Highlights of Brazil

2. BRAZILIAN INTERNATIONAL TRADE

Auhors: Victor Batista/Juliana Tambosi
FORVM

a. Introduction

Despite being one of the 10 largest economies in the world, Brazilian foreign Trade has been for a very long time confined to around 1% (1,25% in 2008) of the world's trade flows. In recent years a more flexible foreign trade policy has taken place, which is slowly changing this situation. Since 2004, Brazilian imports and exports are growing faster than the average world economy. The results are nevertheless still very timid. Brazilian exports accounts for a little less than 15% of the country's GDP. There are many reasons for that, just to name a few: complicated tax system, poor logistic infrastructure, high level of customs control, very large domestic market, culture. Low internationalization is also relevant: Brazil counts around 6 million registered companies, out of which only 18.000 have exported and 30.000 have imported in 2008.

b. Import Statistics

Source: SECEX/MDIC

c. Import Statistics
Source: SECEX/MDIC

d. Export Statistics
Source: SECEX/MDIC

2. Bureaucracy

a. Introduction

International trade operations in Brazil are very bureaucratic. Paperwork is extensive; there are many controls and diverse specific rules to be followed. The non-compliance to these rules may cause severe headaches to the importer or exporter, which can generate fines and long retaining periods in the customs area. There are companies specialized in foreign trade consultancy that can assist its customers to proceed in the correct way, reducing costs and time of each operation. In terms of customs formalities, export procedures are, in general, less bureaucratic than on the import side. All procedures are registered and controlled by SISCOMEX - Integrated Foreign Trade On-line System. Brazilian authorities can monitor and control activities in foreign trade by verifying SISCOMEX registers. There are several players involved in the international trade procedures, such as the importer/exporter or the trading company, the customs broker, the cargo agent, the tax authorities, the regulatory bodies and the Central Bank.

b. International Trade players

i. The importer/exporter
To operate in foreign trade, Brazilian companies need to require an authorization to the Federal Tax Office (Receita Federal) in advance. When the company gets the authorization, it is said that the company has the "Radar". There are 2 main categories of Radar:
- Simplified: the company has a limitation to import USD 150.00000 CIF and to export USD 150.00000 FOB each 6 consecutive months. On the 7th month, the 1st month is discarded; only the 6 last months are considered. If a company exceeds this limit, further international trade operations within the period are suspended, until the company applies for an "ordinary" permit. The simplified is easier to get (takes about 1 week and there is no evaluation concerning the economic capacity of the company), it is recommended to either companies that know beforehand that will not operate above these amounts in international trade, or to companies that will only eventually import or export.
- Ordinary: the company can operate above the USD 150.00000 limit, however limited to its economical capacity. The Federal Tax Office decides this limit, based upon a formal application, in which the company states the estimated volumes that will import/export in accordance to its economical capacity. The company's registered capital in this case is a key factor. This is the most comprehensive form of registration. The new limit is also revolving over a 6-month period.

ii. The trading company

The main role of the trading company in Brazil is typical import and export operations. Apart from the usual reasons why would a company export and import through a trading company, Brazilian regulations created grounds for very specific reasons.
In the export side, for instance if a company does not have the "Radar" (explained above), this company may look for a trading company to export its goods. This company will have the same export tax benefits as if it was exporting directly.
In the import side, this procedure is not possible. All companies that wish to import goods, through a trading company or directly, must have the "Radar". The exception is when a trading company buys the merchandise abroad, keeps it in stock, adds a margin and resells to the domestic market. This is called "import to resell".
The trading companies may serve as third parties acting on behalf of the final importer or importing on-demand. In both cases, the final importer must have the "Radar" and will appear in all documents. The trading company in this case will appear as consignee.
A very common reason for using a trading company "on behalf of" the final importer is to take advantage of tax benefits that some States offer to trading companies.
Using a trading company is highly recommended when a foreign company wishes to enter the Brazilian market and the target customers are small to medium size companies. These companies usually do not have experience in dealing in international trade and customs authorities.

iii. The customs broker

The customs broker is responsible for inputting information on SISCOMEX in behalf of the importer/exporter. The customs broker will also be in contact with the Brazilian legal authorities to cross-examine the information stated in the import/export documents, the goods imported/exported and the current legislation. One of the steps of the customs clearance is the "parameterization". This is a standard procedure and there are diverse verification channels: green, yellow and red. An import selected for green channel is cleared automatically without physical verification by the legal authorities. A yellow channel means that paperwork will be checked. A red channel consists in a verification of paperwork as well as physical verification of the goods. If the authority finds any indication of fraud, the exporter/importer is charged. Usually the decision of channel is on a random basis, however some factors can influence a cargo to be destined to the yellow or green channel: unusual cargo, first-time importers, suspicious cargo or origin or destination, denounce, etc. There is also a fourth channel, which is applied systematically with the same effects as the red channel: the grey channel. The difference to the red channel is that this procedure is adopted in all imports if a certain company, until it is proven that the company can comply with all customs rules. If the yellow and red channels can be seen as merely random checks, the grey channel is consequence of suspicion of fraud.

iv. The cargo agent
The cargo agent will be responsible for coordinating the freight of the goods from its origin to its final destination. Main means of transport in Brazil are via ocean, air and road. Railroad is still incipient and shall be developed in the next years.

v. The tax authorities

Brazilian tax system is complex and there are several taxes that burden the import operation. The Brazilian government supports export operations and fewer taxes are applied when comparing to export operations.
There are Federal taxes (such as II, IPI, Pis, Cofins) and State taxes (ICMS). There are also some other mandatory fees which apply to imports, such as the AFRMM (a fund to subsidize the Brazilian mercantile fleet - 25% surtax applied to the Ocean Freight), the customs broker syndicate fee, etc.

vi. The regulatory bodies and other Government entities

International trade in Brazil is also, depending on the merchandise imported or exported, subject to regulatory bodies approvals and compliance certificates:
• National Sanitary Surveillance Agency (Anvisa): responsible for the sanitary control of goods and services. All medicines, medical equipment, cosmetics, foods, etc are subject to Anvisa approval prior to shipment.
• Ministry of Agriculture, Livestock and Food Supply (MAPA): responsible for inspecting and controlling the international transit of agricultural goods and avoiding the entrance of pests and diseases in the country. Food, livestock or agricultural products must have the approval of MAPA to be traded. All wooden pallets and crates, which come to or from Brazil, must have the fumigation certificate and this is subject to MAPA approval.
• There are other bodies and entities, depending on the products to be traded: ANEEL (electronic and electrical products), INMETRO (several sectors require the INMETRO certificate to be sold in Brazil), ANP (oil & gas products), ANATEL (telecom products), etc.

vii. The Central Bank
The flow of foreign currency to and from Brazil must generate a currency exchange contract, which follows the norms set by the Central Bank of Brazil. Such operations are registered and controlled by the Central Bank.

3. Logistics

a. Introduction

Dealing with logistics in Brazil is quite a challenge. The long distances and the lack of good infrastructure give the logistics coordination a strategic role in business in this country.

b. Air Transportation

i. Characteristics

• Good level of flight security: Brazil ranks 5th safest country for flying, just after South Korea, USA, Canada and Germany
• Close to 70 million passengers were transported in 2008
• Sao Paulo is the main hub, followed by Rio de Janeiro and Brasilia
• Import and Export cargo can be cleared in many airports throughout the country. Customs clearance for passengers, however, must be done in the first landing airport - this causes the Sao Paulo International airport to be a mess sometimes, forming long lines for immigration and customs clearance.
• International carriers are not allowed to make domestic flights. The domestic connections must be done by Brazilian airlines such as GOL, TAM, AZUL, OCEAN AIR.

ii. Main Airports in Brazil

• Aeroporto de Londrina - PR
• Aeroporto Internacional Afonso Pena - Curitiba - PR
• Aeroporto Internacional de Foz do Iguaçu - PR
• Aeroporto Internacional Comandante Gustavo Kraemer - Bagé - RS
• Aeroporto Internacional de Pelotas - RS
• Aeroporto Internacional Salgado Filho - Porto Alegre - RS
• Aeroporto Internacional Rubem Berta - Uruguaiana - RS
• Aeroporto Internacional de Florianópolis - SC
• Aeroporto de Joinville - SC
• Aeroporto Internacional de Navegantes - SC
• Aeroporto de Vitória - ES
• Aeroporto de Uberaba - MG
• Aeroporto Internacional Tancredo Neves - Belo Horizonte - MG
• Aeroporto de Belo Horizonte/Pampulha-MG
• Aeroporto de Montes Claros - MG
• Aeroporto de Uberlândia - MG
• Aeroporto de Macaé - RJ
• Aeroporto Internacional do Rio de Janeiro - RJ
• Aeroporto Santos-Dumont - Rio de Janeiro - RJ
• Aeroporto Internacional de Viracopos/Campinas - SP
• Aeroporto Internacional de São Paulo/Guarulhos - SP
• Aeroporto de São Paulo/Congonhas - São Paulo - SP
• Aeroporto Internacional de Brasília
• Aeroporto de Goiânia - GO
• Aeroporto Internacional Marechal Rondon - Varzea Grande - MT
• Aeroporto Internacional de Campo Grande - MS
• Aeroporto Internacional de Corumbá - MS
• Aeroporto Internacional de Ponta-Porã - MS
• Aeroporto Internacional de Cruzeiro do Sul - AC
• Aeroporto Internacional de Rio Branco - AC
• Aeroporto Internacional de Macapá - AP
• Aeroporto Internacional de Manaus - AM
• Aeroporto Internacional de Tabatinga - AM
• Aeroporto de Altamira - PA
• Aeroporto Internacional de Belém - PA
• Aeroporto Internacional Porto Velho - RO
• Aeroporto Internacional de Boa Vista - RR
• Aeroporto de Palmas - TO
• Aeroporto Internacional de Maceió - AL
• Aeroporto de Paulo Afonso - BA
• Aeroporto Internacional de Salvador - BA
• Aeroporto de Ilhéus - BA
• Aeroporto Internacional de Fortaleza - CE
• Aeroporto de Juazeiro do Norte - CE
• Aeroporto Internacional de São Luís - MA
• Aeroporto Presidente Campina Grande - PB
• Aeroporto Internacional de João Pessoa - PB
• Aeroporto Internacional do Recife - PE
• Aeroporto Internacional de Parnaíba - PI
• Aeroporto de Teresina - PI
• Aeroporto Internacional - Parnamirim - RN
• Aeroporto Internacional de Natal - RN
• Aeroporto de Aracaju - SE

c. Water Transportation

i. Characteristics

• Brazil has many ocean ports
• Cabotage shipping (intra-Brazilian shipping) is not common, however could be a good alternative, especially for long voyages
• Barge transportation in rivers or lakes is also not used in Brazil, with a few exceptions
• Most international shipping lines serve Brazil on a regular basis
• Transit time to most European ports is about 14 to 21 days

ii. Main ports

Source: Ministério dos Transportes

d. Road Transportation

i. Characteristics

• Almost 90.000 km of roads in Brazil
• 31% in good or excellent state - 69% in poor or bad state
• South and Southeast regions have better roads
• About 14.000 km are private roads (toll roads) - around 76.000 km are public roads (free)
• This is the main transportation used in Brazil

e. Rail Transportation

i. Characteristics

• Railway system in Brazil is old and outdated. Need for investment is urgent
• There were almost no investments since 1950's, when government policies gave priority to road transportation
• There is a massive investment program budgeted for 2010-2016, which will considerably change the railway system situation in Brazil
• Today most of the railway system serves cargo transportation - not public transportation.

4. Import cost structure

a. The tax system

i. II - Import Tax

The Import Tax (II) is a federal tax and has protection purposes.
The Import Tax rate varies according to the country of origin of the goods and to the classification of the product (according to the custom tariff used). The formula to calculate the II is:
II = II rate (%) x Customs Value (CV)
CV = goods value + international freight + insurance value

ii. IPI - Industrialized Products Tax

The Industrialized Products Tax (IPI) is a federal tax. This tax also varies according to the classification of the product (custom tariff used).
Follows the formula to calculate the IPI:
IPI = IPI rate (%) x (Customs Value (CV) + II)
Depending on the tax situation of the importing company, this tax can be credited (the amount paid in a purchase or import can be credited against the amount due when the company sells something).

iii. PIS and COFINS - Social Taxes

PIS (Social Integration Program) and Cofins (Social Security Financing Contribution) are social contributions to fund social security. Rates applied are: for PIS 1.65% and for Cofins 7.6%.
Formulas to calculate Pis and Cofins are:
PIS = PIS rate (%) x (CV + ICMS + PIS + Cofins)
Cofins = Cofins rate (%) x (CV + ICMS + PIS + Cofins)
Depending on the tax situation of the importing company, this tax can be credited (the amount paid in a purchase or import can be credited against the amount due when the company sells something).

iv. ICMS - Sales Tax

The ICMS is a state tax. Due to the fact that Brazil is a Federative Republic, there are different laws for this tax. Each state has its own law and ICMS system. ICMS is calculated with the following formula:
ICMS = ICMS rate (%) x (CV + II + IPI + ICMS +Pis + Cofins)
Depending on the tax situation of the importing company, this tax can be credited (the amount paid in a purchase or import can be credited against the amount due when the company sells something).

5. Incentives on International Trade

a. Export incentives

Exports in Brazil are free of ICMS and IPI. Depending on the company tax situation, the exports are also free of PIS and COFINS. Exports through a trading company based in Brazil are eligible for the same benefits. Domestic sales to Free Trade Zones (like Manaus for instance) are also tax-free.

b. Import Incentives

Some States also incentive the import activities, such as Espírito Santo and Santa Catarina. These States have specific international trade policies and grant special tax levels on the ICMS (State tax). When a company wishes to enter the Brazilian market, the consideration of these particular incentives may low considerably the landed costs of the merchandise.

6. Corruption

a. Introduction

Yet ranking 75th in the 2009 Transparency International corruption poll, Brazil is ahead China, India and Russia in this list. Corruption in Brazil used to be much worse, however things are changing. Various recent scandals involving politicians, but also business people in international trading operations, have been severely punished. Even when not sufficiently punished (according to most Brazilian's perception), just the negative exposure of the facts is sometimes sufficiently relevant as example, so that others, who were considering corruption as an alternative, will reconsider this choice. Concerning the international trading operations, the use of on-line systems such as SISCOMEX and RADAR makes corrupts' lives more difficult.

b. Recommendations on handling corruption

Corruption in imports and exports in Brazil is usually linked to something wrong in your procedure. Usually, no tax authority will ask for a bribe if all your documentation is correct and your cargo is legal, if you delivered all the relevant information correctly and timely. Of course this is not to say that if there is any information missing you will be confronted to corruption, the majority of tax authorities in Brazil are correct people. So, the care in preparing the paperwork and respect to the bureaucracy is crucial to avoid corruption. If however you took all the precautions and you still found a bad tax officer in front of you, the best thing to do is to remain calm and look for a legal solution. Once you accept to pay a bribe, you will always have to pay a bribe. So it is better not to start...

7. Common mistakes on a foreign look on Brazil

a. Brazil is a cheap Country

When you spend some time at a nice Brazilian beach and you pay less than USD 10 for a nice portion of shrimps, or USD 1 for a coconut, you may have the false impression that Brazil is a cheap country. The salaries in Brazil may be lower than in Europe or North America, but the social tax burden on salaries can be higher than 100%. Raw materials, components, machinery, everything it is needed to manufacture something in Brazil may have a reasonable price if made in Brazil. However if it needs to be imported, the price will be considerably higher. Same goes for products which, despite being manufactured in Brazil, the domestic production cannot meet the demand. Take the steel prices in Brazil for instance. Even though Brazil is one of the largest steel producers in the world, having the largest iron ores, steel prices in Brazil are much higher than in the rest of the world.

b. It is easy to move around

Wrong, it is actually very complicated to move around, especially if you are not local. The roads are sometimes very bad (specially North of São Paulo and Rio), and road signs are not precise. GPS coverage is good in large cities, however they do not have the "avoid favelas" option, so you might be lead to cross some dangerous neighborhood in your way. The rail system is barely inexistent for passenger transportation and when it exists, the trains are over 50 years old. The airway system is good in terms of security, however the number of passengers grew much more than the investments in airports in the past 10 years. This results in crowded airports and frequent flight delays.

c. Brazil is merely a commodity exporter

Although Brazil actually exports commodities (nr 1 worldwide for meat, poultry, soy, coffee, sugarcane ethanol), the country also exports airplanes (Brazilian Embraer is world leader in the production of 70-100 seats jets), cars, machinery, cell phones and electronics in general.

d. Pricing of products

The complexity of the tax system in Brazil makes it almost impossible to a foreigner understand the pricing structure. One may think that the importer is having an absurd margin, which is very often wrong. The many tax situation possibilities that a certain company may have, can play a decisive role in pricing. Two companies selling the same product for exactly the same price may have very different profit margins, depending not only on their own performance but also their tax situation. So if you studied your entry in Brazil and gave up because your price is not competitive, think it over and talk to a specialist. Maybe you are dealing with the wrong tax situation, which can be changed.

e. Locations

If you think business is in Sao Paulo and tourism in Rio, Recife, Fortaleza and Salvador, you are just partially right. Of course these are the famous locations, however if you take a closer look you will find much better options. There are top industrial locations spread around the South of Brazil and in some areas in the Northeast of the Country. You may be right to think that Sao Paulo is the economic heart of Brazil, but also consider other issues like security, quality of life, structure costs, salaries, and you may end up with a different choice.

f. Size of the country

Brazil has an area of approximately 8.5 million square kilometers. This is more than 200 times the size of Switzerland, or almost twice as big as the European Union. It is the 5th largest country in the world. It is common to travel many hours before leaving the country. When someone leaves for instance from Sao Paulo, by plane, to Europe, it will take around 4 hours of flight to leave the Brazilian territory. If from Sao Paulo you drive south to Uruguay, you will be about 1'500 km from the border, which will take certainly at least 2 days of driving. This is a very relevant aspect when thinking about distribution and logistics, or else when selecting distribution partners in Brazil.

g. Culture

If you think you know something about Brazilian culture, think it over. Due to its size, its multiplicity of races, religions, and diverse origins, Brazil is a melting pot of culture. Very often you may have the impression that you are in another country. If you go to Bahia, you may think you are in Africa. If you go to the extreme South, where the Gauchos live, you may think you are in Argentina. In many cities in the South of the country you will find very Germany-like or Italy-like places. In Sao Paulo, there is the largest concentration of Japanese people out of Japan, something like over 1 million Nisseis or Sanseis (2nd and 3rd generation Japanese). In general, the South region is more similar in terms of culture to Europe than it is to the North part of Brazil.

h. Language

Brazil is the only country in continental South America that does not speak Spanish. English is not widely spoken and Spanish, although somewhat similar to Portuguese, is hardly understandable for most people. Portuguese from Brazil has a different accent and many different words than Portuguese from Portugal. So if you have to translate a company catalog to sell in Brazil, you must look for a Brazilian translator. Someone from Portugal will translate it differently and the result may be very funny in some cases.
A recent study about English usage in Brazil was carried out and the results showed that only 8% of business people could communicate perfectly in English. About 17% can speak fluently however with some mistakes and 24% has a basic knowledge of the language. So if you intend to do business with Brazil and you do not speak Portuguese, you have a 51% chance of not finding anyone that you can communicate in your potential business partner. When talking about consumers in general, the situation is much worse, only 13% of the population can communicate or at least understand English.

i. Brazilian domestic market is poor

Brazil has 190 million inhabitants. About 10% of this population has the same purchase power as the average European. That means about 19 million people, or almost 3 times the Swiss population. The remaining 90% is quickly ascending class in the past few years. Poor people (living on less than USD 100 per month) account for about 10% of the population, 80% belong to middle classes.