Doing Business in Brazil

Perception x Reality
Challenges & Opportunities
December 2020
CONTENT

• BRAZIL
• TAX SYSTEM
• TAX COMPLIANCE
• INNOVATION AND ENTREPENEURSHIP
• PERCEPTION AND REALITY
• FORWARD LOOKING STRATEGIES
• FINAL COMMENTS
• PFM
BRAZIL
The country

Population*
1 POLITICAL DIVISION
210 + million (2019) 26 states,
4 1 federal district
5,500 + cities

CAPITAL CITY
Territory* 5 Brasília
2
8.514.876,599 km2
CURRENCY
6 Brazilian Real (BRL)
Nominal GDP**
3
$ 1,796 Trillion
(8th largest) LANGUAGE
7 Portuguese

Sources: **IBGE **World Bank

 A few facts of our history

• Brazilian Constitution was enacted in 1988;

• It followed an indirect presidential election in 1985, in which the president-elect died

before taking the office;

• The vice-president elect took the office with no intervention from military forces,
which have ruled the country in a dictatorship that began in 1964 (21 years);

• The first free presidential elections since the 60’s were held in 1989 and a politician
from a small state won it with a right-wing speech;

• He was impeached two years after taking office as a result of corruption scandals;

• At that time, Brazil had one of the highest ever inflations of world history and all the
economic plans implemented by these two administrations did not result in success,
but actually the opposite;

• Brazil was an international debtor, with a moratoria record in the 80’s, with the
foreign debt only beginning to be actually negotiated in the early 90’s
 And what happened in the last 30 years?

Based on the previous slide, imagine someone in 1988. Looking to the future,
would he imagine that:

• A new economic plan/currency (Real) was successfully introduced in 1994 and

inflation since then has been 7% p.y. on average;

• Just as a comparison, between 1939 and 2013 the accumulated inflation was of
staggering 3.899.556.304.251.250% (an average of 94% p.y.);

• From a political perspective, Brazil would be enjoying its longest democratic period
since we became a republic in 1889. In numbers, 8 consecutive free presidential
elections have been held since 1989;

• Five presidents were elected (Collor, FHC, Lula, Dilma and Bolsonaro);

• Two of them were impeached: Collor, in his first mandate, as a result of corruption
scandals, and Dilma, in her second mandate, due to illegal acts in connection with
our Fiscal Responsibility legislation, which regulates the federation budget;

• Both impeachments involved the Supreme Court and the Congress;

 And what happened in the last 30 years? (cont.)

• Lula would have been arrested, due to being sentenced in first and second instances
for money laundering and corruption;

• Brazil would be the stage of the world’s largest ever corruption fighting task force,
with billions of dollars that were deviated being recovered and a high number of
tycoons and high profilers been sent to jail, something that one could agree is not
common in Latin America;

• Note that this also did not involve violence (as we have seen in Italy, for example);

• Back to economics, after being rescued by the WMF in 1997 with USD40B to recoup
its foreign currency reserves, which made our currency weak amongst many
international crises at that period (Russia, Mexico, Asian Tigers, etc.), Brazil would
amass foreign reserves that are currently around USD380B;

• This means that we are among the largest global holders of US bonds and also that
we have settled our public foreign debt (Note: yes, there are still foreign bonds, but a
small part in comparison with our gross public debt, which is due internally, in Reais,
to local financial institutions; And yes, there is private debt from companies that
borrow from overseas);
 And what happened in the last 30 years? (cont.)

• In accordance with research from EY, Brazil has been one of the Top 5 destinations of
FDI in recent years, with an inflow of investments that has ranged from USD65 to
85B per year, even in the most acute periods of our self-inflicted recession of 15/16;

• São Paulo is the second city in the world in number of multinational companies’
offices, just after NYC. The same happens with the number of corporate helicopters
fleet, as examples;

• Brazil would develop its energy sector to have one of the most diversified energy
matrices in the world, while also becoming a to 10 worldwide Oil producer;

• We would have held back to back Soccer’s World Cup and Olympics in 14/16 (both
successful events), something that just the US has done before (94/96);
So...

So, based on what you have seen in the previous slides, would you say that
Brazil has generally performed better or worse in comparison to other
countries?

Would you agree that the World’s axis has changed?

Also, in which countries would you place your bets for the upcoming decades
when it comes to your businesses?
São Paulo – the largest city

Population: 12 + million

80.75 56.56 29.23 17.47 15.44 41.94%

7.55%
90.00
8.55% 27.66%
80.00
41.94%
70.00

60.00

50.00

40.00

30.00

20.00

10.00

SOUTHEAST NORTHEAST SOUTH NORTH MIDWEST SOUTHEAST NORTHEAST SOUTH NORTH MIDWEST

Population in Millions
Source: IBGE (2016)
São Paulo – Global Positioning
Brazil is the regional powerhouse
And also a global powerhouse…

• Brazil has been a world’s top ten economy for a relevant period

• Economic prediction of major forecasts indicates that such

position will remain for the foreseeable future (currently #7
and expected to be #6 by 2030 – just 11 years from now)

• This means that, in addition to its natural advantages in

agriculture, natural resources and energy, the country will be a
relevant spot for expansion of consumer business, technology
and services.
Important challenge: still a very closed economy…

Economic Openness’ Index

(% of imports +
exports / GDP)
TAX SYSTEM
 The statutory rate is high x other jurisdictions

• Corporate Income • PIS: • II (Import duty) • INSS • IOF: 0% to 25%

Tax: 25% 0.65% or 1.65% 0% to 35% (Social Security Tax): • ITBI (Real Estate
• Social Contribution • COFINS: • IE (Export tax) 20% to 28.8% Transfer Tax):
Tax: 9% 3% or 7.6% Potentially high, • FGTS: 8% 2% to 8%
• IPI: varied rates • 13th Salary: • IPTU and ITR:
Average rate 14% 8.33% Property taxes
• ICMS: 0% to 25% • Vacation: 11.11%
• ISS: 2% to 5%
 Tax system - complex and counter-intuitive

FEDERAL STATES MUNICIPAL

• II - Import Duty (not VAT) • ICMS - State VAT • ISS - Tax on services
Rates: Rates: • Tax rates range 2% to 5%,
• 0% to 35%. Average: 14% • Intrastate operations: depending on nature
17% to 19%, depending of service and
• IPI - Federal VAT on the State municipality involved
Rates:
• 0% - 330%. Average: 14% • Interstate operations: • Cumulative tax
12% (standard), 7% or 4% (no tax credit on inputs)
• PIS/COFINS
Regimes/Rates: • Tax benefits granted by • Imposed on importation
• Non-cumulative: 9.25% certain States to import of services
• Cumulative: 3.65% and local outputs
• Equipment rentals are
not subject to ISS
TAX COMPLIANCE
Time taken to comply - Brazil
Time taken to comply, 2016 (hours/year)

27
URUGUAY
1
31378
PARAGUAY 0
384
664
ECUADOR
654
BOLIVIA 102
5
792 102
VENEZUELA
792 5

PERU 260
293
COLOMBIA 239
203
CHILE 291
291
BRAZIL 2038
2600
2016
ARGENTINA 359
2013
405
Sources:
0 500 1000 1500 2000 2500 3000 World Bank
 Federal taxes collection
Total Federal Taxes Collected
(in BRL Millions)

Taxes in 2016

25 41
5 29
1,400,015
% %
% %
1,200,015
1,000,015
800,015
600,015
400,015
200,015
15
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
INCOME TAXES PIS/COFINS

OTHER TAXES IPI

Source: Brazilian Federal Revenue
 Technology - investing to increase collection
Total tax assessments issued by the Federal Revenue Service Factors responsible for
(RFB) - in BRL Billions leveraging tax collection and
audit mechanisms:
200,00
180,00 • Improvements on the quality of
160,00
the criteria used to select
140,00
120,00 taxpayers for auditing
100,00 procedures, along with new
80,00 approaches on the detection of
60,00
40,00
tax evasion structures;
20,00
0,00 • The cross-checking of a great
2009 2010 2011 2012 2013 2014 2015 2016 volume of tax data from the
taxpayers;

Period Total Tax Audits Increase • Use of effective measures to

2009 / 2012 R$ 382.865.096.656,00 fight tax evasion structures;
2013 / 2016 R$ 569.194.853.576,00 48,67%
• Increase on tax auditors
specialization and training.
Source: Brazilian Federal Revenue
SPED program to combat tax evasion

SPED

Digital Bookkeeping Digital Tax E-Invoice

of Accounts (ECD*) Bookkeeping (NF-e***)
(EFD/ECF**)

* Escrituração Contábil Digital ** Escrituração Fiscal Digital *** Nota Fiscal Eletrônica
** Escrituração Contábil Fiscal
Electronic audit paradigm

• Audit on distance

CURRENTLY
• Isolated • Integrated data flow
PAST

• Retrospective audit • Prospective review (tax distortions)

• Manual conference • Electronic Audit of all operations

• Reduction of time spent with auditors presence in the

SPED Benefits in numbers:
company
• The average of tax audits increased by double digits on
Source: Brazilian Federal Revenue yearly basis
• 10+ Million trees was spared since its implementation
 A broad view of the problem

• Three levels of government

(Constitution drives the tax system)

• Growing electronic filing and potential

of information/data cross checking

• Court procedures are still time

consuming and do not have specific
chambers specialized in tax matters

• Result: challenging environment

Innovation and Entrepreneurship
Innovation and Entrepreneurship
Private Equity & Venture Capital

Performance of the
Private Equity and
Venture Capital
Industry in Brazil:

This report
commissioned by
ABVCAP and INSPER
presents an overview
of the Brazilian PE and
VC Industry between
1994-2017
Source: ABVCAP
Private Equity & Venture Capital
 Venture Capital

In 2017, Venture Capital tech

investment in Latin American
countries had an all time high
of USD$1.1 billion.

Although 100% of the largest

technology companies of the
world (Market cap criteria)
are currently in the US and
China, we believe that it will
not take more than medium
term for Latin unicorns to
pop up.

Note that Brazil already

account for more than 50% of
the regional investment.

Source and graph:

https://lnkd.in/e-U8svn
(nathanlustig)
Regional Leadership
Fintechs as one of the new trends
Renewables

• Brazil has one of the most diversified

energy matrices of the world and the
renewables portion of it has been
increasing

• Regular calendar of concessions for wind,

solar, etc.

• Biofuels (ethanol or biodiesel) are a

component of gasoline and automotive
diesel

Number of employments
generated on the
renewable energies sector,
on a global basis
Agriculture

• Brazil will shortly become the #1 country

on a worldwide basis when it comes to
agricultural production

• The combination of natural resources,

land, mechanization and inputs have made
the industry one of Brazil’s most
competitive ones
Agriculture & Environment

Conservation Units
(18% of Brazil’s Territory)

Indian Reserves
(14% of Brazil’s Territory)

Areas Protected by Legislation

(over 30% of Brazil’s Territory)
Agriculture & Environment

% of Protected Areas in Countries

Larger than 2MM sq./meters

World’s Protected Areas

(by legislation)

Protected Areas in Brazil are

Equivalent to the Territory of
15 European Countries Combined
Agriculture & Environment

Areas that are legally reserved for

conservation unities, Indian reserves, rural
reform, quilombolas and military

Preserved/Protected
Areas

Protected Areas in Brazil are

Equivalent to the Territory of
28 European Countries Combined
Agriculture & Environment

Areas that are legally reserved for

conservation unities, Indian reserves, rural
reform, quilombolas and military

Preserved/Protected
Areas

Protected Areas in Brazil are

Equivalent to the Territory of
28 European Countries Combined
Agriculture & Environment

Areas dedicated to preservation

in rural lands:

218MM ha
50% of rural lands
Over 25% of Brazil’s territory
Maintenance cost over R$20B/year
Global Stage Competition & Propaganda
Global Stage Competition & Propaganda
Perception x Reality
 Brazil - Perception versus Reality

PERCEPTION REALITY
I heard that… The truth is…

Brazil has a very complicated If you knew all the facts you would be sure
tax system of that.

Nobody can make money Many companies show higher profitability

with this tax system in Brazil than in other markets.

Everything in tax is electronic, Electronic compliance increased the level

so compliance should be easy of scrutiny of most transactions, regardless
of the size and location of the taxpayer.
 Brazil - Perception versus Reality

PERCEPTION REALITY
I heard that… The truth is…

Compliance cost is expensive The number of tax professionals needed is

in Brazil
Internal market is huge so the
easy way to do business is to
export to Brazil
Cash out from Brazil
is difficult
much higher than in other countries, plus
investment in hardware and software.
Historical protectionism imposes several
limitations to direct foreign competition.
There are no restrictions to foreign
remittances. Exchange controls and taxation
do not impose limitations in terms of the
amount to be transferred.
FORWARD LOOKING STRATEGIES
Challenging Environment
Issue
• Complex tax environment
• High fines and interest provided by
tax legislation;
• Brazilian mindset is focused on
local content requirements.
Strategy
• Opportunity to design contractual
structures towards assuring tax
compliance and optimization;
• Modeling alternatives is
recommended prior to entering
in the Brazilian market;
• Tax Incentives can be applied.
Compliance
Issue
• Significant number of filings;
• Information Technology (IT)
tools for the e-filings;
• Electronic crosscheck made
by IRS.
Strategy
• Tax Management Compliance
(TMC) is currently a trend;
• Governance and internal controls
improvement;
• Preparation/review of the
electronic filings/returns might
be co-sourced.
Bureaucracy
Issue
• Redundancy on the ancillary
obligations filing;
• SPED is very much like a Tax
ERP, which implies in companies’
changing its invoicing (NF-e)
and inventory control (EFD).
Strategy
• Companies can use the compilation
of data/information required to
review its business performance
indicators;
• Opportunity to review its
information flows and potentially
optimize them.
FINAL COMMENTS
 Challenges / Opportunities

• Low productivity • Huge market due to

demographics and economic
• Infrastructure/Logistics growth/size of GDP

• Lack of global view/awareness • Infrastructure is severely needed

by many professionals to enable progress

• English skills • Privatizations and concessions

play a big role on the above
• Education
• Very diversified industrial matrix
• Public Debt
• Country will become #1 in
• Politics (as usual…) Agriculture

• How much of the country’s • Energy and Resources matrix is

opening to overseas (e.g. foreign diversified and a very important
trade) will be accomplished asset

• Biodiversity and water

availability
Final Remarks!

• Do not underestimate or overestimate the complexity

• Plan in advance

• The main issues in Brazil are related to taxes’ compliance

• There are several opportunities to be explored

 Paulo Fernando Melo
• Paulo is the Managing Partner of PFM Associados, firm that he founded in 2017. His advisory career began in Arthur
Andersen in the nineties and he has 20+ year consulting experience, having led practices in Big Four and Middle-
market focused networks.

• Leads business strategic consultancy, financial and tax advisory, compliance and outsourcing for several clients,
especially those in the Oil & Gas, Energy, Natural Resources, IT, Manufacturing and Private Equity industries.
Activities comprise advisory, corporate restructuring, foreign investment, M&A, due diligence processes, tax
consulting, review of internal controls and compliance. He also serves as a member of the Compliance Committee of
firms in different industries.

• Frequently invited to be a speaker on Brazil Business Environment and Tax Framework to a number of audiences, in
Brazil and overseas. Over the last years, workshops were presented in the USA (10+ states), Canada, China, United
Kingdom, Portugal, The Netherlands, Luxemburg, Austria, Germany, Italy, Australia, Argentina and Puerto Rico.

• Requested for speeches and presentations on Investing in Brazil to MBA classes of international universities, among
which Auburn University, Bay Path College, Belmont University, Baruch College, Dublin College, George Mason
paulo.melo@pfmassociados.com.br
University, HEC Paris, Imperial College London, Purdue University, Rice University, Rutgers University, Texas Tech
+55 21 99142 0699
University, University of Florida, University of Stellenbosch, University of Tennessee, University of Virginia and
University of Wisconsin.

• Received awards for client accomplishments and authored articles published in the International Tax Review and
industry/sector newsletters. In 2018, was nominated by the Acquisition International publication as a “Leading
Energy & Resources Consultant of the Year – Brazil”. In 2019 and 2020, led PFM to be recognized as a
Recommended Firm in World Tax 2020/2021. Also, Finance Monthly recognized Paulo as a Recommended Tax
Advisor in its Taxation Awards 2020 Publication.

• Co-author of the book “Histories of Success 5”, published in 2019, that has the purpose of inspiring young
entrepreneurs and students through storytelling of the careers of 38 executives.
CONTACTS

contato@pfmassociados.com.br

+55 21 99142-0699

@pfmassociados