Business in Brazil: An Insider's View, Regulatory and Legal Considerations
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The document provides an overview of key considerations for businesses looking to enter or invest in Brazil. It discusses available entry methods such as direct sales, non-equity alliances (licensing, distribution), equity alliances (joint ventures), and wholly owned subsidiaries. It also examines strategic factors to evaluate such as political stability, economic trends, social risks from stakeholders, technological infrastructure, and cultural dimensions. Regulatory structures that can be used include various types of limited liability companies and funds. In summary, the document offers insights into structuring market entry, evaluating risks and opportunities, and selecting the appropriate legal entity for businesses operating in Brazil.
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Business in Brazil: An Insider's View, Regulatory and Legal Considerations
- 1. Entry Method Investment & Operations Agents, Distributors and Labor BUSINESS IN BRAZIL: AN INSIDER’S VIEW, REGULATORY AND LEGAL CONSIDERATIONS dwilsonjdmba dwilson@keglerbrown.com David M. Wilson, Kegler Brown
- 2. Business in Brazil: An Insider’s View, Regulatory and Legal Considerations 1. Entry Method and Organizational Structure -Strategic Considerations & Current Climate -Available Structures & Features -Import Process, Tariffs, Taxes & 2. Incentives Investment and Operations in -Getting Paid Brazil -Regulatory Changes & Trends -Employee Considerations -Agents & Distributors Agents, Distributors and Labor -Immigration | Visas 3. Entry Method Investment & Operations Agents, Distributors and Labor
- 3. Entry Method & Organizational Structure Strategic Considerations & Current Climate Available Organizational & Entity Structures Entry Method Investment & Operations Agents, Distri butors and Labor
- 4. Strategic Considerations & P Current Climate E S T What are the Political, Economic, Social and Technological reasons to enter Brazil? export, manufacture, distribute, design . . . Political Economic Macro trends, Currency risks Social The ability of government to respond to and NOT create political risk The ability of stakeholders to identify vulnerabilities & apply pressure to the company to change its behavior Technological Infrastructure, IP Protection, Government Incentives Entry Method Investment & Operations Agents, Distributors and Labor
- 5. Strategic Considerations & P Current Climate Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk Stable Republic Since 1985 Multiple Peaceful Elections Democratic Constitution Functioning Executive, Legislative and Judicial Branches Multiple Party System Increasingly developed services: Fire, Police, EMS E S T The unit of measurement for political risk is STABILITY Wednesday night, Brazil’s central bank dropped the SELIC overnight interest rate to 8.5% (down 4% from last year) Entry Method Investment & Operations Agents, Distributors and Labor
- 6. Strategic Considerations & P Current Climate Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk The unit of measurement for political risk is STABILITY Executive Decree Authority Article 62 of 1988 Constitution grants the president Under situations of extreme urgency The power to issue “provisional measures” medidas provisorias Force of law for 30 days Then made law by Congress or Invalid Oversight After Delegation E S T Brazilian legislatures endow presidents with broad authority, then monitor case-bycase through amendments Reality All Brazilian presidents have used for routine legislation – not simply extraordinary circumstances If Congress fails to consider within 30 days, presidents often reissue expired decrees Agents, Distri Entry Method Investment & Operations butors and Labor
- 7. Strategic Considerations & P Current Climate Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk E S T The unit of measurement for political risk is STABILITY Appropriation concerns Brazil Long history of privatization & recent commitments 1980s operating 250 institutions 1991 Federal Privatization Program (NPD) – 186 firms within 2 years Recent LatAm Argentina Nationalization of YPF – Spanish oil firm Repsol – April 2012 President Cristina Fernandez de Kirchner, the expropriation was aimed at “recovering sovereignty” over natural resources Bolivia Nationalization of Transportadora de Electricidad, Spanish – May 2012 Entry Method Investment & Operations Agents, Distributors and Labor
- 8. Strategic Considerations & P Current Climate Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk E S T The unit of measurement for political risk is STABILITY Bureaucracy? Entry Method Investment & Operations Agents, Distributors and Labor
- 9. Strategic Considerations & P Current Climate -Starting a Business -Registering -Getting Electricity Property -Protecting -Paying Taxes Investors -Enforcing -Resolving Contracts Insolvency -Getting Credit -Dealing with -Trading Across Construction Borders Permits 2012 World Bank, Doing Business Report The United States 4th Chile 39th China 91st Brazil 126th India E S T 132nd Chad 183rd Ease of Doing Business Ranking The United States Chile China Entry Method Brazil Investment & Operations India Chad Agents, Distributors and Labor
- 10. Strategic Considerations & P Current Climate The unit of measurement for political risk is STABILITY Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk E S T Level of Corruption Transparency International 2011 CPI index The abuse of entrusted power for private gain Perception of corruption in public sector 2011 USA 24th of 183 Brazil 73rd of 183 86th percentile 60th percentile 1995 (year 1 of CPI) Chile 22nd USA 24th Brazil 73rd China 75th Colombia 80th India 95th Russia 143rd North Korea, Somalia 183rd USA: 15 of 41 New Zealand 1st 63rd percentile Brazil: 36 of 41 13th percentile Entry Method Investment & Operations Agents, Distributors and Labor
- 11. Strategic Considerations & P Current Climate Foreign Corrupt Practices Act 1977 (FCPA) E S T Two key provisions Prevention of bribery of (foreign) governmental officials Anything of value to a foreign official Duty to keep accurate financial books and records and have adequate internal controls to accurately reflect the transactions of the business Applies to US companies, citizens, foreign subsidiary, officer, director, employee, or agent of a US company or its foreign subsidiary, any stockholder acting on behalf of the company, foreign companies with US registered securities Scope and operation of FCPA not restricted to USA territorial boundaries Entry Method Investment & Operations Agents, Distributors and Labor
- 12. Strategic Considerations & P Current Climate Foreign Corrupt Practices Act (1977) US has pursued 3.5 formal foreign bribery enforcement actions for every one action pursued by ALL other countries Companies settle, pay fines and forfeit profits 2011 – Johnson & Johnson $70M, JGC $219M Recent – Wal-Mart, Morgan Stanley, Avon US Justice Dept. continues to focus on individuals Guilty employees go to jail, pay fines and must make restitution E S T Average jail term is two years in federal prison but range is very broad with one sentence up to 15 years Best practices Financial controls Contract review Monitoring process, legitimate vendor transactions, employee advances, petty cash, training Analyze all current and future contracts to ensure scope of services does not violate FCPA Outsourcing bribery Compliance program & culture UK Bribery Act, compliance defense – NOT under FCPA Broad definition of bribery, includes commercial bribery Entry Method Investment & Operations Agents, Distributors and Labor
- 13. Strategic Considerations & P Current Climate Increasing domestic demand Growing Middle Class Macro Trends Over 35 million Brazilians entered the middle class from 2003 to 2009 estimates predict an additional 20 million will climb the ladder by 2014 Per Capita GDP larger than China or India Brazil China India $12,789 $5,414 $1,389 Source: IMF 2011 Rich Commodities Base – energy, mining, agribusiness Largest Latin American economy E S T 6th largest in the World Developed financial markets Young workforce Brazil 39.3% United States 30.5% China 29.4% Competes with Australia as worlds largest exporter of iron ore Fertile Land: 1/3rd global coffee, ½ of all global sugarcane exports, major world player in beef, poultry, soybeans and corn Recent oil field discovery 15bn to 70100bn barrels NPV of this discovery is apx $500bn, apx 20% of GDP Rainforest, hydro Entry Method Investment & Operations Agents, Distributors and Labor
- 14. Strategic Considerations & P Current Climate 96% of Brazilian households have a television Population Millions 1U.S. 2Japan 3China 4Brazil 5India 6Russia 7Mexico 8Indonesia 9Philippines 10Pakistan 313 126 1348 197 1241 143 115 242 95 177 Source: UN World Population Prospects, IMF, 2011 Private Consumption US$ Trillions 10.7 3.6 2.6 1.3 0.9 0.9 0.7 0.4 0.2 0.2 Consumption Per Capita US' 000 34.2 28.1 1.9 6.8 0.8 6 5.8 1.8 1.7 1 E S T Macro Trends 99% of Brazilian households have electric lighting Source: World Development Indicators, Haver, 2010 Mortgage debt is 4.8% of GDP 9.7% in Mexico 89.4% in U.S. Source: Insights Global Macro Trends, KKR May 2012 Entry Method Investment & Operations Agents, Distributors and Labor
- 15. Strategic Considerations & P Current Climate Entry Method Investment & Operations E S T Agents, Distributors and Labor
- 16. Strategic Considerations & P Current Climate E S T Currency Risk Transaction exposure – commitment to make payment at future date Solutions: Translation exposure – accounting based changes in consolidated FS Taking the value on 1 day and reporting on your statements Solutions: Forward Contracts Risk Sharing Agreements Foreign Currency Options Swap (assets, debts, and/or liabilities with someone else, e.g., a bank or another company) Economic exposure – non zero changes in expected cash flows due to changes in currency (real not just nominal) Solutions: Diversification Entry Method Investment & Operations Agents, Distributors and Labor
- 17. Strategic Considerations & P Current Climate How substantive is the stakeholder? Social Risk -The ability of stakeholders to identify vulnerabilities & apply pressure to the company to change its behavior How intense is the threat? Stakeholders E S T Shareholders, NGOs, Interest Groups, Consumers, Local Communities. . . Factors Cultural Norms, Languages Demographics GINI index (inequality of income) Ethnic Conflict Entry Method Investment & Operations Agents, Distributors and Labor
- 18. Strategic Considerations & P Current Climate E S T Education Past (2000) - ½ Brazilian students graduated grade school - 3 out of 4 adults were functionally illiterate Present -Goal to reach OECD standard over next decade -Science Without Borders - 75,000 scholarships to attend world’s top universities (only 9,000 a few months ago) -SENAI, SENAC -Bolsa Escola/Bolsa Familia OECD Programme for International Student Assessment (PISA) Entry Method Investment & Operations Agents, Distributors and Labor
- 19. Strategic Considerations & P Current Climate E S T “Culture eats strategy for breakfast” – Oded Shenkar Entry Method Investment & Operations Agents, Distributors and Labor
- 20. Strategic Considerations & P Current Climate E S T 90 80 70 60 50 Brazil 40 Latin America 30 20 10 0 100 90 80 70 60 50 40 30 20 10 0 PDI IDV MAS UAI Geert Hofstede’s Cultural Dimensions US Brazil Latin America PDI IDV MAS UAI Power Distance Individualism Masculinity Uncertainty Avoidance Long-Term Orientation www.geert-hofstede.com Entry Method Investment & Operations Agents, Distributors and Labor
- 21. Strategic Considerations & P Current Climate How substantive is the stakeholder? Social Risk -The ability of stakeholders to identify vulnerabilities & apply pressure to the company to change its behavior E S T How intense is the threat? Solutions Decouple your brands / products Partner with NGOs Charge premium on specific brands for CSR projects, not all consumers Reputational benefit, they understand the industry and may help keep you up to date with shifts in pressure Admit Wrongs People are more likely to believe your CSR reports when you tell them what you are doing wrong (and how you are addressing it) Entry Method Investment & Operations Agents, Distributors and Labor
- 22. Strategic Considerations & P Current Climate E S T Technological Infrastructure Government Incentives Intellectual Property Entry Method Investment & Operations Agents, Distributors and Labor
- 23. Available Structures & Features Direct sale from US using freight forwarder Non-Equity Alliance May also require a small wholly owned subsidiary holding company presence in country Equity Alliance License Agent Distributor Franchise Supply agreement Joint venture Joint venture Joint company Wholly Owned Subsidiaries Greenfield operations Entry Method Investment & Operations Agents, Distributors and Labor
- 24. Available Structures & Features Features to consider Restrictions on foreign ownership Requirement of foreign partner Minimum or maximum capital requirements Partner liability limited to capital contributions Maintenance costs Product liability Intellectual property protection Entry Method Investment & Operations Agents, Distributors and Labor
- 25. Available Structures & Features Sociedade Limitada (LTDA) Sociedade Anônima (SA) Sociedade Simples Sociedade em Nome Coletivo Sociedade em Comandita Simples Sociedade em Comandita por ações Sociedade em Comum Sociedade em conta de Participação Associações Fundações Cooperativas Consórcio Entry Method Investment & Operations Agents, Distributors and Labor
- 26. Available Structures & Features Joint Venture May be created with or without a full joint company Contractual joint ventures between subsidiary company and a partner company Low cost entry and exit to new markets, industries and industry segments Opportunity for learning Provides a “contractual” framework for operations without generating many issues associated with an agency relationship Enables each party to take full responsibility for its contribution to the venture while minimizing the issues associated with exclusivity Enables low cost entry and exit May later evolve into full equity alliance Entry Method Investment & Operations Agents, Distributors and Labor
- 27. Available Structures & Features Common Entities Similar to US LLC Similar to US Corporation Sociedade Limitada (LTDA) Sociedade Anônima (SA) Entry Method Investment & Operations Agents, Distributors and Labor
- 28. Available Structures & Features Common Features -No restrictions on foreign ownership* LTDA & SA -No minimum or maximum capital requirements* -Partner & parent company liability limited to capital contributions -Pierce corporate veil: Yes, Article 50 Brazilian Civil Code 2002 Requires a deviation of purpose or commingling of assets, not mere insolvency - intent is also considered Entry Method Investment & Operations Agents, Distributors and Labor
- 29. Available Structures & Features Sociedade Limitada (LTDA) Similar to US LLC Liability limited to partner’s quotas Quotas may be freely transferred according to the articles of association Quotas may not be traded publicly Simplicity & flexibility Reduced maintenance costs Less formal requirements Must have at least 2 partners Brazilian partners are not required May be managed by one or more persons, partners or other entity Similar to US Corporation Manager must reside in Brazil If foreign manager, must possess a permanent Brazilian Visa with authorization to act as manager of a specific company Generally preferred for wholly owned subsidiaries Sociedade Anônima (SA) May issue securities, debentures and may be publicly held Higher Maintenance Costs More formal requirements Generally preferred for ventures comprised of a large number of different shareholder groups Entry Method Investment & Operations Agents, Distributors and Labor
- 30. Available Structures & Features Product Liability Consumer Protection Code (“CPC”) governs liability for goods and services in the market causing injury to consumers Strict liability regime requiring proof of causation linking the product defect to the damages Damages recoverable are “actual damages” Entry Method Investment & Operations Agents, Distributors and Labor
- 31. Investment and Operations in Brazil Import Process, Tariffs, Taxes & Incentives Getting Paid Regulatory Changes & Trends “If you’re honest and want to comply with the tax code, you need an accountant and a tax lawyer for life” -The Economist, September 24, 2011 quoting a São Paulo based economist Entry Method Investment & Operations Agents, Distributors and Labor
- 32. Import Process, Tariffs, Taxes & Incentives * All US exports are also subject to US export controls * General Import Process & Timeline 24 Days 17 Days Baseline: -medium size business -ship to economy’s largest business city -private, LLC -non hazardous goods -dry cargo, 20-foot full container -Document Preparation (8 days) -Customs clearance and technical control (4 days) -Ports and terminal handling (3 days) -Inland transportation and handling (2 days) Importing a container of goods to Brazil requires 8 documents, takes 17 days and costs $2,275 -Document Preparation (15 days) -Customs clearance and technical control (4 days) -Ports and terminal handling (3 days) -Inland transportation and handling (2 days) Importing a container of goods to China requires 6 documents, takes 24 days and costs $545 20 Days -Document Preparation (8 days) -Customs clearance and technical control (4 days) -Ports and terminal handling (5 days) -Inland transportation and handling (3 days) Importing a container of goods to India requires 9 documents, takes 20 days and costs $1,070 Source: World Bank, Doing Business 2012 Entry Method Investment & Operations Agents, Distributors and Labor
- 33. Import Process, Tariffs, Taxes & Incentives Import Export Process Register with the governmental registration system Obtain import license, if required Secretary of Foreign Trade SECEX, SISCOMEX system Subject to significant variability Automatic Non-Automatic (process may take several months) ANVISA, IBAMA, MAPA, DECEX, CNEN, ANP, ANEEL, DPF, COMEX, MCT . . . Radar Simplified Ordinary Entry Method Investment & Operations Agents, Distributors and Labor
- 34. Import Process, Tariffs, Taxes & Incentives II-Import Duty Associated Taxes & Duties 0-35% varies based on product & Country of origin (NCM, HS) IPI-Industrial Product Tax Varies based on product (CNM) up to 300% tobacco Import Duty 20% avg PIS-Social Integration Program Contribution 6% VAT 19% 7.6% ICMS-State Tax SP 18% Import Duty 1.65% COFINS-Social Security Financing Contribution VAT 0-35% 12% avg 16% 0-5% raw materials, 20% finished consumer goods, 35% autos and luxury items 7– 25% Entry Method Investment & Operations Agents, Distributors and Labor
- 35. Import Process, Tariffs, Taxes & Incentives Additional Tax Considerations Corporate Tax Baseline: -medium size business -began operations 1/1/2009 -taxes & mandatory contributions are measured at all levels of government -a range of standard deductions & exemptions is also factored 15% Corporate Tax 33% Corporate Tax 17% Yes Transfer Price Considerations Yes Transfer Price Considerations Yes Plus 10% on taxable income over R$240,000 -may choose deemed profit system if under threshold Transfer Price Considerations On average, firms make 9 tax payments per year and spend 2600 hours per year filing, preparing and paying taxes and pay total taxes amounting to 22.4% of profit On average, firms make 9 tax payments per year and spend 193 hours per year filing, preparing and paying taxes and pay total taxes amounting to 18.9% of profit On average, firms make 9 tax payments per year and spend 316 hours per year filing, preparing and paying taxes and pay total taxes amounting to 18% of profit Source: World Bank, Doing Business 2012 Brazil: 2,600 LatAm: 382 OECD: 186 Entry Method Investment & Operations Agents, Distributors and Labor
- 36. Import Process, Tariffs, Taxes & Incentives Recent Tax Changes April 2012 – Brazilian government granted a series of important benefits to enhance economic activity General -Payroll tax exemption in certain sectors: IT, pharmaceutical, hotels, chemicals, plastics, textiles, automotive, metallur gy, electronics, consumer goods -Automotive industry companies that invest in technological innovation may now use a presumed credit of the excise tax -Deductions from Corporate Income Tax IRPJ for donations to institutions Investment & Agents, Distributors Entry Method Operations and Labor that fight cancer
- 37. Import Process, Tariffs, Taxes & Incentives Recent Tax Changes April 2012 – Brazilian government granted a series of important benefits to enhance economic activity Transfer Price Three Methods 1. Cost Plus Method (CPL) 2. Method of Comparative Independent Price (PIC) 3. Resale Price Method (PRL) CHANGES: 1. PRL Margin decreased from 60% to 20% Margin 30% for chemical products, glass products, cellulose, paper, metallurgy DECREASE 40% for petroleum, specific machinery & equipment 60% to 20% 2. Standardization of calculation rules, regardless of whether value is added in Brazil freight & Ins now excluded from calculation Entry Method Investment & Operations Agents, Distri butors and Labor
- 38. Import Process, Tariffs, Taxes & Incentives Ex-tarifário Program If no similar good is produced domestically, an importer may qualify for reduced or eliminated tariffs apx 16% to 0-2% II & potentially IPI, Resolução CAMEX 35/2006 Certificate or statement from appropriate body, technical reports, public consultation among other things may be considered to determine the existence of a similar domestic good Even if a domestic good performs a similar function, an importer may qualify for the program if: Higher quality product or service Higher productivity of equipment (may consider part of an integrated system that increases overall productivity) Increased efficiency Supplies required Consumption of energy or raw materials Reduced delivery time Other specific performance factors may be considered depending on product Entry Method Investment & Operations Agents, Distributors and Labor
- 39. Import Process, Tariffs, Taxes & Incentives Free Trade Manaus Free Trade Zone - ZFM Western Amazon - AO Free Trade Areas - ALC General Process Cert of importer eligibility on the SISCOMEX Classification of imported goods HS / NCM Submit Invoice Register Transaction on SISCOMEX Import Licenses IRPJ reduced 75% until 2013 ICMS credit to importer II/IPI 0% or 88% reduction PIS/COFINS reduced Entry Method Investment & Operations Agents, Distributo rs and Labor
- 40. Import Process, Tariffs, Taxes & Incentives Growth Acceleration Program (PAC) Launched by govt in 2007 to promote large scale projects R$ 604B planned expenditures Key PAC Projects Espírito Santo (primary port Vitória) Infrastructure R$ 504B Science & Tech R$ 35B Security R$ 6.7B Health Care R$ 4B law # 2508 FUNDAP program, State bank provides 0% financing for ICMS payments Regions Northeast Bahia, Ceará and Pernambuco ICMS reduction IRPJ reduction 25-75% Industries, Ports, Infrastructure Porto Maravilha, Rio, Porto do Açu, Rio Belo Monte dam Entry Method Investment & Operations Agents, Distributo rs and Labor
- 41. Import Process, Tariffs, Taxes & Incentives MERCOSUL Member Countries Brazil Argentina Uruguay Paraguay Bolivia Chile Columbia Ecuador Peru Observer of Agreement Mexico Venezuela Not yet ratified by Paraguay Free from import duty with certificate of origin Exceptions to Common External Tariff (CET) Brazil is permitted 93 exceptions to the CET June, 2009 the trade minister raised several import duty rates: August, 2009 MERCOSUL members approved tariff increases on hundreds of products within the CET Primarily dairy, textiles, bags, backpacks, suitcases up to the bound level, apx 31.4% Associate Member Applied southern common market Mexico / Brazil revised auto tariff structure Decision No. 39/11 of the Mercosul Common Market Council permits and outlines procedures for the countries to negotiate these topics Entry Method Investment & Operations Agents, Distributo rs and Labor
- 42. Getting Paid Collection Civil law system generally favors the debtor – NOT creditor in Brazil Dual registration system for statutory lien (Alienação Fiduciária) Registry of Deeds and Documents Real State Registry Best Practices Collateral Pledge equipment being sold & statutory lien And . . . Entry Method Investment & Operations Agents, Distributors and Labor
- 43. Getting Paid Classic Trade Solutions Letters of Credit (LC) Documentary Collections Standby Letters of Credit Bank Guarantees Specialized Trade Solutions Supply Chain Finance Purchase Order Management (Open Account) Structured Trade Solutions Receivable and Payable financing Export Credit Agency (ECA) backed structured trade, i.e., Ex-Im Bank in the USA Pre-Export Financing Private Credit Insurance and Political Risk Insurance (PRI) Entry Method Investment & Operations Agents, Distributors and Labor
- 44. Getting Paid Letter of Credit (LC) Characteristics Offers the most protection to the SELLER Three independent “agreements” underline the letter of credit BUYER and SELLER (their contract) Applicant and Issuing Bank (application and reimbursement agreement) Issuing Bank and Beneficiary (the LC) Bank deals in documents only The BUYER’s recourse for problems with goods is through the contract with SELLER Documents presented under the LC must comply with its terms and conditions, otherwise there is no obligation to honor Entry Method Investment & Operations Agents, Distri butors and Labor
- 45. Regulatory Changes & Trends Recent Regulatory Changes July, 2011 August, 2011 1% tax on foreign derivatives, Real reached 12 year high of 1.529 per dollar Three prong plan to continue to spur economic growth – Payroll tax exemptions, Subsidized loans, Govt preference of 25% September, 2011 30% Increase in industrial product tax on cars (37-55%) – Decree No. 7.567/2011 Exempt if 65% domestic parts (Brazil, Mexico or Mercosul country) Oct 6, 2011 Renault SA announced plans to increase its Brazilian production capacity by 100,000 vehicles Brazil will be the companies 2nd largest market after France Expects sales of 3 million vehicles annually by 2013 with 25% from Brazil October 10, 2011 Chinese auto maker JAC announced it would build a factory in Brazil – output set to begin in 2014 January, 2012 Ministry of Development, Industry & Foreign Trade (MDIC) reduced IPI on 18 automakers by 30% until December 2012 The IPI, industrial products tax, is levied on passenger cars, light commercial vehicles and trucks produced in Brazil, Mercosul and Mexico Entry Method Investment & Operations Agents, Distributors and Labor
- 46. Regulatory Changes & Trends Recent Regulatory Changes January, 2012 February, 2012 6% IOF tax (financial transactions tax) on foreign loans with maturities of up to five years April, 2012 Trade ministry team to publish list of products the govt may levy higher import taxes, list will be valid until December 2014 March, 2012 95% reduction on IPI for iPads manufactured in Brazil Multi-prong tax package, reduced IRPJ, IPI, PIS/COFINS, payroll tax, change to transfer price rules May, 2012 Pension Reform Bill – limits government payments to retired public workers Entry Method Investment & Operations Agents, Distributors and Labor
- 47. Regulatory Changes & Trends A Bigger Brazil: US$ 16 Billion in tax breaks (over 2 years) Eliminate Buy 3 prong plan to continue to spur economic growth payroll taxes for labor intensive industries Brazil Initiative Allows government agencies to pay up to 25% more for locally produced products than similar foreign goods Particularly when purchasing for defense, health, or high tech communications equipment Subsidized Loan Programs Entry Method Investment & Operations Agents, Distributors and Labor
- 48. Regulatory Changes & Trends Privatization Airport operating rights - Auction method, public private partnership 2011 2012 São Gonçalo do Amarante Airport, Natal – R$ 170 million (3x reserve) São Paulo Guarulhos – R$16.2 B (12.9B expected) Brasilia – R$4.5B Campinas – R$3.8B Oilfield Rights The Brazilian President’s office emphasized, “[t]he government does not intend to get involved in these investments. These investments are going to be a long-term, private sector affair. The private sector must play a key role.” Entry Method Investment & Operations Agents, Distributors and Labor
- 49. Regulatory Changes & Trends Intellectual Property Protection Protected by Article 5 of the Brazilian Constitution & codified IP law Provides for contracts involving technology transfer, technical and scientific services, franchising and protection against unfair competition Instituto Nacional da Propriedade Industrial (INPI) Federal agency in charge of regulating and registering patents, trademarks, industrial designs, approving licensing and other agreements Copyright Law, Law No. 9610, as amended (Feb 20, 1998)(Braz). Regulates Brazilian Copyrights and some Software Law Entry Method Investment & Operations Agents, Distributors and Labor
- 50. Regulatory Changes & Trends Brazilian Patent Law Brazilian patent law Industrial Property Law, Law No. 9279/96, as amended (May 15, 1996)(Braz); article 5 §§29 of the Brazilian Constitution 20 year term, from date of filing (15 for utility model) How to obtain Brazilian patent protection First to File Absolute novelty Average time for granting patents is 5-7 years How can a Brazilian patent help? Right to prevent third parties from manufacturing, using, and offering to sell Patent infringement is both a tort and criminal offense Damages, destruction of products, fines, imprisonment Remedies generally only available AFTER a patent grant Prior to grant, an applicant may send a cease-and-desist letter A few rare cases have resulted in a cease-and-desist order during application (prior to grant) Patent infringement trials average 3-6 years Entry Method Investment & Operations Agents, Distributors and Labor
- 51. Regulatory Changes & Trends Brazilian trademark law Brazilian trademark law How to obtain trademark protection? Industrial Property Law, Law No. 9279/96, as amended (May 15, 1996)(Braz); article 5 §§29 of the Brazilian Constitution International treaties 10 year term, from date of issuance Register trademark at the National Institute of Industrial Property (INPI) “any visually perceptive distinctive sign, when not prohibited under law, is susceptible of registration as a trademark.” How can a trademark help? Owner is guaranteed exclusive use throughout Brazil Trademark applicants may now enforce their rights against infringers, even before the registration is granted Brazilian Superior Court of Justice (STJ), Special Appeal No. 1.032.104-RS, published decision on August 24, 2011 Entry Method Investment & Operations Agents, Distributors and Labor
- 52. Regulatory Changes & Trends Brazilian trade secret law Brazilian trade secret law Industrial Property Law, Law No. 195 International agreements The Basics Protected under unfair competition law It is a crime to disclose, exploit, or use confidential knowledge, data, or information, without consent Exceptions are provided for public information Entry Method Investment & Operations Agents, Distributors and Labor
- 53. Agents, Distributors and Labor Employee Considerations Agents & Distributors Immigration | Visas Entry Method Investment & Operations Agents, Distributors and Labor
- 54. Employee Considerations Labor – It’s more than just the 13th salary Labor rights are outlined in the Brazilian Constitution, as well as laws, decrees, provisional measures, ordinances and regulations, international conventions and treaties (ratified by the Brazilian government), company policies, Supreme Court decisions, Superior Labor Court decisions and customs Entry Method Investment & Operations Agents, Distri butors and Labor
- 55. Employee Considerations Basic Principals Worker Protection: the worker is considered the weaker party in the relationship In labor-related conflicts, at any level or jurisdiction, whenever there is a doubt regarding evidence, the court’s decision will favor the worker The law most favorable to the worker will be applied The conditions most favorable to the worker will be presumed Actual facts prevail over written documents Protected salary (generally cannot lower an employee’s salary) Nondiscriminatory practices Entry Method Investment & Operations Agents, Distributors and Labor
- 56. Employee Considerations Direct agreements between employees and employers to resolve conflicts are not valid The Brazilian constitution provides the right to sue as an individual guarantee There are ways to settle Arbitration, union conciliation commissions. . . but they do NOT prevent the right of individual claims Entry Method Investment & Operations Agents, Distributors and Labor
- 57. Employee Considerations Every 12 months employees are entitled to 30 Min wage adjusts annually calendar days paid vacation In addition to the 13th Currently R$ 623 per month salary Christmas bonus equal to 1/12 the salary for each month of that year Every month employer must deposit amount equal to 8% of employee’s salary into a social security fund (FGTS) If employee is dismissed without cause, the employee may withdraw the amount Employer must pay a penalty equal to 40% of the amount and an additional 10% penalty to the government Entry Method Investment & Operations Agents, Distri butors and Labor
- 58. Employee Considerations Not at will 30 days prior notice (some agreements may require longer period of time) Notice shall specify whether the 30 days must be worked or not worked If worked may be absent for 7 consecutive days or may leave 2 hours early every day For cause if: A dishonest act Improper conduct Regularly doing business on behalf of himself or for a third party Criminal conviction Inadequate discharge of duty Habitual drunkenness Currently debate on this cause; many courts consider it a social problem and not a just cause Violation of trade secrets Act of disobedience or insubordination Abandonment of employment Injurious act to the honor of any person during working hours (except in self defense) Persistent gambling Entry Method Investment & Operations Agents, Distributors and Labor
- 59. Employee Considerations Brazilian v. Non-Brazilian Staff of companies with three or more employees must be 2/3rd Brazilian at least 2/3rd of the payroll must be paid to Brazilians And, Salaries paid to employees in Brazil cannot be based on foreign currency Entry Method Investment & Operations Agents, Distributors and Labor
- 60. Employee Considerations Ok, but they aren’t employees; they are . . . It does not matter what the parties call the relationship, regardless of whether there is a written contract Courts will weigh factors, including: The regular payment of salary Required personal rendering of service Subordination (direct control by employer, hours worked, benchmarks) Entry Method Investment & Operations Agents, Distri butors and Labor
- 61. Agents & Distributors Agent Distributor Activities subject to some control by supplier Does NOT take title to goods May handle products of other suppliers; but, is less likely to do so than distributor Generally compensated on a commission basis Bears no risk of failure of payment Activities subject to only minimal control by supplier Takes title to goods, buys and sells for own account May handle products of other suppliers Earnings based on resale profit margin Bears economic risk of failure of payment by customer Usually warehouses and physically delivers goods Uses own capital Has no power to bind the supplier contractually Usually does not warehouse goods Usually does not use own capital May have power to contract on behalf of the supplier Entry Method Investment & Operations Agents, Distributors and Labor
- 62. Agents & Distributors Brazilian agency relationships is governed by the Brazilian Civil Code and by special legislation, Law n. 4.886/1965 Exclusivity is NOT presumed unless expressly established in an agency agreement Exclusivity is common and may be a heavily negotiated point Exclusivity entitles the agent to compensation related to direct sales made by the company without assistance of the agent Contract should contain limitations, termination events, territory, products or goods, commission structure and time of payment Termination There are specific enumerated “just” reasons for the termination of an agency agreement – Art. 35 Termination is typically both difficult & costly Generally, an agent is entitled to no less that 1/12th of the total amount received during the time of agency or an amount equal to the monthly average compensation received multiplied by the remaining months left in the agency contract term If earned 80k per year for 6 years, then 80,000 * 6 = 480,000 480,000/12 = 40,000 An agent is also generally entitled to reimbursement for investments made to promote the company, such as advertising, office rent and equipment expenses Entry Method Investment & Operations Agents, Distributors and Labor
- 63. Agents & Distributors Distributorships are regulated by the Brazilian Civil Code and Contract Law Unlike Agents, there are very few statutory provisions governing the relationship (only two) Law Addresses the relationship between auto dealers and auto manufactures Law No. 6,729/1979 amended by Law No. 8,132/1990 No. 7,646/1987 Addresses the distribution of software products Entry Method Investment & Operations Agents, Distri butors and Labor
- 64. Immigration | Visas Business Visa Permanent Visa Legal Entity Administrator Private Investor Foreign Bank Representative Temporary Visa Permanent Visa Establishment Issues Technical Visa 1 year / 90 Days Apprenticeship / Professional Training Touring Vessel Labor Entry Method Investment & Operations Agents, Distributors and Labor
- 65. Immigration | Visas Business Visa To attend meetings, make commercial contacts Permanent Visa Legal Entity Administrator 90 days, may be extended additional 90 days in 12 month period 5 years, R$ 600k registered with Central Bank of Brazil, or R$150k & plan to generate at least 10 new Brazilian jobs within 2 years Temporary Visa Technical Visa 1 year / 90 Days 3 years experience in the functional field Permanent Specific for customer, or training plan Establishment Issues Resume Criminal background check File with Ministry of Labor in Brasilia When enter Brazil, register with Federal Police to obtain RNE If d/n register, then daily fine Entry Method Investment & Operations Agents, Distributors and Labor
- 66. Entry Method Investment & Operations Agents, Distributor s and Labor BUSINESS IN BRAZIL: AN INSIDER’S VIEW, REGULATORY AND LEGAL CONSIDERATIONS dwilsonjdmba dwilson@keglerbrown.com David M. Wilson, Kegler Brown
- 67. Business in Brazil: An Insider’s View, Regulatory and Legal Considerations The content of this presentation is for educational purposes only. Each legal issue is fact dependent, this presentation should not be used or viewed as legal advice; your legal counsel should be consulted on the application of your particular factual situation to the current law. Export Process Investment & Operations Agents, Distributors and Labor
- 68. Additional Sources Insights, Global Macro Trends, KKR, May 2012 Doing Business 2012, Doing Business in a More Transparent World, World Bank Report, October 20, 2011 UBS Investment Research: Emerging Economic Focus, UBS, August 29, 2011 A Closer Look at Brazil’s Credit Boom, Deutsche Bank EM Special Publication, July 22, 2011 Anchoring, De-Anchoring, Re-Anchoring, Bradesco Corretora Economics BBI Equity Research, September 6, 2011 Economic Outlook: Brazil, BBVA, Third Quarter 2011 Brazil Auctions Rights to Airport, WSJ, August 23, 2011 The Geopolitics of Brazil: An Emergent Power’s Struggle with Geography, STRATFOR, July 14, 2011 The Aging World, Ned Davis Research Inc, July 21, 2011 Japanese Dump Real Funds at Fastest Pace Since Earthquake: Brazil Credit, Bloomberg, September, 30, 2011 First they went for the currency, now for the land, The Economist, September 24, 2011 Brazilian superior court of justice confirms the possibility of enforcement of trademark applications, Marca Sur Internatinoal, October 21, 2011 Global Enforcement Report 2011, TRACE International, 2011 Gaining & Sustaining Competitive Advantage Third Edition, Jay B. Barney, 2007 Executive Decree Authority in Brazil: How Reactive Legislators Influence Policy, Gary Reich, February, 2002 Privatization and the Distribution of Assets and Income in Brazil, Economic Reform Project: Global Policy Program, July, 2000 Export Process Investment & Operations Agents, Distributors and Labor
Hinweis der Redaktion
- When you considerhow to enter Brazil, what do you think about? What questions jump into your mind. I generally begin with asking why? Why should you enter Brazil?Is it because your competitor entered? Is it because an article in the WSJ said Brazil is the largest economy in Latin America and the 6th largest in the world. Did your largest customer enter Brazil? Is it because the middle class is growing at an explosive rate? Is it because your organizations’ core competencies can be leveraged to do xyz? All of those could be great reasons, but the way you approach the information we are about to discuss, and the decisions you make will vary greatly based on the answer to that question.
- Simply a framework to discus macro level factors, how you evaluate the factors will differ based on your organizations industry, strategy, competencies and goals; however, I try to pose a general question that you can ask yourself to begin the analysis and help identify what additional information and factors you should research.This is not a “true” PEST analysis, it is simply a collection of general facts, events and trends that may be used in a PEST analysis. The question is not, PEST reasons to enter Brazil. It is, what are the PEST reasons to _____ or to not _______ in Brazil
- -First elections under the new constitution were not held until 1989-several parties (over a dozen) are represented in Congress-Police in Bahia on strike – military in Salvador-Executive Decree authority
- -Executive Decree authority-Argentina Kirchner, import changes - Brazil changes while on boat
- -Ask for story from audience -Share some ANVISA story-Time, communication, Tariff classifications, changes in Tariff rates, Changes in % required for taxation -End with its getting better, but stress there is still a long way to go
- -Denmark was tied for 1st with New Zealand & Singapore last year (2010)-Scale is 10 – 1 , 10 is best-Somalia is worst, tied with North Korea
- Brazil Nominal GDP 2.09 T, US apx 15T2010 7.5% growth2011 even with EU issues, projected to grow steadily at at least 3.5%Source BradescoGDP & Per Capita GDP source 2010 IMF numbers1/3rd global coffee, ½ of all global sugarcane exports, major world player in beef and poultry, soybeans and corn
- Brazil Nominal GDP 2.09 T, US apx 15T2010 7.5% growth2011 even with EU issues, projected to grow steadily at at least 3.5%Source BradescoGDP & Per Capita GDP source 2010 IMF numbers1/3rd global coffee, ½ of all global sugarcane exports, major world player in beef and poultry, soybeans and corn
- Highlight this slide & mention it may be useful for them to come back to and analyze for their particular situation
- Highlight this slide & mention it may be useful for them to come back to and analyze for their particular situation
- -OECD, organization for economic co-operation & development (primarily wealthy countries, or the countries we traditionally think of as wealthy, with current EU crisis, as I’m sure Angela Merkel would argue, that is debatable-in 2000 these countries decided to quantify what children were learning in school (Program for International Student Assessment)-at the time of the initial studyonly ½ Brazilian children completed grade school and 3 out of 4 adults were functionally illiterate. -since enrolled in the study have shown solid gains-Brazil has set a goal to reach the OECD standard over the next decade -Dilma 75,000 scholarships-roughly 80 countries in current tests and Brazil ranks in the low 50s above the bottom 3rd (but not too far, 35 percentile)
- Power Distance expresses the degree to which the less powerful members of a society accept and expect that power is distributed unequally. The fundamental issue here is how a society handles inequalities among people. People in societies exhibiting a large degree of power distance accept a hierarchical order in which everybody has a place and which needs no further justification. In societies with low power distance, people strive to equalize the distribution of power and demand justification for inequalities of power.Individualism v. Collectivism The high side of this dimension, called Individualism, can be defined as a preference for a loosely-knit social framework in which individuals are expected to take care of themselves and their immediate families only. Its opposite, Collectivism, represents a preference for a tightly-knit framework in society in which individuals can expect their relatives or members of a particular in-group to look after them in exchange for unquestioning loyalty. A society's position on this dimension is reflected in whether people’s self-image is defined in terms of “I” or “we.”Masculinity v. Femininity The masculinity side of this dimension represents a preference in society for achievement, heroism, assertiveness and material reward for success. Society at large is more competitive. Its opposite, femininity, stands for a preference for cooperation, modesty, caring for the weak and quality of life. Society at large is more consensus-oriented.Uncertainty Avoidance The uncertainty avoidance dimension expresses the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity. The fundamental issue here is how a society deals with the fact that the future can never be known: should we try to control the future or just let it happen? Countries exhibiting strong UAI maintain rigid codes of belief and behavior and are intolerant of unorthodox behavior and ideas. Weak UAI societies maintain a more relaxed attitude in which practice counts more than principles.Long Term v. Short Term Orientation The long-term orientation dimension can be interpreted as dealing with society’s search for virtue. Societies with a short-term orientation generally have a strong concern with establishing the absolute Truth. They are normative in their thinking. They exhibit great respect for traditions, a relatively small propensity to save for the future, and a focus on achieving quick results. In societies with a long-term orientation, people believe that truth depends very much on situation, context and time. They show an ability to adapt traditions to changed conditions, a strong propensity to save and invest, thriftiness, and perseverance in achieving results.
- -list of several available organizational structures, take a moment on this slide to discuss the importance of research, culture and selecting the right local partner. Mention that we will likely hear several stories related to this topic during the panel discussion later today. Provide a list of some research tools
- -list of several available organizational structures
- -you may decide that you need an actual legal presence in Brazil to execute your desired entry method. These are the most common structures employed by foreigners when creating a subsidiary for the purpose of importation
- *Foreign Investment is prohibited in Nuclear energyHealth ServicesRural land, abutting international bordersPost office & telegraph servicesAirlines (except domestic routes)Foreign Investment is limited inFinancial ServicesMediaRural land in certain districts % threshold
- -Judicial treatment must be granted to foreign & domestic capital under the same terms-few areas are subject to restrictions
- This is a very generic process, the way that you import will vary greatly based on your individual circumstances. If you decide it is best to register as an importer, then you will need to allocate time to navigate the that process. In Brazil: Siscomex registration, RADAR registration (ordinary or simple), licensing with various ministries (by product)Colombia: Chamber of Commerce registration, obtain tax registration, locate tariff sub-regime
- Some non-automatic, Brazilian environmental agency, used materials, restricted & tax benefits, RadarSimplified 150,000 import / 300,000 export from brazil every 6 monthsOrdinary real location, employees, volume of operation depends on investment
- Also touch on specialty taxes Tax on donations (ITCD) – state tax, usually 3%, some apply a progressive rate from 3-8%Tax on Services (ISS)Contribuição de Intervenção no Domínio Econômico (CIDE)Tax on the transfer of technology – generally 10%Law n 10.168, 2000 Transfer Price considerations – Brazilian entity and affiliated foreign company OR Brazilian entity and unaffiliated foreign company in a Tax Haven (Article 24 of Law 9.340/96 country that does not tax income @ at least 20%3 MethodsCost Plus Method (CPL)Profit Margin is fixed, average production cost for identical or similar goods and servies + 20% marginMethod of Comparative Independent Price (PIC) – OECD modelResale Price Method (PRL)Average resell price minus, taxes, commissions and profit margin used to be 60%, recent change to 20% (30% for chemical products, glass and glass products . . . )
- Also touch on specialty taxes Tax on donations (ITCD) – state tax, usually 3%, some apply a progressive rate from 3-8%Tax on Services (ISS)Contribuição de Intervenção no Domínio Econômico (CIDE)Tax on the transfer of technology – generally 10%Law n 10.168, 2000 Transfer Price considerations – Brazilian entity and affiliated foreign company OR Brazilian entity and unaffiliated foreign company in a Tax Haven (Article 24 of Law 9.340/96 country that does not tax income @ at least 20%3 MethodsCost Plus Method (CPL)Profit Margin is fixed, average production cost for identical or similar goods and servies + 20% marginMethod of Comparative Independent Price (PIC) – OECD modelResale Price Method (PRL)Average resell price minus, taxes, commissions and profit margin used to be 60%, recent change to 20% (30% for chemical products, glass and glass products . . . )
- Also touch on specialty taxes Tax on donations (ITCD) – state tax, usually 3%, some apply a progressive rate from 3-8%Tax on Services (ISS)Contribuição de Intervenção no Domínio Econômico (CIDE)Tax on the transfer of technology – generally 10%Law n 10.168, 2000 Transfer Price considerations – Brazilian entity and affiliated foreign company OR Brazilian entity and unaffiliated foreign company in a Tax Haven (Article 24 of Law 9.340/96 country that does not tax income @ at least 20%3 MethodsCost Plus Method (CPL)Profit Margin is fixed, average production cost for identical or similar goods and services + 20% marginMethod of Comparative Independent Price (PIC) – OECD modelResale Price Method (PRL)Average resell price minus, taxes, commissions and profit margin used to be 60%, recent change to 20% (30% for chemical products, glass and glass products . . . )
- -Venezuela signed membership agreement in 2006, not yet ratified
- http://brazilportal.wordpress.com/2011/12/20/brazil-may-take-steps-to-prevent-excessive-gains-in-real-mantega-says/ http://www.desenvolvimento.gov.br/sitio/interna/noticia.php?area=2&noticia=11279http://www.desenvolvimento.gov.br/sitio/interna/noticia.php?area=2&noticia=11265
- http://brazilportal.wordpress.com/2011/12/20/brazil-may-take-steps-to-prevent-excessive-gains-in-real-mantega-says/ http://www.desenvolvimento.gov.br/sitio/interna/noticia.php?area=2&noticia=11279http://www.desenvolvimento.gov.br/sitio/interna/noticia.php?area=2&noticia=11265
- -payroll tax break may be extended-payroll tax breaks will be partially offset by additional 1.5% tax companies will pay on sales
- http://online.wsj.com/article/SB10001424052970204369404577207701246033194.html
- Source: Industrial Property Law, Law No. 9279, as amended (May 15, 1996)(Braz)
- Source: Industrial Property Law, Law No. 9279, as amended (May 15, 1996)(Braz)
- Source: Industrial Property Law, Law No. 9279, as amended (May 15, 1996)(Braz)
- Invest at least R$150,000, or An exception may be made if the investment is less than R$150,000. 1. The old rules (from 2004) stated that the applicant must submit a plan for a business that creates at least 10 Brazilian jobs within 5 years. Even with a plan the issuance of a visa was at the discretion of the National Immigration Council (NIC). 2. The guidance under the new 2009 resolution simply states that the NIC may consider factors such as; the number of jobs created, the type of industry, the geographic location, and the type of production or technology contribution that the investment will provide (which is even more vague).
- Invest at least R$150,000, or An exception may be made if the investment is less than R$150,000. 1. The old rules (from 2004) stated that the applicant must submit a plan for a business that creates at least 10 Brazilian jobs within 5 years. Even with a plan the issuance of a visa was at the discretion of the National Immigration Council (NIC). 2. The guidance under the new 2009 resolution simply states that the NIC may consider factors such as; the number of jobs created, the type of industry, the geographic location, and the type of production or technology contribution that the investment will provide (which is even more vague).