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  • CFO Magazine

Brazil Is Booming (and Maddening)

U.S. companies are keen to expand into Latin America's biggest market, but CFOs report that Brazil poses unique challenges.

Developing an awareness of Brazil’s complex tax environment before entering the market is helpful, says Harding, but he adds that many clients don’t fully understand just how complicated it can be until he walks them through some examples. “Everything in Brazil tends to have a different applicable tax rate,” he says. “Even the simple fact of selling to a Brazilian customer is vastly more complicated than any other place a client might be used to.” For example, “if you have a million-dollar sale as a foreign company in Brazil, there’s a significant withholding tax. If you send a million-dollar invoice, you will get paid $800,000 and the other $200,000 will go off to a bunch of different places in the government,” he explains. (See “No Day at the Beach” at the end of this article.)

A strong local tax team is thus a top requirement for a finance chief preparing to establish a presence in Brazil. Strong internal experts as well as sophisticated external advisers, such as an accounting firm and a law firm, are critical, says Buthman. At Kimberly-Clark, about 70 people work in the company’s finance group in Brazil, and most are native Brazilians or longtime residents. “We have good access to strong, seasoned finance talent there,” says Buthman, in part due to a university recruiting program.

Global consulting, law, or audit firms, and fellow CFOs who are already in the market, can provide helpful services and leads. While such expertise can be pricey, “this is a country where you should feel comfortable spending a little bit more than you might elsewhere to keep up with the tax system,” says SAP’s Brown. The U.S. State Department also regularly fields inquiries from companies looking to vet local service providers. The American Chamber of Commerce has a strong presence in Brazil as well.

Lost in Legalese

In addition to the byzantine tax system, labor laws also stymie many newcomers. The legislation is complex and outdated in many cases, says Brown, and heavily favors workers over companies. “There are very legal, viable opportunities to avoid costs on benefits or tax-related employee costs, but you need to take time to really understand the legislation and get very good advice on how it can be interpreted by your company,” he says. “If you don’t do that, you run the risk of getting yourself into trouble with the government or paying far more than you need to.”

For example, companies that traditionally pay year-end bonuses in the United States and try to continue that tradition in Brazil find that they must remit an array of taxes on those payments. But, “there is a completely legitimate structure that allows employee participation in profits that tremendously reduces the taxes on a bonus,” explains Brown. Once a company adopts a certain approach, however, it can take time to change course.

Corina Monaghan, vice president of political risk at global consultancy Aon, urges finance chiefs to not only familiarize themselves with federal laws in Brazil but also with the laws for the Brazilian states in which they are doing business. “States themselves hold a lot of power in Brazil,” she says. “You really should know how the government in each individual state behaves, what they enforce, and what other taxes they might have in addition to federal taxes.”

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