Doing Business in Brazil

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Doing Business in Brazil

• Prof. Dr. Edson Luiz Riccio

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Very Important Before conducting business in
another country, you must

• 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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Brazil Political Division
Aracaju (SE)
Palmas (TO)
Belém (PA)
Porto Alegre (RS)
Belo Horizonte (MG)
Porto Velho (RO)
Boa Vista (RR)
Recife (PE)
Brasília (DF)
Rio Branco (AC)
Campo Grande (MS)
Rio de Janeiro (RJ)
Cuiabá (MT)
Salvador (BA)
Curitiba (PR)
São Luis (MA)
Florianópolis (SC)
São Paulo (SP)
Fortaleza (CE)
Teresina (PI)
Goiânia (GO)
Vitória (ES)
João Pessoa (PB)
Macapá (AP)
Population
Maceió (AL)
Manaus (AM)
Natal (RN)
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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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Form of Government

• 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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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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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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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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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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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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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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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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AGRICULTURE AND ENVIRONMENT

• AgricultureRecord 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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Inflation Rate and GNP

• Annual rate around 6/7 per year and under control
• GNP of about US1.000 billion 9th economy in
  the world

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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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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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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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Source BNDES - Position at 31/12/2000
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Source BNDES - Position at 26/08/2002
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• 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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TRADE OPPORTUNITIES

• 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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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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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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BUSINESS PRESENCE Types of Business Presence

• 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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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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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.

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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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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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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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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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Country's Location and Language
Tax Year, Financial Reporting and 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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Tax Year, Financial Reporting and Accounting
Standards

• 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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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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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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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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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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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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Inflation Accounting

• 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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Segment Reporting and Pre-operating Costs

• Segment ReportingBrazilian accounting principles
  do not require the disclosure of financial
  information by segment, as prescribed by IAS 14
  on reporting by segments.
• Pre-operating CostsCosts related to
  pre-operating activities may be deferred and
  amortized on a systematic basis after the
  operation begins.

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General Requirements for Financial Reporting

• 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
  well-known 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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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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Income Statement

• 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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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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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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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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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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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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STUDENT EXCHANGE PROGRAM WITH FEA/USP