Doing Business in Brazil: Profa. Me. Carla Mhoura Caruso

Doing Business in Brazil
Profa. Me. Carla Mhoura Caruso
1
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
2
Brazil Political Division
Aracaju (SE)
Palmas (TO)
Porto Alegre (RS)
Porto Velho (RO)
Recife (PE)
Rio Branco (AC)
Rio de Janeiro (RJ)
Salvador (BA)
So Luis (MA)
So Paulo (SP)
Teresina (PI)
Vitria (ES)
Belm (PA)
Belo Horizonte (MG)
Boa Vista (RR)
Braslia (DF)
Campo Grande (MS)
Cuiab (MT)
Curitiba (PR)
Florianpolis (SC)
Fortaleza (CE)
Goinia (GO)
Joo Pessoa (PB)
Macap (AP)
Macei (AL)
Manaus (AM)
Natal (RN)
Population
3
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
4
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
5
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 - Braslia
5 geo-economical regions: North, South, Southeast,
Northeast and Mid- West.
6
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.
7
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
8
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.
9
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
10
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.
11
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.
12
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
13
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
14
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.
15
(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.
16
(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:
17
Proceeds
(US$ million)
by
Sectors
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
1,697
Mining
3,305
3,559
6,864
Ports
421
421
Financial
3,844
3,844
Technology
50
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
18
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 So Paulo
but under federal administration since
1998. The total proceeds from this
operation were over US$ 3 billion.
19
TRADE OPPORTUNITIES
Brazil is the leader country of Mercosur (Southern Common Market), a

common market created by the Treaty of Asuncin 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.
20
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;
21
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.
22
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 Annima"),
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.
23
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.
24
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. Limitedliability companies may not raise capital through public offerings.
Unlike the "Sociedade Annima", 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.
25
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.
26
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.
27
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 (dirio);
- 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.
28

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.
29
Tax Year,Location
Financial Reporting
and
Country's
and Language
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.
30

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.
31
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.
32
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.
33
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.
34
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 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.
35
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.
36
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).
37
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.
38
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.
39
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.
40
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.
41
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.
42
Thank you!
profcarlacaruso@hotmail.com
43

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Doing Business in Brazil

Profa. Me. Carla Mhoura Caruso

Know its territorial and political details

Brazil Political Division

Country's Location and Language

Located in eastern South America- bordering the

Federal Republic since 1891

Geography and Climate

Geographic and Population Data

The renewed dynamism and

Inflation Rate and GNP

Annual rate around 6/7 per year and

The National Privatization Program (PND) was created in 1990

exploit services, that until then were restricted to Brazilian

Since the creation of the PND, 64 companies

Source: BNDES - Position at 31/12/2000

For the year 2000, the main event in the

Brazil is the leader country of Mercosur (Southern Common Market), a

relevant presence of foreign capital, particularly on the

Normally, prior permission is not required to establish a business in

The limited-liability company is the corporate structure most

Joint Venture and Economic

In Brazil, a joint venture may be set up in several ways, but the

Tax Year, Financial Reporting and

Tax Year, Financial Reporting and

Companies in Brazil must use the accrual method for computing

Brazilian accounting principles are established by Law 6404 of

Tax Year, Financial Reporting and

Companies in banking, insurance and other specialized business

Significant Accounting Principles

In Brazil, the fundamental accounting concepts of going

Brazil is a member of the International Accounting Standards

Brazilian accounting principles governing leases do

Consolidated Financial Statements

IAS 3 on consolidated financial statements requires

General Requirements for

Corporations must prepare financial statements annually, transcribing

At a minimum, the income statement must disclose the following

Statement of Cash Flows

The statement of cash flows must include

Notes to the Financial

Notes to the Financial

Publicly traded companies must issue directors' report

General Description of the Tax System

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