Tax incentives as a strategic tool

29/11/2010

Instituto Movimento Pró-Projetos

What the CEOs of Brazilian companies need to know to use tax incentives as a strategic tool, in order to strengthen their production chain and transform incentives into institutional and market gains for shareholders, clients and suppliers

According to figures of the Federal Audit Court and the Folha de São Paulo newspaper (May 2007), Brazil offers some R$ 65 billion of tax incentives, government investment funds, and federal, state and municipal bids or programs. There are approximately 800 domestic sources of funding for projects in a wide range of economic sectors.

However, these sources are outstripped in terms of both quantity and volume by international sources. The UK alone has approximately 300 institutions that provide funding for projects in Brazil (Guidestar UK, 2010). EUROPEAID - EU Cooperation for the Development of Latin America - has a budget of € 556 million for the period 2007-2013 for projects related to human rights, renewable energy, combating narcotics and poverty and other issues related to sustainable and social development.

Despite this remarkable volume of funding available, few Brazilian companies include these sources in their strategic plans. None of the Brazilian companies ranked amongst the thousand largest currently have a department dedicated to this issue, i.e. capitalising on these sources of funds and aligning them with the company's production chain.

The survey of social initiatives carried out by US companies in Brazil, conducted by GIFE in 2008, analysed 59 US companies and institutes. This survey found that R$ 204 million has been invested in social work in Brazil, benefiting 39 million people.
When drawing up their strategic plans, all companies and respective departments include their requirements in terms of costs, processes, projects, recruitment, causes and travel etc. However, this process is always vetted by someone making cutbacks; people are told to look on the bright side because 30% of the budget proposed to meet their goals has been approved.

The various crises in the last 30 years have led to the emergence in the market of consultancy firms with new proposals and modern forms of management: intelligent but mainly uncomplicated solutions. These pioneering proposals are usually created by experienced individuals and qualified teams. IN-PRÓ -Motion Pro Design Institute (www.institutomovimento.com.br) created in July 1997 in the city of Florianópolis, is a perfect example of such a consultancy firm.

In this day and age, companies making their strategic budgets and plans for the next calendar year are practically obliged to know the national and international sources of funds and the respective tax incentive laws. In respect of this IN-PRÓ provides a "Diagnosis of National and International Sources of Funds" service alongside its "Recommended Project". These services transform the other 70% cut from the budget - as mentioned in the previous paragraph - into sources of funds and feasible administrative solutions for the company's planning and to obtain further funding from one or more national and international sources.

Márcio Godoy, Karina Ruffo and Kátia Seadi are part of the IN-PRÓ team and wrote the book 103 tips - What every company needs to know to use fiscal incentives, published in Portuguese and English by Editora Difusão Cultural do Livro - DCL, in 2009.

Sponsorship consultant Kátia Seadi, a specialist in educational sporting projects - states that from 2009 to September 2010 R$ 113,446,351.72 was invested in sporting projects qualifying for federal tax incentives. In Brazil today nearly 140,000 companies pay tax on the taxable income basis, of which 1,876 account for 80% of all income tax payable to the government (Source: Federal Inland Revenue Department, 2008).

An IBGE survey found that while Brazilian GDP grew by 3.2% between 1995 and 2005, the sporting sector saw expansion of 10.9%. Driven by the massive events to be held in Brazil in coming years, the 2014 FIFA World Cup and 2016 Olympic and Paralympic games, the sporting sector is expanding and developing faster than any other entertainment industry in Brazil. The fact that direct investment of R$ 47.5 billion is going to made in infrastructure, tourism and consumption for the 2014 World Cup is an example of this. Indirect investment will be made of R$ 135.7 billion, resulting from money invested to realize the event. (Source: Ministry of the Sports).

These events will generate a whole host of opportunities for companies to invest in the sector. Potential investments in sport are not limited to soccer or the more popular sports. Brazil's population currently stands at approximately 180 million and even the least popular sports can have between 5 and 10 million followers, much more than in European countries.

For the past 3 years, Karina Ruffo - an IN-PRÓ Sponsorship Consultant specialising in International Sources of Funds - has been monitoring the Funds and International Sources of Funds. She attended two international events in 2009, The first of which was the Culture Infodays 2009 in Brussels, organised by the EU's Education, Audiovisual & Culture Executive Agency (EACEA). IN-PRÓ was the only Latin American representative amongst the 450 participants. The second event was the 29th International Fundraising Congress (IFC), the world's leading education and training conference on fundraising. Established since 1981 in Holland, the event regularly attracts around 900 participants from over 55 countries. IN-PRÓ was one of three Brazilian participants at the event.

"Brazil is experiencing its best period of economic performance, politics and growth, and also has the World Cup, pre-salt oil reserves, the Olympics, the Amazon, green energy, the largest reserve of fresh water in the world, a cosmopolitan and truly global people, and a financial system admired for its security by the US, Asia and Europe", commented Márcio Godoy. In his book 103 tips - What every company needs to know to use fiscal incentives, the author shows a new economic convergence is necessary for companies to allocate their funds to projects related to their production chain, in order to render the entire process sustainable. "The recent financial crises have revealed the limitations of investing in projects not related to the company's production chain", adds the executive director.

The government is doing its part, enacting tax incentive legislation and creating sector investment funds. This is where civil society comes in, developing management and transparency mechanisms. The state of the economy has obliged companies to carry out extra activities in addition to their core business, or rather parallel activities. The reverse logistics law is going to transform the secondary market. In short, industry needs to collect its packaging or produce biodegradable packaging; retailers are also responsible for this environmental initiative. Before purchasing any product, from now on consumers should read the label and technical specifications.