Doing business in Brazil: Best practices and pitfalls July 13, Doing business in Brazil: Best practices and pitfalls

Transcription

1 Doing business in Brazil: Best practices and pitfalls Welcome. Today s presentation begins at 11:00 U.S. Eastern Time (10:00 Central) Welcome There will be a live question and answer sessions at the end of the call. To submit a question, select the Q&A window at the top of the screen. In the window that opens, type your question into the dialog box, and press the Ask button. Please turn off all webcams. The slides and recording of this call will be ed to those who attend today s program. 1 1

2 Today s presenters Mark Bloom Partner in Charge, International Operations Great Lakes Region RSM McGladrey, Inc. Chicago, Illinois USA Cícero Alencar International Liaison Partner ACAL Consultoria e Autitoria S/S Ltda São Paulo, Brazil RSM McGladrey, Inc., McGladrey & Pullen, LLP and ACAL Consultoria e Auditoria S/S Ltda are members of the RSM International network of independent accounting, tax and consulting firms. 2 Today s Agenda Brazil at a Glance Major Considerations on Planning Investment in Brazil Specific Subjects to be Planned Ahead Audience Q&A Please feel free to submit your questions at any time. We will address as many as we can at the end of the presentation. 3 2

3 Brazilian Economic Fundamentals Population: million (2009) GDP (US$): $1.6 trillion (2009) $2 trillion forecasted for 2010 $8.042 GDP per capita (2009) Unemployment: 9.9% (2009) Inflation (IGP-M): -1.7% (2009) FDI Inflow: $15.1 billion (2009) 4 Brazilian Economic Fundamentals Trade Balance Foreign Direct Investment International Reserves Total External Debt GDP 2001 US$2.7 $22.5 $35.9 $209.9 $ , , , , F , F ,097.0 Source: Brazilian Central Bank (BACEN) 5 3

4 Brazilian Economic Fundamentals Trade Balance Foreign Direct Investment International Reserves Total External Debt F 2011F Source: BACEN 6 Brazilian Economic Fundamentals 2,500.0 GDP Population 2, , , F 2011F GDP Per Capita 12, , , , ,000.0 Source: BACEN 2,

5 Brazilian Economic Fundamentals Inflation Unemployment Real Interest Rate F 2011F Source: BACEN 8 Relevant Business Opportunities 5th largest country in land mass 5th largest population in the world World s top producer / exporter: - Soybeans - Cattle and beef products - Poultry 3rd largest commercial aircraft manufacturer and exporter 9th largest in the world in GDP Major oil & gas basin currently under exploration 9 5

6 Today s Agenda Brazil at a Glance Major Considerations on Planning Investment in Brazil Cultural Differences Currency Exchange Control Business Environment Labor Law Tax Law - Corporate Law and Accounting Principles Specific Subjects to be Planned Ahead Audience Q&A Please submit your questions at any time. We will address as many as we can at the end of the presentation. 10 Cultural Differences Language Non convertible currency Extensive regulations Short term thinking Not easy financing (mainly long term) Inflationary heritage influencing payment term in general Extremely protective labor law 11 6

7 Currency Exchange Controls Reais is non-convertible Brazilian Central Bank (BACEN) Registers all flow of funds denominated in foreign currency - Registration necessary to enable the transfer of hard currency outside the country Thin capitalization concept tax driven - Debt/Equity ratio is associated to tax deductibility of interest expenses Foreign currency denominated deals - between local entities - not legal, cannot be posted at statutory records Financial institutions (mainly commercial banks) highly developed, considered IT intensive users; - one of the fastest, most sophisticated banking systems in the world Strict and heavy regulations 12 Business Environment Most commercial initiatives tax regulated Implementation of some IT initiatives to enable strict control on income recognition Business conducted on a paper based support environment Quoted prices are deemed to contemplate all taxes Permanent Establishment (PE) concept is not clearly stated in current regulation. Only local legal entities can import and/or export to/from Brazil Tax incentives and benefits are offered on underdeveloped geographic areas or associated to certain specific industries 13 7

8 Labor and Social Security Law Labor Law extremely protective of the employees rights Labor Unions not very active, thus Labor Court is frequently used to resolve controversies Public Social Security system offers poor benefits and is seldom used by educated workers Mandatory annual salary inflation adjustment regulated by collective bargain agreements Mandatory charges/benefits cost no less than 62% of nominal monthly salary to employers Severe auditing from Labor Ministry and Social Security Auditors 14 Social Security and Benefit Costs Nature of the Charge Percentage A - Social Charges - Fixed Rates Non working days (average per year) Social Security system 20,00% Out of 365 days 90 are non working Severance Indeminity Fund (FGTS) 8,00% Sundays: 52 Education Allowance 2,50% Vacations : 26 Working insurance (variable) 3,50% ( 30 days less 04 sundays ) SESI 1,50% Official holidays : 12 SENAI 1,00% Total: 90 SEBRAE 0,60% INCRA 0,20% SUB TOTAL 37,30% B - Additional Cost I (mandatory) Vacations 8,34% Vacation bonus 2,78% SUB TOTAL 11,12% C - Additional Cost II (mandatory) Christmas bonus (13th salary) 8,34% SUB TOTAL 8,34% D - Indirect effects Group A charges over group B 4,15% FGTS over Christmas Bonus 0,67% SUB TOTAL 4,81% Grand Total on annual basis 61,57% 15 8

9 Mandatory Benefits For All Employees FGTS Severance Indemnity Fund 8% of monthly gross remuneration borne 100% by employer 13th Salary Payable each December Equivalent to one extra month average salary 30 days paid vacation Only divisible into 2 periods per year Minimum period: 10 days Vacation Bonus Equivalent to 1/3 vacation payment Payable together with vacations Transportation Allowance Amount that exceeds to 6% of monthly remuneration, paid in a specific card accepted in public transport means Provision for additional days off Marriage, pregnancy leave, death of relatives, etc. 16 Minimum Eligible Benefits To All Employees Basic benefit package which is consider to be standard and in most of the workers categories is made mandatory by Labor Union Collective Bargains Meal Allowance - Amount defined by Labor Union or by Employer if there is no provision at Collective Bargain Health Insurance Life Insurance Dental Insurance 17 9

10 Tax Law Levels: Federal, State and Municipal Imperative and not conceptual - states what is allowed and what is not If a deal does not match the literal wording of the Law, it does not exist for tax purposes Analogy is restricted to very few issues No tax ruling available Taxpayer not allowed to speak with tax authorities Negotiation is not available at any level Changes can only produce effect in the following year SPED Digital Posting Public System (both for Tax and Commercial posting) 18 Tax Law Level Federal Tax Law State Tax Law Municipal Tax Law Regulates Corporate Income Tax (IRPJ) Social Contribution on Net Income (CSLL) Social Contributions on Gross Turnover (PIS/COFINS) Economic Domain Intervention Contribution (CIDE) Import / Export duties (II / IE) Excise Tax (IPI) Financial Transactional Tax (IOF) An additional 44 contributions and duties VAT (ICMS) Heritage and property ownership transfer (ITBI) An additional 10 to 15 contributions and duties Service Tax (ISS) Urban Property Tax (IPTU) An additional 3 to 10 contributions and duties 19 10

11 General Tax Law Concepts Any economic event is a taxable event unless otherwise stated List of exempt activities or events is an integral part of the Tax Law Accrual basis is the standard, except when allowed in regard to certain specific activities or situations Expenses are deductible if: - Are necessary to generate an income - The amount is reasonable towards the generated contribution - It is standard or usual within the industry - Donations (with very few exceptions), promotions (social activities with clients as an example), managing directors fringe benefits, among some other regular expenses are not considered necessary for the business 20 General Tax Law Concepts Physical evidence of services is mandatory to be filed together with posting (written report, printed survey, etc.) Tax auditing does not exclude the period from being audited again Decadency term is of 5 years for tax charge Election for taxation system is done with the first payment of the year and cannot be changed within the calendar year Withholdings are mandatory for services income and can be offset within the same month of collection Payments to non resident beneficiaries are treated as service imports 21 11

12 Corporate Law Most common corporate structure for Brazilian subsidiaries of North American companies is Limited Availability (LTDA) It allows: - identification of the partners in the articles of association; - direct tracing of any partners change and/or move; - direct identification of capital amount and who paid how much LTDA: - does not issue shares but does have capital quotas - shareholders are named quota holders - prescribes preference to existing quota holders on any disposal, sale or withdrawal Limits might be imposed on management as to their scope Annual general meeting (120 days from statutory term) is mandatory 22 Corporate Law Considering that tax year is the same as the calendar year, 99.99% of companies adopt it as statutory term as well Foreign partners must be represented by a resident proxier Only residents can act as managers Corporate domicile is relevant considering tax implications Top management remuneration must be fixed in annual amounts. There is no employment relationship for Directors Dividend distributions can be processed at any time during the year if the Articles of Association allow it Foreign partners must be registered with BACEN and enrolled with Tax Authority (RFB) 23 12

13 Corporate Law Foreign documentation - must be notarized and consularized in home domicile - to be valid in Brazil, must be translated into Portuguese language by a sworn translator Licenses to operate vary depending on nature of business and on Municipal and/or State requirements Total incorporation process time: up to 6 months In a Limitada all and any change (opening of branches, capital increase, change of quota holders, change of managing directors, etc.) requires that the Articles of Incorporation be updated 24 Adoption of IFRS as Brazilian Standard BR GAAP previously, basically tax driven 2008 and 2009 transition period Temporary tax system allowed for the transition period 2010 Mandatory for all corporate entities Statutory auditing restricted to public traded corporations and large private companies Major changes generating intense discussions: - Impairment of assets; - Financial Instruments; - Biological assets; (agriculture, cattle, etc) - Segregation of tax concept from accounting concept US GAAP transition and convergence 25 13

14 Today s Agenda Brazil at a Glance Major Considerations on Planning Investment in Brazil Specific Subjects to be Planned Ahead - Corporate Structure to be Used - Selection of Taxation System - Selling Price Concept and Formation - Transfer Price Regulation Audience Q&A Please submit your questions at any time. We will address as many as we can at the end of the presentation. 26 Corporate Structure to be Used Consider tax implications at parent company level (check the box or equivalent requirements) Level of control required on the local management or legal representatives of foreign investors All local legal representation must be performed by a Brazilian resident need to have a formalized grant of authority All official legal documents must be stated in Portuguese language Foreign language copies are for internal use solely and have no legal validity at all

15 Corporate Income Tax - Taxation System Election Real Profit System Traditional taxation system based on adjusted accounting net income Transfer pricing regulations are imposed on related parties deals and on transactions ti with ith tax privileged iil d jurisdictions iditi Payment term can be monthly or quarterly Tax loss carryover has a quantitative limitation (30% of future taxable income), without any time limit Temporary differences must be posted in a specific tax book (LALUR) Basic rate of 15% Surplus rate of 10% on taxable income that exceeds R$20K per month PIS/COFINS implication non cumulative regime must be used 28 Corporate Income Tax - Taxation System Election Deemed Profit System Taxable base is determined as 32% of gross turnover (services) or 8% (trading), regardless actual profit margin of the business Transfer pricing regulations are not imposed Payment term is quarterly Tax loss carryover is not possible Cash basis is allowed Basic rate of 15% Surplus rate of 10% on taxable income that exceeds R$20K per month PIS/CPFINS implication cumulative regime must be used 29 15

16 Social Contribution on Net Income - Taxation System Election Social Contribution on Net Income (CSLL) Uses the same taxable base and payment term as Corporate Income Tax (the same taxation system must be used for both charges) Rate of 9% Loss carryover follows the same rule of Corporate Income Tax 30 Selling Price Concept and Formation Service Tax ISS Base for computation is gross amount charged to client Taxable event happens in the month when the service is provided It is a sale tax, so no credit is permitted Certain cities (São Paulo included) adopts the Electronic Invoice Rates may vary from 2% to 5% depending on the city where the service is rendered and/or the nature of the service Taxable domicile is determine by physical presence of staff Monthly payment Withholding might be imposed if client domiciled in a different City 31 16

17 Selling Price Concept and Formation VAT ICMS Base for computation is the gross amount charged to the client Taxable event happens in the month when the goods are sold or transferred It is a pure VAT, so payable balance is a credit/debit account Certain States adopt the Electronic Invoice Rates may vary from 7% to 19% depending on the State where the seller and the buyer are located Monthly payment 32 Selling Price Concept and Formation Social Contributions PIS and COFINS Base for computation: gross amount charged to client Taxable event happens in the month when the income is earned Can be a sale tax or a VAT, depending on the selected taxation system Combined rates % (sales tax cumulative regime) % (VAT non cumulative regime) Monthly payment Mandatory withholding On payment for services to a foreign beneficiary it is levied at a combined rate of 9.25% 33 17

18 Transfer Price Regulation Original regulation enacted: 1996 Actual enforcement started: 2004 Current regulation embraces import and export between related parties, parties domiciled in tax privileged jurisdiction (Delaware is in the Brazilian list of privileged jurisdiction) Transactions between non related parties but with exclusive or relevant agreements are also required to proof compliance to TP rules Disclosure of computation is included in the annual income tax return Taxpayer must state (and keep file of it) proof of compliance in written, with complete analytical details on the method selected and formulas used 34 Today s Agenda Brazil at a Glance Major Considerations on Planning Investment in Brazil Specific Subjects to be Planned Ahead Audience Q&A We will now answer your questions. Please submit any additional questions you may have at this time

19 Doing Business in Brazil? Bureaucracy Currency Regulated Tax Burden Paper based Labor Protective e Understand The Local Culture Planning Ahead and Understanding Cultural Differences 19

20 Who to contact In the United States: Mark Bloom RSM McGladrey, Inc. Chicago, Illinois USA T E mark.bloom@mcgladrey.com In Brazil: Cícero Alencar ACAL Consultoria e Autitoria S/S Ltda São Paulo, Brazil T E cicero.alencar@acal.com.br RSM McGladrey, Inc., McGladrey & Pullen, LLP and ACAL Consultoria e Auditoria S/S Ltda are members of the RSM International network of independent accounting, tax and consulting firms. 38 Thank you for attending 20