Brazil: Consumer Fever – and Some Headache

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Full article in Latin Trade

‘Custo Brasil’ alive and kicking

Nevertheless, exploring the expanding Brazilian market still comes at a price, and the business environment has remained remarkably difficult, if not hostile.

Brazil has fared badly in the World Bank’s annual “Doing Business” survey, putting the country at a disadvantage against its main competitors worldwide. The latest survey ranks Brazil 126th among 183 countries, including a dismal 150th in the “paying tax” category.

CFOs in multinationals operating in Brazil usually express a lingering concern – if not frustration – regarding tax complexity and compliance issues in Brazil, which often is described as the most critical case in the region. Almir Barbassa, CFO of Petrobras, the oil company, notes that 900 people are employed in Petrobras’ tax department.

Jorge Gerdau, chairman of Gerdau, the steel group, has complained that companies in Brazil typically need 2,000 hours to comply with their tax obligations. He is now part of a presidential steering group to improve management and try to cut bureaucracy, but executives still complain about the lack of tax and labor reforms. President Dilma Rousseff has pledged to cut the tax burden, but structural reforms are not on the agenda.

Rogerio Menezes, CFO of Akzo Nobel Pulp & Paper, is very critical of what he calls “the tax monster”. He says there already have been more than 300,000 changes in the tax legislation, which results in high compliance costs.  This is a drag on Brazil’s competitiveness as a whole.  At present, each of Brasil’s 26 states and the Federal District of Brasilia has its own tax legislation and is able to tax the so-called ICMS (a sort of sales tax on goods and services) at different rates.

“The cost of doing business in Brazil continues to climb, as Brazil has failed to address the principal elements of the ‘custo Brasil,’ such as poor infrastructure, an onerous regulatory burden, heavy taxation and non-compensation labor costs,” says Clinton Carter, head of research for Latin America at Frontier Strategy Group (FSG), a U.S. business advisory firm. “Add to this a scarcity of skilled labor that is pushing salaries through the roof, and the result is a ‘custo Brasil’ that is climbing.”

The bottom line for foreign investors is that “Brazilian business units are less profitable than those in other Latin American countries,” says Ryan Brier, FSG’s Associate Practice Leader for Latin America.

According to an FSG survey , “net margins in Brazil are 5.1 percent narrower, on average, than in the rest of Latin America, largely due to taxes.” Whereas the average corporate tax paid amounted to 48 percent of profits in Latin America, the figure reached 69 percent in Brazil, FSG says. Fast-moving consumer-goods companies are much more heavily taxed than those operating in other sectors, it says.


2 thoughts on “Brazil: Consumer Fever – and Some Headache

  1. Rachel Kasumba

    Clinton, thanks for this piece. It is a shame that instead of trying to remain competitive, Brazil has instead chosen to continue with protectionist policies, most of which will only hurt her in the long-run, if not already.

  2. Fernando

    I think despite the modest trade statistics in the last years and lack of infrastructure that South American countries face in order to achieve better results there are a lot of potential and it’s a matter of time and governmental policies to adjust this scenario.

    In other hand internet is here to make the process easier and marketplaces can be helpful to approximate buyers and supplies in the bloc.

    As I could see many deals have been started last year through ( ( I personally have closed a B2B deal with buyers and suppliers from Argentina and Uruguay. I think there a lot to happen still in the South American international trade scenario.

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