Doing Business in Brazil Perception vs Reality Perception x Reality - PowerPoint PPT Presentation

DOING BUSINESS IN BRAZIL Doing Business in Brazil Perception vs Reality Perception x Reality March, 2019

CONTENT • BRAZIL AT A GLANCE • TAX SYSTEM • TAX COMPLIANCE • INNOVATION AND ENTREPENEURSHIP • PERCEPTION AND REALITY • FORWARD LOOKING STRATEGIES • FINAL COMMENTS • PFM

BRAZIL AT A GLANCE

The country Population* 1 POLITICAL DIVISION 207 + million (2016) 26 states, 4 1 federal district 5,500 + cities CAPITAL CITY 5 Territory* Brasília 2 8.514.876,599 km 2 CURRENCY 6 Brazilian Real (BRL) Nominal GDP** 3 $ 1,796 Trillion (7 th largest) LANGUAGE 7 Portuguese Sources: **IBGE **World Bank

Regional characteristics NORTHEAST NORTH CIT reduction Free trade zone CIT reduction SOUTHEAST MIDWEST Most important ports Higher VAT Agriculture (Special Tax Provisions) SOUTH Important ports Higher VAT

São Paulo - the largest city Population: 12 + million (2016) 41.94% 80.75 56.56 29.23 17.47 15.44 7.55% 90.00 8.55% 27.66% 80.00 41.94% 70.00 60.00 50.00 40.00 30.00 20.00 10.00 SOUTHEAST NORTHEAST SOUTH NORTH MIDWEST SOUTHEAST NORTHEAST SOUTH NORTH MIDWEST Population in Millions Source: IBGE

Brazil - back on track... In 2017, The Economist stated “ The Brazilian economy has been shrinking for eight quarters but, with inflation expectations tamed, interest rates are now falling. Brazil and Russia are likely to add to global GDP this year, not subtract from it. ” • Due to our currency decrease, it is cheaper to invest and buy business in Brazil; • The new government is expected to boost Brazil’s international credibility; • The government has publicly stated that it intends to incentivize public and private partnerships, a relevant privatization program and, very importantly, introduce a social security reform to hep tackle public deficit.

Back on track (cont.) INDICATORS MAY 2016 2018 (CALENDAR YEAR) 9.28% 3,75% % Inflation (IPCA) Source: IBGE (12 months until April 2016) Interests (SELIC) 14.25% 6,5% BACEN Industrial Production –9.8% 1,5% Source: IBGE (accrued Jan-May 2016) (until November) Vehicles Production –24.3% 8,8% Source: ANFAVEA (accrued Jan-May 2016) (until November) Grain Harvest 184,7 Million Ton. Approx. 230 Million Ton. Source: LSPA/IBGE (total production in 2016) 95,100 Points IBOVESPA 57,901 Points Source: Uol 1,3% GDP –5.4% Source: IBGE (GDP variation 1 ° Q 2016 x 1º Q 2015) Trade Balance US$ 19,682 Billion US$ 58,3 Billion (Balance) Source: MDIC (accrued Jan-May 2016) (Record) Exportations US$ 73,512 Billion US$v239,523 Billion Source: MDIC (accrued Jan-May 2016) Imports US$ 53,830 Billion US$ 181.225 Billion Source: MDIC (accrued Jan-May 2016) Employment Creation -448,101 Thousand 530 Thousand Source: CAGED (accrued Jan-May 2016) Direct Foreign Investment US$ 75 Billion US$ 59 Billion Source: BACEN/Unctad (total of IED in 2015) (World’s #9)

Brazil is the regional powerhouse

And also a global powerhouse… Brazil has been a world’s top ten economy for a relevant • period of time Economic prediction of major forecasts indicates that such • position will remain for the foreseeable future (currently #7 and expected to be #6 by 2030 – just 11 years from now) This means that, in addition to its natural advantages in • agriculture, natural resources and energy, the country will be a relevant spot for expansion of consumer business, technology and services.

Brazil is a global powerhouse Brazil is already a world’s top ten oil • producer Pre-salt and regular concession bidding • rounds expected to bring back momentum to the industry and also billions in investments Interesting note to US investors: in just two • bidding rounds (17/18), Exxon acquired enough acreage to become the #1 foreign company in exploration acreage in Brazil

Current Political & Economic Situation GDP growth 2.0-2.5%

Current Political & Economic Situation

TAX SYSTEM

The statutory rate is high x other jurisdictions • Corporate Income • PIS: • INSS • IOF: 0% to 25% • II (Import duty) Tax: 25% 0.65% or 1.65% 0% to 35% • ITBI (Real Estate (Social Security Tax): 20% to 28.8% • Social Contribution • COFINS: • IE (Export tax) Transfer Tax): • FGTS: 8% Tax: 9% 3% or 7.6% Potentially high, 2% to 6% • 13th Salary: • IPI: varied rates • IPTU and ITR: 8.33% Average rate 14% Property taxes • Vacation: 11.11% • ICMS: 0% to 25% • ISS: 2% to 5%

Tax system - complex and counter-intuitive FEDERAL STATES MUNICIPAL • II - Import Duty (not VAT) • ICMS - State VAT • ISS - Tax on services Rates: Rates: • Tax rates range 2% to 5%, • 0% to 35%. Average: 14% • Intrastate operations: depending on the nature 17% to 19%, depending of service and • IPI - Federal VAT on the State municipality involved Rates: • 0% - 330%. Average: 14% • Interstate operations: • Cumulative tax 12% (standard), 7% or 4% (no tax credit on inputs) • PIS/COFINS Regimes/Rates: • Tax benefits granted by • Imposed on importation • Non-cumulative: 9.25% certain States to import of services • Cumulative: 3.65% and local outputs • Equipment rentals are not subject to ISS

Incentives that can be applied • Suspension/Reduction of PIS and COFINS F E D E R A L • IPI reduction to 0% • Suspension of PIS/COFINS/IPI on imports • Reduction of ICMS calculation basis S TAT E • ICMS deemed credits • Tax financing with lower rates • ISS and IPTU exemption M U N I C I PA L • Land Yield • Infrastructure Specific benefits granted for key sectors considered essential for the country I N D U S T R Y development

TAX COMPLIANCE

Time taken to comply - Brazil Time taken to comply, 2016 (hours/year) 27 URUGUAY 1 31 378 PARAGUAY 0 384 664 ECUADOR 654 102 BOLIVIA 5 102 792 VENEZUELA 5 792 260 PERU 293 239 COLOMBIA 203 291 CHILE 291 2038 BRAZIL 2600 2016 359 ARGENTINA 2013 405 Sources: World Bank 0 500 1000 1500 2000 2500 3000

Federal taxes collection Total Federal Taxes Collected (in BRL Millions) Taxes in 2016 41 25 29 5 % 1,400,015 % % % 1,200,015 1,000,015 800,015 600,015 400,015 200,015 15 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 INCOME TAXES PIS/COFINS OTHER TAXES IPI Source: Brazilian Federal Revenue

Technology - investing to increase collection Factors responsible for Total tax assessments issued by the Federal Revenue Service leveraging tax collection and (RFB) - in BRL Billions audit mechanisms: 200,00 • Improvements on the quality of 180,00 160,00 the criteria used to select 140,00 taxpayers for auditing 120,00 procedures, along with new 100,00 approaches on the detection of 80,00 60,00 tax evasion structures; 40,00 20,00 • The cross-checking of a great 0,00 volume of tax data from the 2009 2010 2011 2012 2013 2014 2015 2016 taxpayers; Period Total Tax Audits Increase • Use of effective measures to 2009 / 2012 R$ 382.865.096.656,00 fight tax evasion structures; 2013 / 2016 R$ 569.194.853.576,00 48,67% • Increase on tax auditors specialization and training. Source: Brazilian Federal Revenue

SPED program to combat tax evasion SPED Digital Bookkeeping Digital Tax E-Invoice of Accounts (ECD*) Bookkeeping (NF-e***) (EFD/ECF**) * Escrituração Contábil Digital ** Escrituração Fiscal Digital *** Nota Fiscal Eletrônica ** Escrituração Contábil Fiscal

Electronic audit paradigm • Audit on distance CURRENTLY • Isolated • Integrated data flow PAST • Retrospective audit • Prospective review (tax distortions) • Manual conference • Electronic Audit of all operations • Reduction of time spent with auditors presence in the SPED Benefits in numbers: company • The average of tax audits increased by double digits on yearly basis Source: Brazilian Federal Revenue • 10+ Million trees was spared since its implementation

A broad view of the problem • Three levels of government (Constitution drives the tax system) • Growing electronic filing and potential of information/data cross checking • Court procedures are still time consuming and do not have specific chambers specialized in tax matters • Result: challenging environment

Innovation and Entrepreneurship

Innovation and Entrepreneurship

Private Equity & Venture Capital Performance of the Private Equity and Venture Capital Industry in Brazil: This report commissioned by ABVCAP and INSPER presents an overview of the Brazilian PE and VC Industry between 1994-2017 Source: ABVCAP

Venture Capital In 2017, Venture Capital tech investment in Latin American countries had an all time high of USD$1.1 billion. Although 100% of the largest technology companies of the world (Market cap criteria) are currently in the US and China, we believe that it will not take more than medium term for Latin unicorns to pop up. Note that Brazil already account for more than 50% of the regional investment. Source and graph: https://lnkd.in/e-U8svn (nathanlustig)

Regional Leadership

Fintechs as one of the new trends

Perception x Reality