Written by William Billeaud, President of Lombard Global, Inc. Author Joseph Low is a Senior Advisor of Lombard Global, Inc.
Husband and wife authors Joseph H. Low III (“Joe”) and Claudia Brito Low (“Claudia”) together have over four decades of experience as high-level executives in Brazil. Joe co-launched Nokia’s Brazilian operations and has consulted other multinationals in Brazil and throughout the Americas. Claudia is recognized as one of the world’s foremost experts on business planning and tax law in Brazil. While employed as a tax attorney with KPMG in Brazil, she served on the Conselho de Contribuintes in Brasilia (the Brazilian equivalent of the United States Tax Court in Washington) and became the youngest-ever appointee in the history of the judicial body. She is now a global tax executive for UPS in Miami. Business taxes can seem intimidating to those starting out with a business, so if you are in need of a tax lawyer to help with any financial business matters, then make sure you get it and it is the right one for you and your company.
I know of no other book in the marketplace that provides an introduction on the subject of doing business in Brazil. Even though it was designed as an introduction for market entry, “They Don’t Speak Spanish in Brazil” will also serve executives who have been doing in Brazil for many years. The mix of real “on the ground” business experience, statistics and quantified tax examples will organize you properly for market entry, or make you rethink your Brazil strategy. You’ll always have to use advisors, but it helps tremendously to “know what you don’t know” about doing business in Brazil.
The book is divided into two parts. In the first half of the book, Joe relates his experience and insights to living and managing enterprises in Brazil. In the first chapter, he covers some of the numbers that make Brazil so impressive. In subsequent chapters he talks about business culture and language protocol (did we already say, don’t speak Spanish?), the typical Brazilian (there’s not one), security, bureaucracy, labor issues and talent wars. He further shows that the opportunity in Brazil is no longer just confined to Sao Paulo and Rio. As Joe says, “Invest early, invest big”. In the second half of the book, Claudia provides an introduction to the various aspects of Brazilian law you need to be familiar with, personally and in business. Fittingly, she opens by describing the growing role that women play in Brazil. In the next chapter, she gives an overview of the three levels of taxation: federal, state and municipal. For non-tax experts, she demonstrates how Brazilian taxation is in many ways similar to US and EU taxation. To me, this was very valuable because I then had a little more confidence in following the detail that follows in subsequent chapters. Claudia goes on to describe gross income taxes, complete with example calculations showing debits and potential credits. She covers labor law, operational taxes such as VAT, corporate law and entity establishment, foreign transactions and capital, visas, personal income tax and describes the political landscape and the legal environment. Finally, Joe and Claudia present an appendix which describes the different tax incentives for all 26 states and a glossary of terms.
Joe and Claudia don’t pull any punches about Brazil. Both readily admit that there are real challenges and problems. Security, lack of world class infrastructure and bureaucracy are the most important of these challenges. They add value, I think, by being transparent and acknowledging the problems instead of simply writing them off as the cost of doing business there. It makes it so you can consider it carefully when you want to look at business loans to open in the region.. Most importantly, the authors demonstrate ways to deal with challenges and show that regardless, you can’t afford not to do business in Brazil.
Some of my key takeaways of the book are:
Brazil’s numbers: Brazil’s GDP is 42% of all of Latin America’s GDP. The state of Sao Paulo has more people than the entire country of Argentina. Therefore, if you don’t have a Brazil strategy, it isn’t a Latin American strategy. Brazil’s socioeconomic class no longer represents a pyramid. Like most developed countries, it’s diamond-shaped with smaller groups of people on the top and bottom and most people in the middle.
Brazilian culture, mindset and talent: In Brazil, status is everything. “Keeping up with the Joneses” is taken to another level. The luxury market is huge in Brazil and wages are rising dramatically for employees such as housekeepers, who are being pushed to the middle class. This has led to a war for talent, not necessarily technical talent, but clearly executive and management talent. For example, if you consider total compensation, Brazilian CFOs are now earning 22% more than their next highest counterparts in London who make $393, 000 USD.
Language: As far as language is concerned, Brazilians don’t speak Spanish. Most business people starting at mid-levels speak English. Their English abilities can vary; some of them sounds like they’ve gone through some extensive lessons such as Effortless English accent training, while others have more of a basic grasp on English. Therefore, speak English and learn Portuguese.
Bureaucracy and corruption: In dealing with the bureaucracy, do things the right way, don’t cut any corners. It might take a little longer, sometimes a lot longer, but you or your business will earn a good reputation which pays off in the long term.
Opportunities outside of Rio and Sao Paolo: The Rio de Janeiro to Sao Paulo corridor has always been the heart of Brazil. Almost a quarter or 25% of the population lives there. Today, however, there are opportunities all over the country. In order to compete with SP and Rio, many of the states and municipalities in the Northeast, Southeast and interior are booming and producing the best incentives for business in the country.
Taxes overview: Taxes appear extremely complex but are related to taxes in developed countries, with voluntary disclosure and all the other components involved. The types of taxes are: federal, federal social, state and municipality. State and municipality taxes can offer a tax advantage if you know and can apply their incentives accurately. Brazil has one of the most technically advanced tax systems in the world. For instance, today, company invoices are required by law to originate electronically from a piece of equipment the government provides, the ECE. Additionally, tax authorities have taken the additional step of requiring you to keep your financial books in electronic format on a government website, called SPED. Finally, all federal taxes including VAT and foreign import taxes can be paid through one form, the DARF. Can you imagine one form in the US? That saves time…
Gross Income Taxes: Again, looks intimidating but you may elect the tax regime you choose to figure your tax liability, depending on the nature of your business and a handful of other factors. You may also change your tax regime from year to year. This way, you may elect the tax regime most beneficial to you. The authors then describe the four available methods.
Labor Expenses and Employment Law: The total cost of employee benefits can increase base payroll costs by 60 to 80%. Some analysts calculate that the true costs for a typical multinational can be as high as 200%. Employment law is pro-labor. Lots of holidays and vacation time (mandatory), such as 1 month of vacation after one year of service, long maternity leaves, weddings, and others, “13 months” of salary. Bottom line: lots of benefit expenses.
Operational Taxes: Similar to Europe’s VAT taxes. You do get credits but they must be managed professionally and accurately. For instance, there is a tax included in the price of fuel. However, if you use that fuel in your business, let’s say to transport goods from your factory to your shipping facility, then the tax becomes a credit in your books. In addition, the tax strategy of service providers should focus on where to incorporate. If, for example, you incorporate in certain municipalities outside of Sao Paulo, the effective tax rate is 2% on gross service sales as opposed to 5 %.
Foreign transactions and capital: You will have to pay something for conducting a transaction in Brazil, but make certain that you select the right business entity and have the right relationships so that you can repatriate the rest of your capital in a reasonable time frame, if you desire.
Brazil transfer pricing: This is a very lucrative business for Brazilian transfer pricing specialists because it’s so complex, but they model it based on the fundamentals and principles of the OECD. Nevertheless, don’t cut corners and pay to get it done right.
Summary of available incentives: You’ll find a number of different programs and development related organizations able to finance qualified taxes. You may be able to build an entire factory without paying a centavo in taxes which frees up further investment or working capital.
In summary, I highly recommend this book. I now try to keep it with or close to me when in Brazil or working on a Brazilian deal. I often can build a case around the details in the book and have a leg up on our network of local advisors and/or government officials who are specifically involved in the deal or project. The book can be purchased on the internet via www.theydontspeakspanishinbrazil.com. Simply click on the “buy book” tab from the top menu and you’ll see the tabs for purchasing in digital format via Amazon or for the printed edition via the publisher, Entrust.