Brazil is often depicted as an uncompetitive country with a high tax burden. It is an image that often scares away investors – particularly those who are not very well informed.
But that picture is not completely accurate, and in reality the prospects for companies investing in Brazil are likely to depend on their area of business and what precisely they are aiming to achieve. In many cases investors have a pleasant surprise when they take a closer look at the Brazilian tax scenario and consider it from a long-term perspective.
Brazil’s tax system levies excessive rates upon consumption, and also imposes high nominal rates on income and revenue. In those senses the tax burden is more onerous than in most other countries, including Brazil’s closest competitors for foreign investment such as the other BRICS.
In addition, Brazil is shrouded in a barely believable fog of bureaucracy and complexity. According to a recent study by the World Bank, for example, Brazil is the country in which a legal entity has to spend the most time preparing to comply with its tax obligations – almost 2,000 hours per year, which is more than double the time needed in the second-placed country, Venezuela. Another study conducted by a reputable trade organisation suggested that if bureaucracy in general were less of a problem, Brazil’s GDP per capita might be 17% higher. As a further illustration of this gargantuan problem, more than 4 million new tax rules have been introduced in Brazil at the federal, state and municipal levels since the enactment of the 1988 constitution.
Nevertheless, hidden in the midst of this seemingly extreme and hostile environment are some surprisingly positive aspects of Brazilian tax legislation. To start with there are tax benefits, designed either to attract new businesses from abroad or help those that are already established in the country. For example Brazilian legislation grants a varied set of benefits to exporters, with numerous incentives in the form of reduced taxes when it comes to setting up a production plant or outsourcing. In the procedural field it is not rare to see Brazil’s tax authorities granting special regimes to facilitate companies’ issuance of invoices or tax payments.
Loopholes and unregulated areas may also provide significant opportunities for tax-paying companies – as in the case of the several tech startups that have taken advantage of the much lower level of taxation in Brazil, in their particular area, than in most developed countries. There is currently also a long list of active litigation cases in Brazil in which companies have been successful in claiming tax refunds on the basis of legislative grey areas.
Moreover, from time to time the Brazilian government seeks to boost revenues by implementing special tax-regularisation programmes with very attractive terms – for example by granting significant reductions in fines, and in the interest charged on tax arrears? This is always a good way for companies to terminate outstanding litigation or avoid new cases.
Having said that, companies that know how to push hard in the execution of a set of micro tax actions may end up gaining a very significant advantage over their local or even international competitors – as demonstrated by several Brazilian corporations (many of them well-known names worldwide) that have long employed this strategy. Furthermore, there have been many cases of Brazilian subsidiaries of international companies thriving during tough economic times in the US or Europe – to the extent that their positive performance has been important in sustaining the group as a whole. Of course, Brazil has enormous economic potential, and offers good returns in several fields, but those examples also show that the tax scenario in Brazil may not be quite as much of an obstacle to companies as is often believed.
There is also a potentially positive structural change on the horizon. As a sign of what seems to be a new compliance era in the wake of the corruption investigations that have put important politicians and businessmen behind bars, Brazil is currently adopting or incorporating into its legislation a number of OECD taxation guidelines as part of its bid to become a full member of the organisation. The results of these actions are likely to signal to investors that the country is much more in line with international standards.
Finally, although Brazil has procrastinated for decades when it comes to passing tax reforms to facilitate the life of entrepreneurs, there is now an international trend towards simplification, and within Brazil the possibility of renewed political momentum in the near future, which will exert pressure on the country to stop being the ugly duckling among its peers.
All in all, Brazil’s confusing tax scenario is not only manageable but can even turn out to be highly beneficial if companies learn to navigate it well. And the changes envisaged to take place in the near future may play an important role in optimising Brazil’s tax legislation, making the country more attractive to foreign investors in general.
Alexandre is a lead partner of the tax practice at ASBZ Advogados in Brazil. He has a Master’s in Law from UC Berkeley and is also a tax professor and writer for magazines and newspapers.
Renata Amarante Bardella
Renata is a senior tax lawyer at ASBZ Advogados, with more than 12 years’ experience in tax and customs. She has a postgraduate degree in tax law and also works for other local and multinational companies in diverse areas.