The ignorance level regarding Brazil is higher than you might presume. I once spoke with a retired Federal Reserve banker, a quite knowledgeable gentleman who had traveled around the world. I made a remark about the Spanish-Portuguese language gap, to which he replied, "Oh, they don't speak Spanish in Brazil?"
No. They don't speak Spanish in Brazil.
I often correspond with former colleagues preparing to go to Brazil. Everyone needs some cultural translation and tips on getting around. Just recently I helped a Frenchman working for a California-based telecom who was flying to Brazil for a three-day meeting. A book on cultural etiquette may be appropriate for him. But the person who's really going down to do business in Brazil needs to know more than just which knife and fork to use, or the difference between a caipirinha or a caipiroska.
That's where They Don't Speak Spanish in Brazil comes in.
The Brazil of today is not the Brazil of ten to fifteen years ago. The country has made tremendous strides in technology, industry, finance, rule of law, and development. And that's just for starters.
You can feel Brazilians pushing their institutions to be more efficient and more effective. When you hear or meet Brazilian leaders at conferences, you get the impression they know even more change is coming and that it needs to happen even more quickly. But for all the progress yet to be made, for all the challenges the country still faces—Brazil works.
Keep your arrogance at bay. Respect the country, its people, and their achievements. Accept Brazil as it is.
Prior to joining Nokia, I graduated with a Latin American studies degree and worked for another company in Brazil. I felt I knew how to comport myself with Brazilian clients, how to win their goodwill, so to speak. As a giveaway, I ordered some very nice pinpoint cotton shirts that just said "Nokia—Latin America," confident our OEM partner would love them.
Ricardo, one of the owners who taken aback by my classifying him as Latin, said to me, "Joe, don't get me wrong, we like the shirts, but… we're Brazilians — we're not Latinos."
I knew on an academic level that Brazilians often identify themselves differently, but this was the first time I witnessed it firsthand.
On the other hand, many Brazilians in the southern states of Rio Grande do Sul, Santa Catarina, and Paraná commonly refer to themselves as German or Italian. They refuse to call themselves "Brazilian" and it's insult to refer to them as such. They consider themselves "European."
When I was working in San Diego, I had a friend by the name of Rolph, a Swiss engineer, who often traveled to Rio on business. When he went, he would always stay in his hotel room the entire trip, petrified of being mugged.
I told him, "Rolph, you need to get out. Ten years from now you're going to regret you didn't get to know Rio better."
So he took my advice and went out one evening. He walked straight out of the posh hotel lobby onto a touristy beach, talking on his expensive cell phone and oblivious of everything around him. Of course, he was immediately mugged. He wasn't irreparably harmed, but he did take a pounding.
I encourage people not to let Brazil pass them by. It's a wondrous country — the culture, the music, the mystery. It's quite easy to be captivated by it all. But in the midst of that, you have to use common sense, and common sense says you don't walk onto a beach that is known for petty theft while you're talking on your cell phone. Nobody does that.
I will never forget what an old-timer in Brazil told me: "Joe, never forget: you're always being sized up."
Take kidnapping, for example. It's like shipping: your two options are 'standard' or 'express.'
In a standard kidnapping, the victim is carefully chosen before the kidnapping is carried out. The victim is usually held for three or four days to intensify the family's emotions, and then they'll begin negotiations. An express kidnapping is where a random person is grabbed off the street — a foreigner waiting outside a nice restaurant for a cab, a well-dressed Brazilian walking out of an ATM. The kidnappers will blindfold the victim, drive around for a few hours to get them good and scared, and then max out their ATM cards and take whatever they have on them.
It's a lot of work to successfully pull off a standard kidnapping. It requires careful consideration, logistics planning, tracking a target's movements, and finally seizing the precise time. For an executive going to Brazil for three months, their only real concern is just an express kidnapping, and there are a couple of easy ways to avoid it.
For instance, if you need to go an ATM in São Paulo, make sure you go inside a shopping center; avoid the ones that open onto the street. Even native Brazilians are too scared to utilize a street ATM because of the risks involved. Nowadays, would-be kidnappers are likely watching, sizing up everyone who goes in and out.
For getting a cab, there are often pontos (taxi posts) in front of hotels that are commonly used by foreigners. If you can, get to know some of taxi drivers and establish a relationship with them. Ideally, find one who speaks English, which is easier than you think. You can go through the whole line, one-by-one until you find a cabbie you're comfortably, or you can simply ask a front-desk person accompany you outside to ask on your behalf.
Alternatively, get your hotel or restaurant to call for a radio-dispatched taxi. The cab company employs the driver, has a record of who picks you up, and knows their license plate number - just in case.
The Brazilian Way
Nokia's first manager at the joint-venture factory in Manaus was an Englishman by the name of Nick Newman. The factory had separate worker and executive lunchrooms, similar to those old General Motors factories in Detroit. Nick decided that, for camaraderie and solidarity, he would eat with the workers.
"It really seems silly that I should eat in an executive lunchroom and not with the Brazilian workers who are contributing to the bottom line, making this firm successful," he told me at the time.
After just a few days of this, the factory workers' union leader requested a meeting and said, "We'd like to officially request that you stop eating in the worker lunchroom." Nick was taken aback, afraid he had offended someone or mistranslated something. The union leader said, "No, it's just that the workers aren't eating because they're intimidated by you sitting there with them."
Nick had the right idea — camaraderie at lunchtime is a very important ritual. But because of their manager's presence, the workers were too nervous to relax, even to eat. They couldn't enjoy their one real break of the day.
This is an important cultural point. You cannot assume that what you learned in a U.S. or European management course will apply in Brazil. It's not automatic that an egalitarian environment is accepted. Here was somebody trying to do what he thought rig ht — to eat with his troops and show his benevolence — but formally requested not to. It's a perfect example of the clash of cultures.
You can have an argument about whether these things are right or wrong, but that misses the point. It exists. The social hierarchy is ingrained in the very fibers of the Brazilian culture. The lesson is to be aware that, even with the best of intentions, doing it your way instead of the Brazilian way may very well step on people's toes.
I remember a conversation with Nokia's OEM partner about the contrasts that exist in Brazil. The gentleman told me that foreign suppliers of OEM equipment from Asia or Europe were astounded by a particular line item in their operations costs: feminine hygiene products.
Local women in Manaus (in the state of Amazonas) were working in factories for the first time. Just like in the frontier towns of the Old West, these rural women never had the need for these products prior to working in an industrial setting.
Of course, the non-Brazilian factory managers were worried about the monthly mess if the women refused to buy their own hygiene products. Imagine women at their workstations, putting together highly delicate, SKD-produced material, menstruating where they sat and thinking nothing of it.
The line item included flying women from São Paulo to Manaus to teach the workers how to use feminine products, educate them on the benefits, and make sure they actually did use them while working.
The majority of your stay may be focused at business meetings in nice hotels, but don't make the assumption that Brazil is only what you see in São Paulo and Rio. By North American and European standards, plenty of Brazil — such as the states of Acre, Rondônia, Roraima, Pará — continues to be extremely rural and very much frontier territory.
Copy and Paste Won't Work
At both Nokia and a former employer of mine, there were people who, misguidedly, wanted to take a marketing campaign from Argentina or Chile and just "tweak it" for Brazil. They saved pennies in upfront costs but spent dollars in the end because the campaigns ultimately failed.
You can't customize an initiative, and then implement it in Brazil. The country itself is made up of "many Brazils," as we talked about earlier. It's not homogenous even within itself, much less compared to the rest of Latin America. You simply cannot copy-paste in this country.
Many people I know say, "Oh, I don't have to worry about all those crazy bureaucratic rules. I have a friend in the government." Be very, very careful about being suckered into one of these deals.
An American friend of mine built a great business in Minas Gerais. To 'expedite' setting up the operation, he arranged for a fiscal (Brazilian tax official) to "take care of some things." Just like anywhere else, people retire, get transferred, and move away.
When his government contact retired and a new group of guys came to inspect his business, they said, "Gee, this is completely illegal. It should never have been approved. We're issuing an injunction to immediately cease operations." Imagine the amount of money he lost because he 'expedited' his permits!
Bribes are to officials what heroine is to an addict: it never ends. The first person that a dirty fiscal will hit up for money is you, the foreigner, because you have no protections, no friends in the government, and no contacts in the ministries.
Regardless of their promises, this fiscal (or whomever) may not be around to protect you in the long-run. If someone starts insinuating they can "help" and you get a bad feeling in your stomach, do just like your mom taught you — walk away. Don't take that avenue.
It may take longer — even if it takes months to get that permit to begin manufacturing or open your store, to get your tax identification, or whatever — but take your time and do it right. In two years, that same guy that cut you 'the favor' is still going to be at your neck, coming around to ask, "Hey, what have you done for me lately?" They'll have you by the neck forever.
Don't limit your horizon. Look to your business interests throughout Brazil. If you represent a consumer product line for, say, Johnson and Johnson or Colgate Palmolive, wouldn't you want to know how your product is selling out in the Northeast or the interior — any area far from São Paulo?
Take Brasilia, for example, the actual capital of Brazil. Carved out of Goiás state in the 1950's, the seat of government's location encouraged development in the interior of the country, away from the populated coasts. The idea was originally proposed as far back as 1827 and enshrined in the 1891 constitution.
Brazilian leaders built a futuresque city whose architecture is recognized as a UNESCO World Heritage site. It's a beautiful place, home to a number of foreign embassies and domestic headquarters.
There 170 million other Brazilians outside of São Paulo state. Don't you think it's worth committing another day of the company's money to see how things are selling in Recife or Fortaleza or Curitiba? Don't allow yourself to get important data from others. It's best to see with your own eyes and hear with your own ears.
From a business perspective, many countries' domestic policies screw up logistics and spreadsheets in headquarters around the world. The COO's rant might go something like this: "We maintain that factory in Mexico to satisfy NAFTA and supply the United States, in spite of our factory in Asia where prices are dramatically lower than at the Mexican factory — and now you're telling me we have to put a factory in Argentina and Brazil to get access to those markets? Maybe the Brazil facility could supply the Latin American market, but to have another one in Argentina — that makes no scalable sense whatsoever!"
I've participated in innumerable meetings where someone raised these kinds of concerns. But, in reality, it's a moot point. Yes, the costs to operate in Manaus are X plus six — but would you prefer your costs and revenue to be zero? Because that's what they'll be otherwise.
Think of it in terms of a poker game. The Brazilian government is the dealer and they will always — always — have all the cards. If you want a seat at the table, you have to play by their rules.
Getting to Know the Law
At a recent tax conference, I spoke with the senior lawyer for a large, multinational corporation. During our conversation, she said, "Oh, you're from Brazil? We're opening a branch of our company in Brazil."
After telling me about it for only a few minutes, I interrupted her and pointedly asked, "Why are you incorporating your entity as an S.A. [sociedade anônima]?"
She looked at me blankly for a moment and said, "Well… is there another type?"
Of course there is!
These "experts" are often just as in the dark as anyone else. While they may be competent, they cannot be conversant in every nuance of tax law. As Joe said in the section on cultural management, the key to success in Brazil is to "know before you go." The more you understand the different types of applicable taxes and laws for your Brazilian venture, the less you have to depend on other attorneys, consultants, financial advisors, and so forth.
You cannot rely solely on others. You must know for yourself.
In my experience, when multinationals consider do a cost-benefit analysis on operating in a country, they focus on income taxes. This is for a good reason: in the majority of other countries, there are many advantageous deductions.
However, in Brazil, available income tax deductions are usually so insignificant as to be irrelevant. (There are some incentives, but these are the rare exception to the rule.) The best tax strategies for Brazil focuses on 'operational' taxes: import taxes, VAT-equivalent taxes, labor costs, and so on.
Take strictly import taxes, as an example. I once consulted for an air conditioner manufacturer who wanted to supply the Brazilian market. To import each finished product, the company would have to pay 110% import tax. Obviously, they did not want to double the price of their product, already somewhat of a luxury item for many Brazilians.
Manufacturing the entire product in-country was not an option, either. There were simply too many components to justify setting up so many factories. Instead, we analyzed importing the individual component pieces and assembling them as a finished product. This significantly reduced the company's final tax liability and allowed it to competitively offer its air conditioners to the domestic market.
My fellow conference attendee in the introduction was unaware of the many different legal entities her company could incorporate as. She asked me, "Then what are the different types available? Could our subsidiary operate as a sole proprietorship? Can we form a corporation with just one shareholder?"
In practical terms, no — a legal entity cannot operate with a single shareholder. Recently, the legislature did update the law so there are some instances where Brazilian nationals can operate as sole proprietorships. However, multinationals' options primarily center on corporate entities and a handful of special structures.
There are two corporate entities available:
Sociedade anônima, a joint-stock company, either public or private; the equivalent of a U.S. "inc." corporation
Sociedade limitada, a limited liability company; the equivalent of the U. K.'s "Ltd."
…and four types of partnerships:
Sociedade em nome coletivo, a general partnership
Sociedade em comandita simples, a limited liability co-partnership
Sociedade em comandita por ações, a limited liability co-partnership by shares
Sociedade em conta de participação, an unincorporated partnership
Just like in the U.S. or Europe, each structure subjects its owners to different legal liabilities, different tax regimes, and unique legislation. The key is to understand the differences and pick the one most appropriate for your situation. For my colleague's company, a sociedade anônima was not the best choice — a sociedade limitada was.
Who told her an S.A. was the company's only option? Not even counting the different applicable taxes, the tax compliance and reporting alone for that structure vs. a Ltda. could easily cost tens of thousands of dollars per year in extra fees!
In the United States, a corporation (i.e. an "inc.") can choose to remain private or to go public. Of course, going public requires much more tax compliance, brings it squarely under the jurisdiction of the Securities and Exchange Commission, and requires full public disclosure. A sociedade limitada (or, simply, a "Ltda.") is similar to limited liabilities companies in the United States: more flexibility, decreased disclosure and compliance, but unlikely or unable to issue public stock.
A Ltda. may choose two specific forms: a simple company (sociedade simple) or a business corporation (sociedade empresária), each with its respective tax regime. In both cases, it requires a minimum of two shareholders whose contributing shares may represent money, credits, rights, and/or assets. These shares must be registered but may never represent securities. Therefore, Ltdas. may never be publicly traded on a stock exchange.
Similar to an S.A., each shareholder is a limited liability partner — every partner is liable only for the value of their shares. In other words, a shareholder's personal assets are protected in such an event as bankruptcy. The idea is the same as the European or American "corporate veil" concept, wherein a company's creditors can seize the company's assets but cannot collect from the individual shareholders themselves.
As I alluded to in the section on corporate entities, there are different tax regimes available to and/or associated with the different entities. The most common for multinationals is the real profit regime, the lucro real. Under this tax system, entities calculate their income tax liability according to their net taxable income.
As such, this allows for the deduction of certain expenses (as examined in the section on 'Corporate Deductions'). However, as I stated earlier, such deductions are usually so insignificant as to be inconsequential in tax planning.
While the official Brazilian corporate income tax is 15%, that does not take into account a surtax of 10% for income exceeding R$20,000 per month (R$240,000 per year), nor does it include payroll-related taxes, cumulatively 9%. For virtually all foreign businesses, then, the effective corporate tax rate is 34%. For financial institutions, payroll-related taxes are cumulatively 15%, subjecting them to an effective rate of 40%.
However, even for entities not required to follow this tax system, I recommend they do so. In many regards, this regime lends itself to easier international reporting compliance, as the accounting books must be maintained on an accrual basis and it allows net operating loss carryovers (NOLs).
The following types of companies are required by law to comply under the real profit regime, regardless of their corporate entity type:
Publicly traded entities
Entities whose total gross income exceeds R$48 million in prior-year financial statements
Financial institutions, including insurance companies and agribusiness credit corporations
Entities with international sources of income
Some entities form as a sociedade limitada to take advantage of different taxations, such as the straightforward simples regime below. But as you can see, simply forming a Ltda. does not guarantee you being able to choose your tax regime, too. This is exactly why getting the basics right is so critical to success in Brazil.
The good news, of course, is that none of this is rocket science. If you prepare yourself, ask the right questions, and have a working knowledge of the major elements in tax strategy, you can avoid these potentially fatal mistakes.
As we said earlier, tax strategy for most multinationals operating in Brazil primarily centers on VAT-type taxes. There are two. At the federal level are VAT taxes levied on manufactured goods and foreign imports. At the state level are VAT taxes levied on interstate and intrastate (i.e. from one city in the state to another) transportation of goods.
The federal VAT tax is called the IPI (imposto sobre produtos industrializados, the tax on industrialized products) and is levied at every stage of the production process, much like Europe's VAT taxes. In addition, the tax is levied on all international import transactions; export transactions are exempt. The exact tax depends on the product's classification, as in the A/C example earlier where importing finished goods was more expensive than importing the component parts. The general logic behind IPI is that goods of necessity, i.e. food and medicine, are taxed at a lower rate than luxury goods, i.e. lipstick (although many of us could argue lipstick is a necessity) and air conditioners (again…).
The state VAT tax is called the ICMS (imposto sobre circulação de mercadorias e serviços, the tax on the circulation of goods and services) and is levied on the import, distribution, and/or sale of goods (and a couple of specific services) in a state. This applies to all goods (and certain services) imported into the state, even those originating in foreign countries.
The good news is these VAT-type taxes are creditable, meaning these taxes are not technically a cost in a company's ledger but a credit you can apply towards the respective government(s). For example, if I buy fuel, there is at least an ICMS tax included in the price. However, if I use that fuel in my business, say, to transport goods from my factory to my shipping facility, then the ICMS tax becomes a credit in my books. The next time my business is levied an ICMS tax, I can first apply my accumulated credits before having to pay anything else out-of-pocket.
The twist in Brazil is the complexity of calculating IPI and ICMS taxes. Brazil has twenty-six states plus a federal district. Each state is aggressively pursuing more foreign direct investment and economic development, and so each offers unique economic incentives. The tax rates vary according to a product's classification, the origin of the product, and the destination of the product. For instance, the city of Manaus, Amazonas, offers a lucrative import rate so competitive that many companies import directly into Manaus, even if the product's final destination is São Paulo, 3,500 kilometers away.
Where to Incorporate
The surprise is the service tax (imposto sobre serviços, ISS) municipalities can levy. The ISS is completely different from the other taxes companies face in Brazil. First, it's levied on the gross income derived from services provided by any entity headquartered within its jurisdiction. Second, the tax cannot be transferred — that is, credited — like VAT taxes can.
Because of this, ISS is not a tax-deductible cost, nor is it a cost a company can pass it on to its customers. It is a direct cost. The ISS tax varies between a half percent to ten percent throughout Brazil, depending on the municipality.
A consultant who sets up a business in São Paulo, for example, has to add a five percent service tax on every invoice she sends out. There is no way to recoup this cost (unless, of course, she wants to raise her fees to cover the tax… but then, of course, she would have to still add a five percent tax on top of that…)
Thus, a service provider's tax strategy focuses on where they decide to incorporate. For instance, while São Paulo is the place many businesspeople gravitate to, it's actually smarter to incorporate just outside of São Paulo in the municipality of Campinas. Here, ISS is only one percent on gross service sales.
Therefore, our consultant who incorporated in São Paulo could be pocketing R$ 4,000 for every R$ 100,000 in sales… if she had been smarter about where she incorporated. Because she incorporated in São Paulo, though, it doesn't matter if she provides consulting in Rio, Buenos Aires, or London — she has to pay five percent of gross sales to the municipality every year.
Harbor Activities Development Fund, FUNDAP
FUNDAP is a financial incentive to support companies headquartered in Espírito Santo that have foreign trade transactions subject to state VAT taxes (ICMS).
Specifically, the incentive defers and/or partially finances ICMS taxes at 8% of sales revenue on goods imported into Espírito Santo. For example, if a medical device reseller imported R$ 100,000 of equipment into the state, the deferred and financed tax amount would be R$ 8,000.
Thus, while the reseller would still technically owe the state R$ 8,000 in taxes, they would not have to immediately pay. This allows them to reinvest that R$ 8,000 back into the company, perhaps in buying additional inventory or covering other administrative costs.
Because the medical device reseller still owes the tax, the incentive can be thought of as a loan. In those terms, the 'loan' stands for twenty-five years, broken into a five-year grace period (no money due) and a twenty-year amortization period. The annual finance charge for the entire loan period is just one percent. After the grace period, the reseller would pay the principal and interests charges in successive annual installments.
The incentive primarily seeks to encourage industrial diversification and business start-ups. For this reason, the incentive explicitly excludes most commodities and resource extraction-type products and their derivatives, ex. iron ore and steel. These commodities include: iron; coffee; cocoa; wheat; wood; cement; marble and granite in blocks; and liquid and gaseous fuels.
Invest-ES is an incentive granted for industrial projects that will expand, modernize, and/or diversify the state's economy. Recipients of the incentive must demonstrate their project will: stimulate social and economic development; contribute to the development of less industrialized regions, including job creation and increases in aggregate economic value; modernize the technology of production infrastructure; and increase the state's economic competitiveness.
Potential tax benefits include (but are not limited to):
Deferral of ICMS taxes on (i) purchases of raw materials and/or supplies intended for to a manufacturing process, and (ii) the acquisition of machines, equipment, and other fixed assets intended for implementation, expansion, and/or the creation of business projects
Reduction of interstate and/or intrastate ICMS taxes, up to 70% of the tax (calculated on a monthly basis)
These benefits may be cumulative and are granted for a period not to exceed twelve years.
For over 20 years Joseph Low has been a leader in building and developing international business opportunities in Brazil. He has held numerous leadership roles with large multinationals and numerous smaller enterprises - all with offices in and strategically important operations focused on Brazil. While living in Sao Paulo as an expatriate with Nokia for over four years in the late 1990's, Mr. Low co-founded and built Nokia do Brasil and also was instrumental in the hiring of most of the office's first Brazilian employees. His MBA is matched by his mastery of Portuguese and a deep understanding of what it takes to build a business working with the energy and entrepreneurial spirit of the Brazilian people.
Claudia Brito Low is a native of Brazil, and a Brazilian bar registered attorney recognized as one of the leading experts in the ever-changing field of Brazilian taxation and business incentive policies. She has been a consultant with a big four accounting firm in Sao Paulo, a federal tax judge in Brasilia, and business entrepreneur in the United States. Now, Claudia continues her career as an executive with a large multinational in Florida while pursuing her LLM degree in tax at the University of Miami.
Joseph Low may be reached at: email@example.com
The book is available, in printed format at