Doing Business in Brazil
Prof. Dr. Edson Luiz Riccio
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Prof.Dr. Edson Luiz Riccio
Very Important
Before conducting business in
another country, you must:
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Know its territorial and political details
Understand the history and ethnic formation
Understand its culture (hofstede)
Acquire information about:
– Economy, Industry, major accomplishments,
Inflation, major on going actions
– Laws, Business setting, Accounting regulations
– Specific industry chamber information
– Visit and meet people
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Prof.Dr. Edson Luiz Riccio
Brazil – Political Division
Aracaju (SE)
Palmas (TO)
Porto Alegre (RS)
Belém (PA)
Belo Horizonte (MG)
Boa Vista (RR)
Brasília (DF)
Campo Grande (MS)
Porto Velho (RO)
Recife (PE)
Rio Branco (AC)
Rio de Janeiro (RJ)
Salvador (BA)
São Luis (MA)
São Paulo (SP)
Cuiabá (MT)
Curitiba (PR)
Florianópolis (SC)
Fortaleza (CE)
Goiânia (GO)
João Pessoa (PB)
Macapá (AP)
Maceió (AL)
Manaus (AM)
Natal (RN)
Teresina (PI)
Vitória (ES)
Population
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Prof.Dr. Edson Luiz Riccio
Country's Location and Language
• Located in eastern South America- bordering the
Atlantic Ocean
• 8.5 million square kilometres – 6th the in the world
• 40% of Latin America
• Larger than the continental United States
• Population: 181 millions inhabitants
• Language: Portuguese
• Major religion: Catholicism
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Prof.Dr. Edson Luiz Riccio
Form of Government
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Federal Republic since 1891
Independent from Portugal since 1822
Monarchy system from 1822-1889
Presidential system
Two Legislative Chambers – Senate and
House of Representatives
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Prof.Dr. Edson Luiz Riccio
Political System
Political System
• Constitutional democracy and its political power is
divided into the Executive, Legislative and Judiciary
branches.
Political/Administrative Divisions
• 27 partially autonomous states
• One Federal District, located in the center of the
country - Brasília
• 5 geo-economical regions: North, South, Southeast,
Northeast and Mid- West.
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Prof.Dr. Edson Luiz Riccio
Geography and Climate
Geographic and Population Data
• 181.8 million, consisting of nearly 80% urban and 20% rural
• Immigrants: Portuguese, Italians, Germans, Spanish, Japanese,
french
• Life expectancy for men is 65,1 years and 72,9 for women.
Climate and Natural Resources
• Climate is mostly tropical, but it is temperate in the south.
• Natural resources, such as bauxite, gold, iron ore, manganese,
nickel, phosphates, platinum, tin, uranium and petroleum.
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Prof.Dr. Edson Luiz Riccio
Economy
Currency
• Currency unit is the "Real" (R$). Current rate:
1US$= R$,
• Fluctuating exchange rate
Main Economic Sectors
• Well-balanced economy with virtual self-sufficiency
in agriculture and industrial production, diversified
markets and inexpensive labour. Current
government information 1 , 2
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Prof.Dr. Edson Luiz Riccio
Industry
The installed capacity of heavy and basic industries
(heavy industrial machinery and equipment,
shipbuilding, road building equipment, railway
equipment, equipment for hydroelectric plants,
offshore drilling equipment, steel, cement,
aluminium, pulp, paper, etc.) is significant and
provides the infrastructure to manufacture the
capital goods necessary to increase the country's
productive capacity or to earn additional foreign
currency from exports. Capital investments had
been increased in recent years, in light of the new
currency.
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Prof.Dr. Edson Luiz Riccio
Power Generation
Brazil's electricity is almost entirely
generated by water power even though a
considerable proportion of the nation's
hydroelectric potential remains untapped.
Total hydropower potential amounts to
259.7 gig watts, of which only 25 percent
has been tapped
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Prof.Dr. Edson Luiz Riccio
Motor Vehicles
• The renewed dynamism and
modernization of the Brazilian automotive
industry has caused Brazil to move up
from tenth to eighth place in world output.
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Prof.Dr. Edson Luiz Riccio
Aircraft Industry
Today the success of planes wholly designed
and manufactured in Brazil, mainly by
Embraer, and exported to countries on every
continent, makes Brazil's aircraft industry
one of the largest in the world. Most of
Embraer's planes have been sold to
customers in the United States (more than
700 aircraft currently in service) and in
Europe.
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Prof.Dr. Edson Luiz Riccio
AGRICULTURE AND
ENVIRONMENT
Agriculture
Record of harvest in 2003 with more than 123
millions of tons of crops, like corn, and soy beam.
Environmental Protection
Increasing adoption of environment friendly farming
practices. One example is the direct planting
technique, where croplands make use of organic
waste from previous harvests
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Prof.Dr. Edson Luiz Riccio
Inflation Rate and GNP
• Annual rate around 6/7 per year and under
control
• GNP of about US$1.000 billion – 9th
economy in the world
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Prof.Dr. Edson Luiz Riccio
PRIVATIZATION PROGRAM
• The National Privatization Program (PND) was created in 1990
• The constitutional reform of 1995 may be highlighted, for the
establishment of:
• the flexibility of state monopolies in telecommunications,
electric power, oil and natural gas;
• the widening of the definition of a "Brazilian company",
allowing for foreign companies headquartered in Brazil to
exploit services, that until then were restricted to Brazilian
companies of national capital; and
• the opening of mining activities and the exploitation of
hydraulic power potentials for foreign investors.
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Prof.Dr. Edson Luiz Riccio
PRIVATIZATION PROGRAM
(CONT)
• exploit services, that until then were restricted to Brazilian
companies of national capital; and
• the opening of mining activities and the exploitation of
hydraulic power potentials for foreign investors.
• private sector participation into cellular telephone system,
satellite services, limited services and services of added value;
• Decree 2003/96, which established the rules applicable the
independent production and the self-production of electrical
power, as well as to Cable TV and Multipoint Multichannel
Distribution Service-MMDS.
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Prof.Dr. Edson Luiz Riccio
PRIVATIZATION PROGRAM
(CONT)
• Since the creation of the PND, 64 companies
owned by the federal government and other
companies under minority control have been
transferred to the private sector especially
from the steel, chemical, petrochemical,
fertilizer, electricity and telecommunications
sectors, as shown in the chart below:
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Prof.Dr. Edson Luiz Riccio
Proceeds
(US$ million)
by
Sectors
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PND
Sector
Sale
Proceeds
Debt
Transferred
Total
Steel
5,562
2,625
8,187
Petrochemi
cals
2,698
1,003
3,701
Fertilizers
418
75
493
Electricity
3,907
1,670
5,577
Railroads
1,697
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1,697
Mining
3,305
3,559
6,864
Ports
421
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421
Financial
3,844
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3,844
Technology
50
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50
Other
344
268
612
Total
26,279
9,201
35,480
Decree
1,068/94
1,101
-
1,101
Total
27,414
9,201
36,615
Source: BNDES - Position at 31/12/2000
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Prof.Dr. Edson Luiz Riccio
Source: BNDES - Position at 26/08/2002
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Prof.Dr. Edson Luiz Riccio
• For the year 2000, the main event in the
privatization program was the sale of
Brazil's sixth largest bank, Banespa,
originally owned by the State of São Paulo
but under federal administration since
1998. The total proceeds from this
operation were over US$ 3 billion.
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Prof.Dr. Edson Luiz Riccio
TRADE OPPORTUNITIES
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Brazil is the leader country of Mercosur (Southern Common Market), a
common market created by the Treaty of Asunción signed by
Argentina, Brazil, Paraguay and Uruguay on March 26, 1991 Chile,
Bolivia were associated in 1996.
Some of the objectives settled in this Treaty are:
the free transit of production goods and services between the member
states;
the elimination of customs rights and lifting of non tariff barriers on
the flow of goods;
the adoption of a common trade policy with regard to non-member
states or groups of states; and
the coordination of positions in regional and international commercial
and economic meetings.
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Prof.Dr. Edson Luiz Riccio
Brazil advantages as a
partner
• When compared to other emerging economies, Brazil relies on
major comparative advantages such as:
• huge territorial extent, with plenty of natural resources, some of
them entirely unexplored;
• enormous population with a dynamic and fast growing internal
consumer market, a tendency being boosted by the income
resulting from the sharp drop in the inflation rate;
• economical integration within Mercosur, with the
corresponding expansion of market and business
opportunities;
• deep-rooted, dynamic, and profitable capitalist economy with
availability of skilled labour force, including management
levels;
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Prof.Dr. Edson Luiz Riccio
Brazil advantages as a
partner
• relevant presence of foreign capital, particularly on the
industrial structure, that accounts for 30% of the production;
• well-developed industrial center, with a diversified export
agenda that ranges from iron ore and orange juice to highly
value-added manufactured products such as cars, airplanes,
ships and capital goods;
• diversified export markets;
• modern and integrated agriculture presenting one of the
world's largest harvests of around 115 million tons;
• stability of the democratic political institutions.
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Prof.Dr. Edson Luiz Riccio
BUSINESS PRESENCE
Types of Business Presence
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Normally, prior permission is not required to establish a business in
Brazil, except for some areas requiring government agency to analyze
the project from an environmental standpoint. Also, certain limitations
are imposed on foreign companies, in areas such as shipping,
newspapers and other publications, radio and television, health care,
mining, banking and alcohol production.
Foreign investors may organize their entrepreneurial activities in
Brazil as:
a Corporation ("Sociedade Anônima"),
a limited liability companies ("Sociedade por Quotas de
Responsabilidade Limitada")
or a branch. Operating through a branch is also quite uncommon,
since setting up a branch in Brazil involves enormous bureaucratic
requirements, including presidential authorization.
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Prof.Dr. Edson Luiz Riccio
BUSINESS PRESENCE
Types of Business Presence
• A Corporation must, upon its incorporation:
• deposit 10% of its capital in a bank. In addition, it
must
• allocate 5% of its annual profits to a legal reserve
until the reserve reaches 20% of capital
• a minimum of two shareholders and two directors is
required.
• the directors must be Brazilian residents and the
shareholders, if they are not residents, must have
legal representatives in Brazil.
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Prof.Dr. Edson Luiz Riccio
BUSINESS PRESENCE
Types of Business Presence
• Open (public) corporations ("Companhia de Capital Aberto")
must have external auditors. A corporation must pay several
registration fees and emoluments upon incorporation. The
major advantage offered by a corporation structure is that
capital may be raised through the public offering of shares or
debentures. Limited-liability companies may not raise capital
through public offerings.
• Unlike the "Sociedade Anônima", a limited-liability company is
not required to maintain a legal reserve. There is only one class
of ownership, the registered quota (the amount to which each
partner limits his liability). The limited-liability company must
have a minimum of two quota holders. There is no nationality
or residence requirement to participate in a limited liability
company. A quota holder may not sell his quota without the
consent of all quota holders. However, non-resident quota
holders need to have a resident legal representative in Brazil. 26
Prof.Dr. Edson Luiz Riccio
BUSINESS PRESENCE
Types of Business Presence
• The limited-liability company is the corporate structure most
often used by foreign investors. Foreign investors generally do
not have any commercial or other interest in making public the
administrative acts and financial statements of their Brazilian
subsidiaries, and are not required to do so under Brazilian law.
In addition, because limited liability companies have fewer
bureaucratic requirements than corporations, companies
operating as limited liabilities can make corporate decisions
more quickly, which is a significant advantage in the constantly
changing legal and economic environment of Brazil.
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Prof.Dr. Edson Luiz Riccio
Joint Venture and Economic
Interest Groups
• In Brazil, a joint venture may be set up in several ways, but the
main type is the equity joint venture.
• This type of joint venture is by far the most common form of
partnership involving foreign investment. They occasionally
involve participation by two or more partners in the equity
company, but much more frequently in the incorporation of a
new company in which each partner owns a certain portion of
the equity capital.
• A joint venture may be established through a corporation or a
limited-liability company.
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Prof.Dr. Edson Luiz Riccio
Tax Year, Financial Reporting and
Accounting Standards
• Corporate entities and individuals engaged in commercial
activities must maintain proper accounting books and record
transactions in these books as required by law.
• Corporate entities must keep the following books and records:
• - a general journal (diário);
- federal and state VAT books;
- book of calculation of taxable income (LALUR); and
- registry of inventory and goods shipped and received.
• Official records must be written in Portuguese with values
expressed in Reais. Transactions must be recorded in
chronological order. Manual or computerized subsidiary
journals for cash receipts and disbursements and for
purchases and sales are permitted if they are properly
registered. Records must be clear and without erasures. Blank
lines and alterations are not permitted.
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Prof.Dr. Edson Luiz Riccio
Tax Year, Financial Reporting and
Accounting Standards
• Companies in Brazil must use the accrual method for
computing the results of their activities.
• Corporations must prepare financial statements annually,
transcribing them into the general journal. Limited liability
companies are not subject to reporting requirements
(Exception are companies with more than 10 quota holders – by
the new Civil Law (2003) .
• Corporations with publicly traded shares or other securities
must have their financial statements audited and publish the
independent auditor's report together with the statements.
Financial institutions, including leasing companies, must
publish semi-annual audited financial statements. All publicly
held companies must prepare and publish consolidated
financial statements in addition to their own financial
statements.
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Prof.Dr. Edson Luiz Riccio
Tax Year,Location
Financial Reporting
and
Country's
and Language
Accounting Standards
• Brazilian accounting principles are established by Law 6404 of
1976(changed by Law 10303 of 2001) and by accounting
professionals, by means of the Brazilian Institute of
Accountants (IBRACON) and the Federal Board of Accountancy
(CFC). IBRACON issues technical pronouncements and
guidelines for all basic generally accepted accounting
principles (GAAP).
• The Securities Commission has the authority to specify the
accounting and reporting practices for publicly traded
companies. The commission establishes disclosure
requirements for the quarterly and annual financial reports of
publicly held companies. Although the commission has
determined some accounting rules, it generally relies on
IBRACON and the CFC to establish accounting standards.
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Prof.Dr. Edson Luiz Riccio
Tax Year, Financial Reporting and
Accounting Standards
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Companies in banking, insurance and other specialized business
sectors must comply with the specific accounting practices
established by the regulatory agencies with responsibility for their
sectors.
Publicly held companies, under control of CVM, must publish audited
financial statements annually, together with the auditors' report. The
financial statements consist of a balance sheet, an income statement,
a statement of retained earnings (usually provided as a part of the
statement of shareholders' equity), a statement of the source and
application of funds (working capital), and notes to the financial
statements. The audited financial statements must be submitted to the
CVM annually, to the appropriate government agency if the company
is of public utility, and to the BACEN and other regulatory agencies if
the company is engaged in banking, leasing or insurance activities.
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Prof.Dr. Edson Luiz Riccio
Significant Accounting Principles
and Practices
• In Brazil, the fundamental accounting concepts of going
concern, consistency and prudence must be respected. The
FIFO method and average cost method are permissible. The
LIFO method can not be used for financial tax accounting.
• Brazil is a member of the International Accounting Standards
Committee (IASB). In general, accounting principles prescribed
in Brazil are comparable to those prescribed by the IASB
because IBRACON and the CFC take IASB pronouncements
into consideration when preparing accounting
pronouncements. The main areas in which Brazilian standards
differ significantly from international standards are summarized
below.
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Prof.Dr. Edson Luiz Riccio
Research and Development Costs
• International Accounting Standard (IAS) 9 on
research and development activities requires that
research and development expense be deducted in
the year incurred, that the amount charged as
expense be disclosed and that any deferral of costs
comply with the criteria expressed in the standard.
These requirements are not imposed in Brazil. In
general, research and development costs are not
substantial and are deducted without further
disclosure.
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Prof.Dr. Edson Luiz Riccio
Pensions and Inter-company
Transactions
• IAS 5 on financial statement disclosure requires
disclosure of the method of providing for pension
plans and disclosure of significant inter-company
transactions. Brazilian GAAP does not include an
equivalent requirement for disclosure of the method
of providing for pension plans. In addition, in Brazil,
only publicly held companies must disclose
significant inter-company transactions.
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Prof.Dr. Edson Luiz Riccio
Leases
• Brazilian accounting principles governing leases do
not follow IAS 17 on accounting for leases. In Brazil,
lease contracts are recorded as rental expenses by
lessees (as the lease installments are paid) and as
property, plant and equipment by lessors, regardless
of whether the contract provides for a finance lease
or an operating lease. However, the BACEN and the
CVM require that the income of lessors be adjusted
through a provision to reflect the substance of
finance lease agreements.
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Prof.Dr. Edson Luiz Riccio
Consolidated Financial Statements
• IAS 3 on consolidated financial statements requires
companies to supplement consolidated statements
with separate financial statements of subsidiaries
excluded from the consolidation. In Brazil, only
publicly traded companies must prepare
consolidated financial statements. However, an
investment in an excluded subsidiary is carried at
equity, and the notes to the consolidated financial
statements must disclose relevant data concerning
such an investment.
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Prof.Dr. Edson Luiz Riccio
Inflation Accounting
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Prior to 1 January 1996, all companies were required to recognize the
effect of changing prices in their statutory books through the
monetary restatement of all "permanent assets" (fixed assets,
investments and deferred charges) and shareholders' equity, using an
index authorized by the tax authorities. The net effect of this monetary
restatement was credited or charged to income.
Due to the decrease in the inflation rate, the government enacted Law
9,249/95, which prohibits the recognition of any inflationary effect for
accounting or tax purposes. Publicly traded companies are
nonetheless encouraged by the CVM to disclose the effects of
inflation. The CVM suggests that publicly traded companies provide
supplementary information in the form of condensed financial
statements prepared using the constant currency approach.
The current Brazilian accounting procedure of not recognizing the
effects of inflation through monetary restatement does not follow IAS
15, which requires that price level changes be disclosed in the
financial statements.
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Prof.Dr. Edson Luiz Riccio
Segment Reporting and Preoperating Costs
• Segment Reporting
Brazilian accounting principles do not require the
disclosure of financial information by segment, as
prescribed by IAS 14 on reporting by segments.
• Pre-operating Costs
Costs related to pre-operating activities may be deferred
and amortized on a systematic basis after the operation
begins.
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Prof.Dr. Edson Luiz Riccio
General Requirements for
Financial Reporting
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Corporations must prepare financial statements annually, transcribing
them in the general journal. Required financial statements include a
balance sheet and statements of results of operations, changes in
financial position and changes in shareholders' equity (if not
disclosed in the notes). Assets and liabilities are presented in the
order of liquidity. In addition, notes to the financial statements are
required, including disclosures of the accounting policies adopted by
the company. All Corporations must publish two-year comparative
financial statements in the Official Gazette and in at least one wellknown newspaper.
Closely held corporations are subject to disclosure requirements
similar to those of publicly traded companies, but their statements are
not required to be audited. Limited-liability companies are not required
to disclose their financial statements to the public.
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Prof.Dr. Edson Luiz Riccio
Balance Sheet
• Balance sheets must disclose the following items:
- Current assets;
- Long-term assets;
- Permanent assets (investments, fixed assets and
deferred assets);
- Current liabilities;
- Long-term liabilities;
- Results of future years;
- Share capital;
- Reserves; and
- Retained earnings.
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Prof.Dr. Edson Luiz Riccio
Income Statement
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At a minimum, the income statement must disclose the following
items of income and expense:
- Gross income from sales of goods and services, sales deductions,
discounts and taxes on sales;
- Net proceeds from sales of goods and services, cost of goods and
services sold, and gross profit;
- Selling expenses, financial expenses (less financial income),
administrative expenses and other operational expenses;
- Income (or losses) from operations, non-operational income and
expenses;
- Income for the year before income taxes;
- Income taxes;
- Participation in profit payable to employees and directors and
contributions to employees' pension and welfare funds;
- Net income; and
- Net income per share (outstanding at end of period).
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Prof.Dr. Edson Luiz Riccio
Statement of Cash Flows
• The statement of cash flows must include
the sources and applications of funds, any
increase or decrease in net working
capital, and the balance of current assets
and liabilities at the beginning and end of
the fiscal year.
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Prof.Dr. Edson Luiz Riccio
Notes to the Financial
Statements
• To comply with Law 6,404 of 1976 (changed by Law 10303 of
2001) and subsequent accounting regulations, corporations
must provide the following information in the notes to their
financial statements to the extent the information is applicable:
- the main accounting policies used in preparing and
presenting the financial statements, including the method used
for valuing inventories and determining depreciation,
amortization and depletion; the basis for provision for
expenses and risk; and adjustments made to cover losses
expected to be incurred on the disposal of assets;
- the basis of consolidation and the companies included in
consolidation;
- the major categories of all significant accounts, for example,
inventories and fixed assets.
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Prof.Dr. Edson Luiz Riccio
Notes to the Financial
Statements
- details of material investments in other companies;
- increases in the carrying values of fixed assets as a result of
spontaneous revaluation;
- pledges of assets, guarantees given to third parties and other
contingent liabilities;
- interest rates, maturity dates and guarantees for long-term loans;
- the number, type and classes of the company's shares;
- dividend distribution policies;
- prior year adjustments, which are made for a variety of reasons
(often involving immaterial amounts);
- significant events occurring after the balance sheet date that have or
might have a material effect on the company's financial position or on
the results of future operations.
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Prof.Dr. Edson Luiz Riccio
Directors' Report
• Publicly traded companies must issue directors' report
containing basic information about the company, any
significant changes and information on the business segments
in which the company is engaged. In addition, they must supply
detailed annual and quarterly information to the CVM,
information that is similar to but much less extensive than that
required by the Securities and Exchange Commission (SEC) of
the United States. Independent auditors must review the
quarterly financial information submitted to the commission by
publicly traded companies with gross sales of R$ 100 million or
more.
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Prof.Dr. Edson Luiz Riccio
TAXATION
General Description of the Tax System
• The concept of doing business in Brazil is
related to the existence of permanent
establishment in the country, i.e.,
subsidiary or a branch.
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Prof.Dr. Edson Luiz Riccio
STUDENT EXCHANGE PROGRAM WITH FEA/USP
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Prof.Dr. Edson Luiz Riccio