Monday, 27th March 2017

Practical Challenges in Brazil for Multinational SME’s

Posted on 01. Feb, 2012 by in FINANCE


The major focus given to Brazil from mainstream media outlet over the last years has led many multinational SMEs to Brazil with the goal of capitalizing on the quickly growing Brazilian market.

Dealing with foreign SMEs is a fairly new thing in Brazil, for only 20 years ago, Brazil was a closed market with little or no room for importing and exporting goods or services. The new trend of smaller international companies willing to do business in Brazil has somehow taken the Brazilian society by surprise. This new wave of foreign companies is not investing in factories nor hiring local staff to maintain their Brazilian operation. Multinational SMEs have rather taken a lean approach to the Brazilian market and want as little upfront investment as possible before closing deals in Brazil. Unfortunately, Brazil’s legislation and Brazilians’ mindsets tend to favor multinational corporations that are willing to do a major upfront investment in the market.

1. Local Competition

Brazil is a melting pot of people and cultures. Most people will agree that Brazilians are extremely open and friendly to foreigners, and it does not matter whether you are visiting their country or relocating permanently. It is easy to misinterpret their personal friendliness towards foreigners as a general appreciation of foreign companies, but this is not the case. There is a deeply founded bias against foreign companies in Brazil. They are seen as both expensive and difficult to deal with due to time zone and language differences. This leads to a preference for products and services from local companies, even when the price is higher or the quality might be lower.

To circumvent these perceptions, multinational SMEs should not expect to make their usual margins on their first order from Brazil. Taxes can eat as much as 50% of your sales price in Brazil because you import the product or services. For a Brazilian company, it seems unfair that the additional tax burden of being an international company without operations in Brazil should affect the price they are paying.

Two simple ways of addressing the challenge of local competitors are to either find the price point of your local competitors and match them, or hire a Brazilian intern/trainee in your company to address the language differences.

2. High Import Taxes

If you ever had any doubt, import taxes are indeed extremely high in Brazil. Taxes are high in order to protect Brazil as it has an underdeveloped domestic industry. Typically, the locally produced products are of lower quality and are more expensive than what you will find abroad. Both high costs of doing business in Brazil and the unqualified work force are important sources of the problems that the domestic industry is facing. Without high import taxes on goods and services, Brazil would risk moving back into the colonial economy, when they would export commodities and import high value industrialized goods. To ensure Brazil is able to take advantages of foreign innovations, there are special schemes to reduce import tariffs or tax deductions for imported capital goods not available locally.

My previous recommendation of not having margins on your first deal in Brazil would not make much business sense without a solution for how to reduce taxes on your second deal. Any foreign company can significantly reduce the tax burden by creating value in Brazil. This means you should either subcontract to Brazilian partners or hire your own workforce in Brazil. Typically, local subcontractors can be responsible for solution assembly or highvalue, onsite work with clients.

Creating local value in combination with owning a local entity that can pay out dividends to the foreign HQ is usually the most optimal tax constellation for multinational SMEs.

3. Forming a Legal Entity
As a multinational SME, you will at some point have to form a legal entity in Brazil. The legal entity will be needed either for taxation reasons or because a client expects a Brazilian contractual partner. In many industries, it is common that Brazilian companies send out RFPs where one of the preconditions is that you operate as a Brazilian entity.

Forming a legal entity in Brazil is usually done as a limited company. In a limited company, at least two parties are required, but both parties can be foreign. However, a Brazilian entity needs a legal administrator that can be either a Brazilian citizen or a resident in Brazil. Eventually, this is the person who will be responsible for making the company comply with the Brazilian laws. The process of forming a legal entity in Brazil takes from six weeks to six months, depending on the nature of your business. Forming a legal entity for foreign service companies usually takes from 12 to 18 weeks.

When forming a legal entity, it is important to evaluate carefully which municipality will be the most beneficial for your company. Brazil has more than 5000 municipalities; each of them has a unique tax profile in terms of municipality taxes as well as in terms of refund of federal and state taxes.

THERE IS A DEEPLY FOUNDED BIAS AGAINST FOREIGN
COMPANIES IN BRAZIL

4. Dealing with Customs
Most multinational SMEs doing business in Brazil at some point will have to declare goods through Brazilian customs, including product samples, marketing material or commercial products. The golden rule is that you should never ship goods to Brazil with a value exceeding USD $500 without making sure that the recipient has the necessary import licenses for the goods in place and the necessary paperwork is processed in advance.

Having goods stuck in Brazilian customs is time-consuming and expensive. You may have to pay storage fees and large fines for undeclared or mis-declared goods. Customs agents that are located in the port where your goods should arrive are best suited to handle the import of larger goods.

Even international parcel companies like FedEx and DHL have problems getting goods like product samples and marketing material through customs in a timely manner if the correct documents are not processed in advanced.

5. Contracts and Agreements

Contracts and agreements are as important in Brazil as in American business culture. Brazilian courts are considered to be fair, and even foreign companies can expect fair resolutions of disputes. Although fair, the system is slow as a result of legal instruments used by the attorneys to delay judgment and fi nal sentences and to force unappealing decisions.

Foreign companies are often taken by surprise when they have negotiated a deal in Brazil − presenting an English contract with the Brazilian counterpart refusing to sign it.

Although your industry uses English as contractual language worldwide, it is common to run into Brazilian companies that refuse to even sign simple NDAs in English. A common workaround is to write a contract both in Portuguese and in English side-by-side and have it validated by a sworn translator.

Due to the slow processing in the Brazilian court system and Brazilians’ general skepticism against foreign companies, it is common to spend a lot of time and energy negotiating with Brazilian companies to decide in which jurisdiction a contract should be governed.

The negotiation is not only frustrating and time consuming, but it can cause you to lose the deal. The truth is that, all too many times, negotiating governing and jurisdictions have little or no practical difference.

Choosing to govern a contract in a foreign jurisdiction does not necessarily solve the problem, as a court ruling from a diff erent country will be diffi cult to enforce in Brazil. It is often possible to establish a compromise by governing contracts in a neutral jurisdiction, like the International Chamber of Commerce.

6. Money Transfers & Payments
Payments from Brazil to abroad are a challenge for Brazilians and foreigners alike. As a foreign company, you cannot open a Brazilian bank account without having a Brazilian entity in place. Clearing money out of Brazil includes a signifi cant level of bureaucracy that the Brazilian party will have to deal with. Even international banks in Brazil are not truly international; so do not be surprised if a Brazilian bank takes two weeks to clear a payment abroad.

You should not misinterpret the payment challenge as a lack of willingness to pay from the Brazilian party’s side; it is simply the way banks work in Brazil. Although your Brazilian client might have the best intentions, it’s wise to make sure that payments are due ahead of product or service delivery, as there are no simple ways to enforce payments in Brazil, even with a contract in place.

7. Security for Professionals
A primary concern for business professionals living in a safe western country is the security situation in Brazil. Th ere is no question that Brazil has a problem with crime, but the situation has improved over the last years.

Brazil is a country with huge contrasts between the rich and the poor. Th is has created an image of Brazil as an unsafe country, especially in the metropolitan cities like São Paulo and Rio de Janeiro. Although the occasional mugging happens all over the large cities, it is unlikely for a foreign business professional to visit areas where violent crime related to drug traffi cking often occurs.

From a personal security perspective, foreign business professionals should pay more attention to the danger of the traffi c than the crimes. Drunk driving is still a huge problem in Brazil, and every year more than 40,000 people die due to car accidents in Brazil.

8. Everyday Corruption
The reality of corruption in Brazil today is very different from the picture the news headlines are trying to paint. Corruption may be a problem in high-stake negotiations, but these are usually projects where foreign SMEs are excluded.

Leveraging friendships is common in Brazilian business culture and can lead to an exchange of values. Foreign businesses should not try to bribe their way through the bureaucracy or off er bribes to win a deal. However, you should seek advice about what is considered to be common practice for earning goodwill in your industry.

If you are put in a position in which you are asked to exchange bribes, you will have to consider your options carefully. Corruption happens sometimes very openly in Brazil, and you will always meet people with a hidden agenda. If you choose to pay bribes or accept bribes, there will be people who will use this against you in future negotiations.

What’s next?

The Brazilian business culture and legislation are clearly not in favor of foreign SMEs entering the market. However, there have never been better opportunities for a lean approach to the Brazilian market than the present.

Bureaucracy and language have, for a long time, been the main challenge to closing deals in the Brazilian market. Since a large part of the Brazilian population is now speaking English, new opportunities will be opening up for foreign SMEs.

My advice is to have a lean approach to the Brazilian market. Not all foreign businesses will be successful in Brazil, but with a lean approach and clear guidance from local industry specialists, any company with a competitive value proposition can successfully generate profit in the Brazilian market.

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