Brazil is in recession, and there is no end in sight to the rough economic times ahead. One fallout is that the government, facing dwindling income from commodities and other slumping sectors, is trying to find more revenue.
“Our government needs more and more and more money,” said Ronaldo Apelbaum, a tax expert at Taxativa Consultoria de Negocios in Brazil who has previously worked for Capgemini, Hewlett-Packard, and KPMG, in a recent webinar hosted by Tax Linked.
This is reversing discussions from years ago that had Brazil focused on improving its notoriously onerous regulatory schemes and taxation requirements for both domestic and foreign companies. On top of that, the ongoing corruption scandal has hit a new boiling point. President Dilma Rousseff’s appointment of embattled former President Luiz Inácio Lula da Silva to chief of staff, seemingly only to avoid potential legal proceedings against him, has led to new protests in the streets and further calls that she should be impeached.
With revenue shortfalls and much bigger issues to worry about, virtually all substantive discussions on making it easier for businesses to operate have stalled — and in some senses been reverse. “The picture is not good,” said Apelbaum. “We really face a very bad moment.”
This hit home recently for IT companies. The government tried — but failed — to abolish a major tax incentive that they have been reaping the rewards of for years. “All the IT companies in Brazil were pissed off about this,” said Apelbaum. “But the government was not able to negotiate with the Congress if that should be cancelled of not. So it was cancelled for some months, but now it is back again.”
This “Special Tax Regimen for the Export of Information Technology Services” is key for IT companies and designed to foster more software development, according to the Latin American Trade and Investment Association. To be eligible, firms must export more than 80% of their gross annual revenue related to the sale of goods and services, but those that do fall under what is known as the REPES system are exempt from the PIS “social integration program” tax and COFINS social security contribution requirement. Companies within REPES can also reap savings by not paying any IPI taxes on any imports of products that cannot be come by in the country.
The government’s failure to repeal the provision was a sigh of relief for many. Although Apelbaum notes that, especially amid today’s feverish political and economic climate, predicting the future can be tough. “The craziest thing about Brazil is that you never know what is going to happen — yesterday, today, or tomorrow,” he said. “This is really the most difficult thing. If I tell you, ‘Hey, come to Brazil. Bring your money to Brazil because there is a tax incentive you can use.’ It may be that, in the next day, this is not true anymore. This is really the worst thing that we have here.”
One of the most corporate friendly incentives is an exemption on dividend taxes. “You don’t pay taxation when you send dividends abroad,” said Apelbaum. Again, however, there is a downside. He notes that there is talk among several senators about doing away with this rule. For now it remains — and so far the opposition is a small minority — but knowing such momentum exists to revoke incentives makes it a headache to project future earnings.
There is some stability, however. In addition to the IT tax break, two other tech incentives — through the PADIS and PADTV regimes — allow for major savings for those involved in the R&D, production, and manufacturing of semiconductors, display monitors, and digital televisions. Neither of these have come under as much fire, and the provisions all for import taxes for needed products to be waived and breaks on the sales of such equipment as well.
Then there are tax benefits to setting up shop in northern Brazil or the Amazon city of Manaus. Although fewer tech companies have taken advantage of the regional incentives, the goal is to combat the fact that the majority of foreign investment has long gone to country’s southern states and mega cities. So the government offers a lot of cuts, and some firms are starting to jump onboard.
According to Deloitte, state taxes for foreign firms operating in Manaus can be cut be up to 100% on top of a 75% corporate income tax reduction and exemption from import taxes and social security requirements. This Manuas Free Trade Zone program can even provide subsidized land. In the north and northeast, companies can attain corporate income tax breaks, reinvestment benefits, and discounts on depreciated assets in addition to import and social security exemptions.
It has been working so far, says Deloitte. “In order to achieve a competitive edge and access markets with incredible growth potential, multinationals are beginning to look to investment opportunities outside the traditional investment centers,” states the company. “The North and Northeast regions are being seen as potential destinations. These two regions have tremendous room for future growth and investors are starting to realize these opportunities.”
Despite the existence of some tax breaks, Apelbaum is most alarmed by the lack of urgency for further reform. All change is hard in Brazil, a country of 27 states and some 5,000 cities. But reigniting the economy is going to require renewed interest in the type of foreign investment that made Brazil a darling earlier in the century. And with the government so mired in other problems, he is troubled as he watches nothing happen in his home nation at the same time that countries like Chile and Colombia are making progress to modernize their tax code and attract outsiders.
“Brazil is out of this discussion,” said Apelbaum, adding that he is sorry to the messenger in this situation. “I don’t want to be the one that will bring only bad news about Brazil. But unfortunately that’s what is happening nowadays.”