Top challenges of doing business in Brazil
Article

Top challenges of doing business in Brazil

19 March 2018

Brazil has moved on a lot since it was named a “BRIC”, one of the world’s best emerging economies, a decade ago. The Latin American powerhouse has been one of the most exciting growth stories of recent times.

Disclaimer: This article was accurate at the time of publishing. To obtain the most up-to-date information, please get in touch with our local experts.

Plenty of foreign companies came to do business in Brazil, buoyed by a commodities boom and increase in family consumption. Playing host to both the football World Cup (2014) and the Olympic Games (2016) did not hurt Brazil’s attractiveness, either.

...But that was then. Government support may have lifted more than 30 million people out of poverty in this time, but the sporting stages generated controversy, especially around how much it actually cost. Government budget deficits are up to 10% of economic output, up from around 3% in 2013. That, in turn, impacts doing business in Brazil.

It’s not all doom and gloom, though. Brazil’s consumer confidence is climbing, with households more optimistic about inflation, unemployment, personal income, their own financial situation and debt. And, following the impeachment of then-president Dilma Rousseff in August 2016, President Michel Temer of the centrist Brazilian Democratic Movement Party set out to restructure the economy. His government has formally applied for membership of the OECD.

After almost three years of economic recession, the Brazilian economy is now slowly heading towards a recovery. IMF predictions had Brazil’s economy growing by 0.5% in 2017, and  interest rates are decreasing.

Will the air of optimism last? However, the economy twists and turns, doing business in Brazil remains notoriously complicated. In fact, Brazil was named the second-most complex jurisdiction for accounting and tax in TMF Group’s 2017 Financial Complexity Index. Here’s what to consider before making the leap to do business in Brazil.

Developing nation

Brazil is still considered a developing nation, and although that is often interpreted as a precursor for ‘high growth levels’, it also means that several areas of the economy remain underdeveloped. The consumer base, regulatory environment and sphere of investment are not as mature as those of developed nations, and considerations must be made to that effect.

Bureaucracy

The reform of the laws and regulations for opening and running a business in Brazil has not adapted at the rate with which the economy has grown, presenting many hurdles to overseas corporations.

Brazil ranked 125th out of 190 countries in the World Bank’s latest annual global report which evaluates the ease of starting a business, dealing with construction permits, registering property, and paying taxes. On average, it takes 11 procedures and around 90 days of work* to start a business in Brazil - though this used to be almost 120 days - and construction permits demand an average 20 procedures and 404 days to finally get authorised.

(*TMF Group’s one-stop shop for company incorporation reduces this further, to 30 days.)

Corruption

While Brazil is among the world’s leading investment destinations and is formally a well-functioning business environment, corruption and bribery are still serious obstacles. The federal structure of the political system means there is a wide range of regulatory agencies, which can lead to demands for bribes from public officials. In 2016, Brazil was ranked 76 in Transparency International’s corruption perception index, and organised crime is a significant problem in some parts of the country. However, this is something the government is fighting hard through a so-called integrity programme.

Financial

Credit risks in Brazil are growing, and insolvencies are forecast to again increase as financial conditions in the market tighten. These in turn have a knock-on effect to payment behaviour trends and the way businesses protect themselves against risks. Brazil’s overall country risk has been considered medium for 13 consecutive quarters, though the improving political situation is expected to have a positive effect on economic growth. However, the slowing growth may offer foreign investment opportunities; the M&A sector grew by 5% in 2015, with investment opportunities ranging from IT to pharmaceutical, insurance to mining, and energy, oil and gas.

Taxes

Brazil’s tax regime is one of the driving forces behind its complexity. More than 90 taxes, duties and contributions are charged in Brazil, and all taxes are based on different government spheres of federal taxes, state taxes and municipal taxes. The launch and roll-out of eSocial has created a single system that replaces the need for companies to send separate reporting to Social Security, the Internal Revenue service and Brazil’s Ministry of Labour and Employment, but the new system has led to increased short-term complexity in reporting.

Corporate transparency

Brazil’s diverse and varied economy means that many companies moving into the country choose to do so in partnership with local companies. This makes the transition less disruptive for consumers, as well as giving the company essential insight on the local economy. However, don’t expect this to be a short-cut to growth; there is a slew of regulation aimed at controlling FDI to the country. One such obligation is the Normative Instruction 1634, which aims to bring even more transparency to the corporate market and clearly define the concept of the Ultimate Beneficial Owner.

Infrastructure

Being on the world stage for the football World Cup and the Olympic Games pushed the Brazilian government to urgently improve the country’s infrastructure, auctioning road, railway and airport concessions as well as cutting financial transaction tax on several major projects. According to the World Economic Forum, Brazil ranks 107th out of 144 countries in the level of infrastructure development. That said, the build was fraught with controversy, and the long-term impact is yet to be truly assessed.

Technology

Brazil has been hampered by a lack of technology during its development, however there are concerted efforts to improve this. Indeed, many technology start-ups have grabbed the headlines of late, and large corporations have also pledged a commitment to the economy; Microsoft invested $100 million in Rio de Janeiro in the lead-up to the Olympics. Smart technologies are already being implemented in Brazil to: manage use of resources in cities; facilitate the movement of people; improve emergency services coverage; and make shopping more efficient. Big data, security and surveillance, risk assessment and 3D modelling are seen as the big opportunities in tech.

Local labour force

The labour force participation rate in Brazil is increasing, and was approaching 62% by end of 2017. Unemployment is nearing 12%, but the cost of labour is falling while wages are rising quarter on quarter. Some, however, say the labour market is imploding, so businesses should seek expert advice before employing in Brazil. Unions also have a lot of influence in Brazil, and although their achievements have led to a more developed labour market, businesses should be aware of how they operate. It is easy to fall prey to Brazil’s labour laws, which are set out in 900 articles and are difficult to navigate. Non-compliance can lead to fines and a soured reputation.

Export and import barriers

Brazil is the 21st largest export economy in the world; in 2016, the country exported $182bn and imported $135bn worth of goods, resulting in a positive trade balance of $46.4bn. Imports, however, are decreasing at an annualised rate of -19.552%. Businesses can often be confronted with complications when exporting and importing goods. Most imported goods are held in port for some time while the correct procedures take place and the average cost per container is relatively steep. Compliance when exporting can take 71 hours at a cost of 1185. High duties may make an export too expensive for the Brazilian market.

TMF Group

We have the local knowledge to help you navigate these minefields. Whether you want to set up in Brazil or just want to streamline your Brazilian operations, talk to us.


    Learn more about TMF Group in Brazil    

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Written by

Marco Sottovia

Sub-Regional Director Brazil, Barueri / São Paulo

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