Expanding to Brazil – What You Should Know
Tim Finerty
As small to mid-size enterprises shift gears to accelerate growth, they are taking a closer look at new opportunities in foreign countries. One of those countries is Brazil. As the fifth largest population in the world and with the upcoming exposure of international sports events like the 2014 World Cup and 2016 Olympics, Brazil needs service, manufacturing, construction, and distribution businesses.
What we are seeing?
The move of advanced manufacturing processes. Automotive is ramping up manufacturing in Brazil with state-of-the-art facilities that house all suppliers in the same plant. In additon, service and franchises have seen their growth spurred by the demands of a fast-expanding middle class. IT hardware, software, and services have also experienced significant growth. This is in part due to the influx of foreign companies into the country who require such support, as well as entrepreneurial sector growth and demand.
Despite these bright prospects, Brazil remains a complicated place to do business.
Planning
Before expanding globally, it is critical to create a business plan and budget for the new enterprise that addresses the issues of taxation, business structure, and financing. Owners need to know how to get money into the country, how to take it out, and how long the process takes. A rough budget of anticipated expenses, even if only a starting point, can help determine how to fund the effort.
Business owners and company executives don’t need to be pioneers to establish a global presence. While they can follow the lead of large multi-national organizations, small to mid-sized privately held companies can be better served by benchmarking against companies of comparable size and engaging a business advisor with experience and connections in foreign markets.
The importance of structure
One of the biggest decisions a company can make when establishing a foreign presence is how to structure the organization. Small to mid-size enterprises should work with their business advisor to determine all options before making the decision to establish their own company. For example, in most instances, if you have one or more employees working in a foreign country for a total of 183 days in a rolling 12-month period, permanent establishment will be created, often unintentionally, and now you are subject subject to taxes.
Financing
Initial financing is typically done from retained earnings. Clients must be realistic about cash-flow projections, which can change significantly based on sales and collections. For currency issues, owners should understand how the fluctuation of the monetary system impacts equipment values and the financial statement. Banks look at how the foreign operation impacts a company’s profit and loss statement, as well as cash flow. Banks lend to companies based on how certain financial ratios look at a point in time. The financial statement can become devalued with higher currency valuation; in the case of deflation, a company will show a gain in assets.
Regulations
Business owners often need assistance working through the intricacies of transfer pricing principles, exchange rates, taxation, permits, and regulations. These factors all impact the price established for goods or services in other counties. Additionally, government dealings can be daunting. Having a business advisor who knows government policies and procedures is a good investment and can help cut through red tape. For small to mid-sized enterprises looking to capitalize on the Brazilian market via exports from their domestic operations, it is encouraged that they consider working with their business advisor to help structure the flow of goods, the associated manufacturing, and distribution value stream. Proper planning well in advance of market entry can reduce import duties and tariffs by double-digit percentages. This translates into significant market advantages in both price competitiveness and retained earnings.
Companies also need to establish transfer pricing agreements between related parties in foreign countries, such as Brazil, to help reduce the risk of adjustments on a federal tax audit. A CPA firm with international experience can advise clients about how to structure related-party transactions, such as technology, sales, and/or management fees to maximize profits and minimize taxes.
Words of Wisdom
One of the biggest learning curves about doing business in Brazil is the slower pace. What might take days to do in the United States could take weeks or months. Knowing how to complete the paperwork in a foreign market trumps a handshake and business deal sketched on a bar napkin.