Egil Fujikawa Nes

Egil Fujikawa Nes

Co-Founder
The Brazil Business

Updated

Understand Brazilian Tax Incentives and Consumers once and for all

Egil Fujikawa Nes

Egil Fujikawa Nes

Co-Founder
The Brazil Business

Updated

There are not many people that can truly say they completely understand the Brazilian Tax system, neither can we. This article will give you an outside-in view of Brazilian Tax incentives and policy.

Don’t get fooled by Brazilians that keep telling you that the Brazilian tax system is impossible to understand. The Brazilian tax system might be overwhelming but the foundation is solid and when digging deep enough there is usually a logic behind each tax that is relatively easy to be understood.

This article is inspired by the outcry from Brazilian consumers complaining that high taxes in Brazil drive retail prices and how 99.9% of the population seems to believe that "Assembled in Brazil" should mean lower retail prices.

The Real Problem: Productivity

Let’s dive into the real problem right away. There are many numbers floating around trying to present a picture of Brazil’s productivity improvement. This is a controversial statistic as measuring productivity objectively is difficult, however all of them tell the exactly same story:

Brazilian productivity has not benefited proportionally from a near 100% employment rate and doubling in wages over the last 10 years.

It’s time to be realistic: the last 10% of the Brazilian workforce to get hired was probably not the most productive labor and doubling somebody's salary does not double the output delivered.

Increased productivity in Brazil will not come by getting more mediocre workers into physical labor. The increase will have to come from sophisticated equipment and increased education of the workforce.

The Hot Potato: Is Brazil Expensive?

You cannot answer yes or no to this question without having a reference point to compare with. 99.9% of all Brazilians will tell you that Brazil is extremely expensive, but compared to what?

Since the Brazilian assembled iPhone has been at the core of the consumer outcry and the symbol on how unfair Brazilian taxes are, it might be worth to do a price comparison.

We have compared the price of an unblocked iPhone 4S 16GB in several markets:

Country Local Price Price in BRL
Brazil
BRL 1778
BRL 1778
USA
USD 589
BRL 1076
UK
GBP 499
BRL 1448
Norway
NOK 5495
BRL 1748
Germany
EUR 638
BRL 1548
Russia
RUB 22 000
BRL 1372
India
INR 44 500
BRL 1588

Price comparisons tables like this fuel populist headlines like "Brazil sells the most expensive iPhone in the world". What the headline misses to mention is that Brazil is the only country in this list that has received any direct investment due to iPhone 4S.

The direct investment from iPhone 4S has brought a modern machinery to Brazil and educated the workforce on how to use it, exactly what Brazil needs to increase its productivity.

Let’s now have a look at Brazil’s most recognized industrial product, the world known Havaianas.

We have been comparing the price of an unisex single color Havaianas in several markets:

Country Local Price Price in BRL
Brazil
BRL 7.45
BRL 7.45
USA
USD 9
BRL 16.46
UK
GBP 9
BRL 26.02
Norway
NOK 249
BRL 79.21
Germany
EUR 14.90
BRL 36.17
Russia
RUB 1 200
BRL 74.88

Let us quickly point out that we have never heard an outcry between Russian nor Norwegian consumers that they have to pay 10 times more for their Havaianas than Brazilians have to.

It should not be a surprise for anybody that Brazilian flip-flops are cheapest in Brazil while German cars are cheapest in Germany and American phones are cheapest in the US.

It’s a popular understanding that when Apple moved the production of iPhones to Brazil it would be cheaper to buy iPhones in Brazil. The fact is that Apple pays about USD 5 for assembling the phone in China, so when moving assembly to Brazil any tax benefit will quickly be compensated by the added cost of Brazilian labor.

Even tough the Brazilian government was fully funding the assembly in Brazil the best thing Brazilian consumers could hope for is a price reduction of USD 5. As the components are still produced in China and the profit is still being sent to the US.

So back to the original question, is Brazil expensive?

The answer is: No, not if you compare to healthy European economies.

Why do so many Brazilians feel that things are expensive?

The Brazilian productivity is low and there are very few products of high status or superior quality that is produced by Brazilian companies and by produced we mean Invented, Designed and Sold.

Brazilians simply do not want Brazilian goods.

Because the output from Brazilian industry is mostly based in commodities, the Brazilian salaries are too low to pay the fair market price for the expensive imported goods the Brazilian consumers desire.

Although the world considers Brazil as a part of the BRIC economies Brazil is clearly the most modern and mature market of the four BRIC countries aspiring to be a fully industrialized western country.

Brazilian consumers live and compare themselves with the ideal of USA. Most Brazilian economists will agree that the US model is an unsustainable model driven by over consumption. This is why the Brazilian tax policy leans towards the model adopted by long-term sustainable economies like Germany and Norway.

So how does the Corporate Tax Incentives Works?

The big question is how can Brazil move forward. Today the only two industrialized companies from Brazil that reach any international recognition are Havaianas and Embraer. Compare this to a small country like South Korea, which dominates the international electronic market with brands like LG and Samsung.

Brazil does not steer tax incentives towards increased consumption by reducing retail prices, this would be a short-term American solution that would not bring any long-term benefits for the country.

The overall goal for Brazil is to make sure that companies like Positivo Informática and Megaware becomes the next Apple and Samsung.

President Dilma Rousseff is promising new tax relief for businesses as a solution for what Brazilian authorities consider an unbalance in the international currency market.

Along with the tax relief, the president was very clear that she expects private investors and business to take more risk and to invest into increased efficiency. Maybe the next revolution in cars will come from the first Brazilian car manufacture.

Brazilian Consumers want to be American today

Brazilians are competitive and they hate to see USA being more American than themselves. Every day they are reminded about how their future will look like once the country is catching-up. What they forget is that USA has got 80 years ahead of Brazil when it comes to being American.

While USA experienced their depression and devaluation in 1934 Brazil experienced the same devaluation as late as 2002. Looking at the Tax Foundation’s historic data for taxation in USA from 1930 - 1950 makes the current tax burden in Brazil seems modest.

Brazil will eventually be fully Americanized and it will not take 80 years.

How can foreign benefits from Brazilian tax incentives?

As Brazilian products and industry are becoming more sophisticated, it is reasonable to believe that import duties to Brazil will vanish or at least reach an European standard.

Such concessions in terms of import duties will not be made before Brazil has succeeded in a major overhaul of industrial production facilities as well as the educational system.

If you as a foreign business will take advantage of Brazilian tax incentives today, here is what you will have to do:

  • Come to Brazil with a long timeframe
  • Re-invest profit into the Brazilian operation

Brazilian incentives are all about creating local value, not commercializing foreign products and extract profit.

Already today there are a lot of tax incentives in Brazil, the most widely used being tax relief for small companies and tax waiver for hiring university students.

If we are going to believe president Dilma, there are likely to be new tax incentives for business around the corner.

Why shouldn’t consumers benefit from tax relief?

Brazilian households consume like Americans and prefer to spend on items that will enhance their short-term well being rather than save for a rainy day.

It is not American to save money and Brazil has a low saving rate fluctuated around 17 per cent of the GDP over the last decade, a number that contrasts sharply with China’s 45-50 per cent.

An annual consumption growth of 5% over the last five years shows that the current price level does not scare Brazilian consumers from spending money. Taking unnecessary tax cut that directly influences product costs at this point would only accelerate an already heated inflation level.

If Brazilian consumers really want lower taxes they will have to start saving money, a stagnation or decline in Brazilian consumption would be a clear message to Brazilian politicians that a tax relief for consumers would be need to make sure the economy does not stop.

However it is highly unlikely that Brazilian consumers will start saving like their BRIC brothers in China.

Tax incentives that benefit Brazilian consumers

In some rare occasions Brazilian consumers will directly benefit from tax incentives through maximum price schemes on products and services.

The best example on such beneficial incentive is the National Broadband Plan in Brazil. A part of this plan is to give service providers significant tax relief for services delivered under a price cap and with a specific service quality. Although the consumer does not directly benefit from the tax incentive they will indirectly benefit as the price cap was set almost 50% lower than the market price for the service at the time it was set.

Brazil is finally on track

In 1995, 15 percent of Brazilian school-age children did not go to school. In 2005, this fell to 3 percent, and today Brazil has practically achieved universal basic education.

Education tell us an important story about what’s to come: educated people increase productivity.

Brazil’s future is not dependent on the tax burden but on the productivity of the Brazilian population and their companies. It is well known that people produced best in environments with certainty and over the last 20 years there has been a certainty in Brazil.

The man who Brazilians can thank for the country we see today is the rather unknown Brazilian economist named Edmar Bacha. He was the one that introduced the basic ideas of Plano Real to the Finance Minister Fernando Henrique Cardoso, a plan which is the base for the Brazilian economy as we see it today.