Ranked second in TMF Group's Global Business Complexity Index (GBCI) 2020 and fourth in our Rules, Regulations and Penalties report, Brazil can be a difficult market in which to do business. Here's what's contributing to the complexity.
Long incorporation times, varying regional requirements and intricate tax and accountancy rules all play a role in making Brazil a challenging compliance environment.
The Americas region is highlighted in the GBCI report as having some of the longest incorporation times for private companies and businesses can be required to interact with multiple bodies to set up. In Brazil, this process can take up to 20 business days or more, depending on the type of activity to be developed.
These delays can discourage foreign investors or multinationals from entering the market. Factors such as the type of company being established, the location of operations and the nature of business activities being undertaken can all affect the time it takes establish a presence in Brazil. In addition, national, state and city government need to be notified of company registration – a factor which contributes to Brazil's high ranking in the RRP report.
Regional nuances, local rules
Notifying multiple authorities isn't the only challenge: Brazil's regionalised structure means that the processes to follow and requirements to meet often differ between states. It can be difficult for foreign investors to grasp the nuances of these layered local compliance rules, especially as different regulations can apply to international and local businesses seeking to trade in Brazil.
For example, import legislation stipulates certain requirements for foreign companies looking to bring goods into Brazil. An entity must first be established locally, with a director in place who is a resident of the country and has both a Brazilian bank account and tax number. Failure to meet requirements such as these can frustrate a company's ability to operate in this jurisdiction and can even result in penalties or fines being awarded, the companies that don't indicate a new director, may have their registration with the Federal Revenue Service suspended until the regularization.
Tax and accountancy
A source of anxiety for international organisations is the complexity of Brazil's rules and regulations concerning accounting and tax. There are dozens of different tax regimes, and businesses must comply with tax regulations at the municipal, state and federal level.
"In spite of progress made in recent years towards digitalisation and more simplified taxes, including the launch of the digital system eSocial, Brazil remains a very complex business environment, with dozens of different tax regimes." - Rodrigo Zambon, Sub-Regional Director, TMF Brazil
To ensure that the correct amount of tax is being paid, companies must correctly identify which tax structure is applicable to their enterprise. Factors such as the classification of the entity in question and the type of business being conducted are considerations in determining this.
For some time, the Brazilian Congress has been pondering reforms to the taxation system, to make it leaner and simpler for both foreign entities and domestic businesses alike. Until meaningful changes are implemented, the tax and financial reporting landscape remains a difficult one to navigate.
Scrutiny and penalties
The Central Bank of Brazil (BCB) has adopted a more proactive stance and is increasingly scrutinising the accuracy and validity of companies' financial reporting, particularly in relation to foreign capital. The BCB has the power to apply hefty fines for incorrect reporting, so a lack of awareness on financial reporting regulations and the mandatory certifications required by the BCB could prove costly.
There are obligations that companies must observe, such as mandatory declarations on financial transactions, as well as updates throughout the fiscal year.
There are also stringent rules concerning businesses Ultimate Beneficial Owner (UBO). Since regulation was in 2017, companies are required to submit a statement identifying their UBO. This information needs to be provided to Brazil's Receita Federal (RFB) within 90 days of incorporation, whether they are Brazilian or foreign entities. Failure to do so, or incorrect reporting of UBOs, carries a severe penalty – suspension of a company's National Corporate Taxpayer Registration (CNPJ), which effectively puts a stop to the company's operations in Brazil.
Change on the horizon
At a time when governments are looking inwards to protect national interests amid the COVID-19 pandemic, they are also aware of the need to attract foreign investment to boost their economies.
In addition to relief schemes that extend deadlines for financial reporting and allow for businesses to apply for support, attempts are being made to streamline processes around compliance and incorporation in Brazil, to make this market more attractive to foreign investors.
The way in which businesses interact with authorities is being improved, with the introduction of systems such as eSocial, and the digitisation of administrative procedures such as notarisation. Owing to Brazil's regionalised structure, levels of sophistication and adoption can still vary between states.
The government has also sought to simplify the business environment and align it globally by signing international treaties. These aim to bring Brazil in line with other countries, by adopting internationally standardised requirements around the information businesses are required to provide to the authorities when incorporating or submitting financial reports.
We can help
Brazil's complex and evolving compliance environment is a difficult one to negotiate. Investors and companies looking to expand internationally and explore new opportunities in this market can easily overlook rules and regulations, and the penalties for doing so can be costly.
Our TMF Brazil experts can help you to navigate the country's compliance landscape. We can help you manage your risk and regulatory obligations to stay compliant. Our work ranges from local statutory bookkeeping to compliance filings and managing tax and reporting obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.