Brazil is fast becoming the investment opportunity of choice for foreign investors, but the South American country has one of the most complex tax systems in the world.

The range of tax duties and contributions in the country means tax professionals are required to have in depth knowledge of applicable rules and of the market itself to help keep companies competitive both locally and internationally. 

World Finance spoke to Eliézer Serafini about the reasons behind Brazil’s complex taxation system and to find out what is making Brazil so popular with foreign investors.

Serafini, lead tax partner at Ernst & Young Brazil, is currently leading an award-winning team of nearly 500 professionals in areas as diverse as local taxes, international taxes, expatriate tax compliance and advisory, transfer pricing, customs, VAT and labour, amongst others.

The country’s taxation is a complicated issue, involving more than 60 different taxes and exceptions. The Brazilian Constitution establishes different categories of tributes that may be levied on entities and individuals.

The tax systems’ complexity derives from certain taxes which are not included in the ‘non-cumulative regime’, in addition to a range of sector tax incentives and an extensive list of tax liabilities that tax payers meet monthly and require on-going updates and follow ups by the tax team.

Streamlining the system

Serafini explains: “Brazil’s tax system is very complex, specifically the indirect taxes. We recently had a visit from our global leadership in indirect taxes and they were amazed at the complexity we have here. We have many taxes, tax laws and many formalities that the tax payers have to comply with.

“There are four main taxes and what makes the indirect tax system very complex is we have the non cumulative system in Brazil, so companies have to take tax credit when they buy raw materials.”

Brazil is currently updating their tax system, replacing some of the paper-based methods with a more high-tech alternative. This has created a process which is a lot more streamlined, but may add yet more complexity to the system.

“Our IRS has just adopted the digital system where companies have to comply with all formalities electronically. All information has to go through the digital system, so when you think about all the taxation formalities that the companies have to comply with and then when you consider that all those formalities now have to be adopted by a digital system, it makes life and the process even more complex.”

Award winning tax team

All these tax particulars drive many companies to rely on specialised advisory services, such as those offered by Ernst & Young, to address tax matters, rather than keeping an ‘in house team’ which would be a drain on funds.
This specialised knowledge required to deal with the tax system in Brazil stems from the experience of professionals at Ernst & Young who have had a very ‘hands on’ approach.

Voted Brazil’s Best Tax Team by World Finance magazine, Ernst and Young’s professionals have achieved a level of competency that truly sets them apart from others.

Specialisation is the key, according to Serafini, with tax experts split into teams which each focus on a different aspect of taxation.

“We’ve structured our tax practice so we have people who focus on direct taxes only, people who are experts in international taxation and people who concentrate on individual taxation. In the past, we used to specialise in all parts of taxation, but nowadays our professionals are organised according to the tax system due to its complex nature.

“As a consequence, the entire training programme, as well as jobs and projects, are organised based on the particular specialisation, so that our staff can have enough knowledge and expertise to properly serve our clients.”

Law changes

Keeping up to date with the changes in the law is another ever-present challenge for the team at Ernst & Young and it is a vital part of the service they provide, as companies could miss out on important tax benefits if amends in the law are overlooked.

“We have a specific team who are assigned to follow changes in the law. They share their research and what they have found with the rest of the team so everyone is completely up to date with any changes.

“The tax law in Brazil changes a lot and clients should be updated with the changes because sometimes they bring opportunities. Recently, there was a new law implemented which stated that companies with tax debts can make a settlement with the IRS and gain some tax benefits. If the company was not made aware of that change in the law, they could miss out.”

It is important for foreign companies to get the best advice when it comes to investing in Brazil, continues Serafini:
“One of the main challenges for foreign investors is to be able to effectively manage their taxes, because of the complexity involved. Companies have to comply with many formalities and our tax law changes frequently, so tax payers have to make sure that they are up to date regarding all the changes.”

Brazil, in particular, is becoming more popular with foreign investors, at a time when emerging markets are becoming increasingly attractive to FDI. He believes that Brazil’s healthy financial system, stable economy and a controlled rate of inflation is helping bring investors to the country:

“Brazil is a large market with around 185 million people and it is considered to be a very promising market. The economy is doing well, inflation is under control and our financial system is very healthy; we are stable economically so I would say that our market is very promising and we are very optimistic that Brazil’s economy will grow.”

The country will also be the focus of the whole world when it hosts both the World Cup in 2014 and the Olympic Games in 2016. An increasingly promising sign for Brazil is that an oil reserve has just been discovered, which will almost certainly lead to a lot more foreign investment.

Optimising earnings

Brazil very much realises its own potential and has begun investing in its own future, building and improving transport links and rethinking energy sources.

“We have foreseen many foreign investments from oil and gas companies and have begun to build new seaports, airports, highways, railways and new power energy plants. If you consider all of these elements together, I would say that there are many opportunities available in Brazil.”

For foreign companies planning to invest in Brazil, business structure and geographical location are not to be forgotten when considering an investment plan, according to Serafini.

“Foreign investors need to make sure their businesses are well structured from a tax perspective to take advantage of the benefits available so they can optimise their taxable earnings and be competitive.

“Geographical aspects are also key; they need to find the right place to set up their business.

“It’s important that the taxation experts within the company are involved with some executive decisions of the company; some companies don’t properly involve them when making decisions and if they don’t involve them, they are not able to work out what impact the decision would have tax-wise.”

Brazil is currently, and proudly, adopting the International Financial Reporting Standards (IFRS), developed by the International Accounting Standards Board (IASB) as a single set of high quality and understandable set of standards.

“We are very proud of what Ernst and Young has been doing for Brazil in terms of IFRS,” says Serafini, “we have assisted both the Brazilian Securities and Exchange Commission and the Brazilian Central Bank to identify the differences between the existing Brazilian accounting rules and the IFRS ones with the purpose to harmonize them. This is a very important step for Brazil as a country.”

Promising future

Brazil’s future looks promising and for the investor, things have never looked better.

All eyes will be on Brazil in five years time when they host the World Cup, followed by the Olympic Games two years later and, unlike many other countries, Brazil’s economy seems to be riding out the recession, with its stable economy and hold on inflation.

The country has major plans for its future; updating its public services, energy plants, modernising its tax system and the recent discovery of oil will, no doubt, be the major factor which will shape the country’s future. Brazil is moving forward, and it’s on the up.