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7 Challenges SMES face in Brazil

The Brazil Business

Updated

26 March 2013

Over the last months we have written several articles regarding bureaucracy in Brazil. The purpose of this article is to articulate all these barriers in order to explain how they directly affect investments in the country.

How Bureaucracy Affects SMES?

As mentioned in the article “Permits and Licenses to Operate your Business in Brazil”, getting your business working in Brazil takes up to 185 days. Such slowness makes it hard for SMES to compete in the market, leaving the country in a problematic situation as right in the beginning Brazil is already way behind other BRIC members.

It is estimated that a business that would take 40 days to start operating in China would take 120 days in Brazil, leading to unfair levels of competition. Bureaucracy creates barriers to imports, exports and foreign investments, causing a negative impact to the national economy as it directly affects employment levels and economic growth.

1. Problems Getting Support from BNDES

Banco Nacional de Desenvolvimento Econômico e Social (BNDES) is an organization linked to the Department of Development, Industry and Foreign Trade. BNDES gives financial support to projects that contribute to the development of the country and is a major financing source for entrepreneurs.

Getting a loan from BNDES can be the first step to many SMES starting a business or an important project. Besides taking a long time (more than six months, in some cases) it is very expensive. Costs with notarize signatures for several declarations and certificates may add up to BRL 15.000,00 depending on the enterprise you are asking funds for.

Several documents are requested and the project is evaluated according to its contribution to society. As the evaluation of the project has got no specific deadline, all the growth plans that company had for that semester (and sometimes to that entire year) are suspended as it takes a long time until you have a clear decision regarding the concession of the funds.

2. Taxation Issues

It is estimated that when opening a company, entrepreneurs have 67% of its profit spent with taxation matters. This is the highest tax burden of all BRIC countries. Besides the cost, that by itself is already a major problem, entrepreneurs in Brazil also have to deal with the fact that Brazil has got 275000 norms regarding when, how much and how to pay your taxes.

It is impossible for an entrepreneur, regardless on how much effort he puts on having everything strictly organized, to keep track of all these taxation norms and legal procedures, even those related to work policies. The result is that several different types of fines and fees are applied and depending on the severity of the fault, it may even lead the company to go out of business.

Bureaucracy shifts priorities in the company as before actually getting into business entrepreneurs have to worry about taxation. The most problematic tax pointed out by Brazilian entrepreneurs is ICMS. The major complaint is that there is no logic in the definition of which product has the tax collected by who, as depending on the transaction the tax is collected by the supplier, by the client or by the producer. Not to mention, ICMS varies from state to state, so a company working with the manufacturing of hundreds of items and with distributors in different states will have a lot of calculation to do.

In order to keep track of all this bureaucracy, the company will have to delegate staff to work exclusively to make sure that taxes are being paid when they are supposed to. It is estimated that an entrepreneur spends 2600 hours a year to take care of all the taxation. This number is equivalent to 325 days of work. In China, the same job could be done within 55 days.

Besides the problem with the norms being so many, there is also the fact that they are constantly changing, as it will be approached in our next topic.

3. Frequent Changes in Norms and Procedures

If the norms are already too much and too complex, imagine having them frequently changed with no apparent criteria. It is common to have the Ministry of Finance establishing new rules and procedures regarding tax collection and procedures related to imports and exports in Brazil.

These changes seem to be made arbitrarily and entrepreneurs have to find their own way to deal with them. Financial institutions in charge of regulating the enforcement of these norms are very strict when it comes to punish those who do not follow them, but rarely provide any information when inquired about the procedure. In other words, they know how to point out the wrong, but refuse to explain how to make it right.

4. Additional Costs

Dealing with taxes and regulations in Brazil is so complicated that even the smaller company needs to have at least one employee in charge of it. If there is a mistake in the information provided in a form (and by mistake I mean a minor typo or an erasure), you can miss a deadline, spend time and money filling the form again and in some cases, you can actually have to pay a fine.

Besides these more direct losses and the cost of having an employee (and sometimes an entire department) working exclusively to make sure that taxes are paid and regulations are being followed , there is also the fact that the project you needed the document for will get delayed and your company will lose money.

Some companies choose to hire a broker instead of having an employee in charge of bureaucratic procedures. As brokers deal exclusively with these bureaucratic procedures, they are already familiar with the parts involved and many times can get things done in half of the time a regular employee would take.

5. Barriers to Imports

If doing business in Brazil already requires a lot of patience, entrepreneurs who do business with foreign companies need to be extra patient. Imported goods are held in the port for at least 17 days. Out of these 17 days, 8 are only to provide the proper documents. In the mean time, the average cost per container surpasses BRL 1700,00

Besides the general delay, there are also several permits and licenses that have to be presented and the foreign party participating in the trade have to write a letter proving that they are doing business with the Brazilian company. This letter has to be translated into Portuguese by a certified translator.

In 2010, the National Health Surveillance Agency (Anvisa) determined that imported medications and health products could only be commercialized in Brazil after the inspection of the supplier's plant by an Anvisa agent.

To each visit, the Brazilian company has to pay BRL 37.000,00 in advance and is expected to wait at least eight months. Such significant delay restrain the planned annual growth and its direct result is unemployment. Just to give an idea, there are currently 1000 companies waiting for Anvisa's certification, so that they can import again.

There is no clear specification on what Anvisa will evaluate when inspecting the foreign company. The only definition given by them is that foreign suppliers need to obtain the “certificate of good manufacturing practices” issued by the agency.

6. Barriers to Exports

In terms of exports, it takes at least 13 days for your goods actually leave the Brazilian territory, but besides the delay, Brazilian companies also have to deal with bureaucratic procedures that may cause serious problems in the relation between them and foreign trade partners.

Just to give an example, Brazilian companies that have the benefit of tax exemption when exporting to the US and to EU countries must fill in a document named Form A . This form is found at Banco do Brasil branches and authorized stationery stores. The problem is that there is no regulation regarding the supply of these forms and they are hard to find.

Besides form A, there are two other declarations that must be delivered and they repeat the very same information provided on form A . Recently, a third document was created and there is no formal instruction on how to fill it. When inquired about how to fill in the form, a foreign trade secretary at Ministério do Desenvolvimento, Indústria e Comércio Exterior did not know exactly what to answer. According to her, it is impossible to know the exact information to be provided in the form as it is subjected to different interpretations.

7. Delays to get a Patent

Patents exist in any serious country and have the purpose of guaranteeing the rights of intellectual property to private people and legal entities. In Brazil, patent requests are handled by NPI – National Institute for Industrial Property –, and currently, the organization has got more than 150000 patent requests on hold. It takes eight years to get a patent in Brazil.

As absurd as it sounds, the problem is that instead of having an automatized system to take care of the requests, all requests sent to INPI are filed in folders, making the access to information very slow and complicated. Another problem is that one single employee takes care of at least 550 patent requests.

With the implementation of an automatized system and the hiring of 400 hundred employees, it would be possible to reduce the waiting time in four years.