from marital status and economic status. These differences may result in pay differences between people at similar levels within companies. However, Brazil has made strong steps towards anti-discrimination laws and class differences being exploited in business. Foreign investors must make note of all rules and regulations when it comes to the anti-discrimination acts in Brazil. Another key cultural difference to take into account is the importance of family to the Brazilian population. It is not uncommon to have family working in the same company or with the company and in some cases this may not be common with foreign investors. Labour legislation Brazil has a relatively complex set of labour laws and foreign investors must take note of these before deciding to enter into the market as the costs may fall higher than expected. In the Brazilian Consolidated Labour Laws and other complementary laws and regulations workers are guaranteed certain rights and benefits that may differ to what foreign investors are used to in their home country.

The administrative pressures put in place due to these complex labour laws and regulations are high compared to other countries. Sanctions for failing to keep to the existing labour legislation are similarly high as employers are responsible for the payment of social security payments not only during the course of the labour agreement but also after termination of the labour agreement. Foreign investor and worker acceptance in Brazil From a practical point of view it is difficult to relocate foreign workers to Brazil. Brazil’s visa process is extensive, as Brazil attempts to protect local jobs. However, more important to the acceptance of foreign workers and the investor is the focus of the investor and whether this is long-term focussed. Interview feedback has indicated that the key to success in Brazil is to invest for the long-term. Establishing strong business relationships in the Brazilian market is difficult if long-term intentions are not made clear. “You don’t just do business with others just because they offer you the best deal, you do business with others because they have become your friends and they offer you a good price” Flávia Witmer, Brazil expert

Business etiquette in Brazil There are several business customs that need to be considered when doing business in Brazil. Below, the main elements of Brazilian business etiquette are discussed.

Time In Brazil, time is considered to be a flexible concept, with the exception of business meetings in Sao Paolo and Brasilia. Business meetings may not start at the exact time announced. Both meetings as well as negotiations may take longer than expected. In Brazil, it is key to be flexible and patient towards business relations. It is also important not to display any irritation or impatience towards the business partner for not arriving on time, or because of delays in meetings and negotiations. It can be convenient to leave time in between meetings to take these delays into account.

Communication style When engaging in conversations, it is Brazilian custom to maintain eye contact as much as possible. It is considered impolite not to do so. Often, Brazilians stand relatively close to each other, and speak at high speed when having a conversation. They also express genuine interest in the discussion partner. They can easily express feelings, which is somewhat uncommon in Western culture. Business meetings often start with small talk, and immediately moving towards the meeting subject is considered impolite.

Relationship management Building a personal relationship is a vital element of Brazilian business culture. To Brazilians, a personal relationship is key to building trust with their counterparts. Relationships are quickly moved towards a first-name basis. Although this cultural business characteristic has been changing gradually over the last years, some Brazilian business partners prefer not to discuss business matters over lunch or coffee. Lunches and dinners can even take place with the Brazilian’s family.

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Who to contact in KPMG with your queries on Brazil

KPMG Brazil Practice, The Netherlands

KPMG Brazil

Augusto Sales Strategic & Commercial Intelligence, Market entry support

Rob Wilmink Chairman Brazil Practice KPMG Audit, Partner

KPMG Advisory, Partner

Amstelveen, KPMG the Netherlands

Rio de Janeiro, KPMG Brazil

KPMG Advisory, Associate Director

Rio de Janeiro, KPMG Brazil Tel: +55 21 3515 9133 Mob: +55 21 9497 4179 jcepeda@kpmg.com.br

Dudley Juana KPMG Brazil Practice

Anderson Dutra Director

Alexandre Y. Fujimoto Director

KPMG Meijburg Senior Tax Manager

KPMG Audit

Rio de Janeiro, KPMG Brazil

São Paulo, KPMG Brazil

Tel: +55 21 3515 9477 Mob: +55 21 9927 4742 adutra@kpmg.com.br

Tel: +55 11 2183 6453 Mob: +55 11 2183 3001 ayfujimoto@kpmg.com.br

Amstelveen, KPMG the Netherlands

Eindhoven, KPMG the Netherlands

Tel: +31 20 656 4671 Mob: +31 6 5118 6859 vanderschrier.bud@kpmg.nl

Tel: +31 40 250 2418 Mob: +31 6 1504 0421 juana.dudley@kpmg.nl

Eric van Deursen Manager Audit KPMG Tax Advisory Sao Paolo, KPMG Brazil Tel: +55 11 2183 3033 edeursen@kpmg.com.br

KPMG Tax Advisory Partner

Tel: +55 21 3515 9443 asales@kpmg.com.br

Tel: +31 26 389 9747 Mob: +31 6 5126 1404 wilmink.rob@kpmg.nl

Bud van der Schrier Strategic & Commercial Intelligence, Market entry support

Julio Chamarelli de Cepeda International Tax

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2012 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. The name KPMG, logo and ‘cutting through complexity’ are registered trademarks of KPMG International. 1012