Ranked second in the TMF Group’s Global Business Complexity Index (GBCI) 2020 and fourth in our Rules, Regulations and Penalties report, Brazil can be a tough market to do business with. This is what contributes to complexity.
Long incorporation times, varying regional requirements, and complex taxation and accounting rules all play a role in making Brazil a challenging compliance environment.
The American region is highlighted in GBCI report because it has the longest incorporation time for private companies and businesses to be asked to interact with multiple entities to set up. In Brazil, this process can take up to 20 working days or more, depending on the type of activity being developed.
This delay can prevent foreign investors or multinational companies from entering the market. Factors such as the type of company that is set up, the location of operations, and the nature of business activities undertaken can influence the time it takes to set up a company in Brazil. In addition, national, state and municipal governments need to be informed about company registration – a factor contributing to Brazil’s high ranking in RRP report.
Regional nuances, local rules
Telling multiple authorities isn’t the only challenge: Brazil’s regionalized structure means that the processes to follow and the requirements to meet often differ between states. It can be difficult for foreign investors to understand the nuances of these layered local compliance rules, especially since different regulations can apply to international and local businesses wishing to trade in Brazil.
For example, import laws impose certain requirements for foreign companies wishing to bring goods into Brazil. An entity must first be established locally, with a director who is a resident of the country and has a Brazilian bank account and tax ID. Failure to meet such requirements could derail the company’s ability to operate in these jurisdictions and could even result in penalties or fines being awarded, companies that do not appoint new directors may be suspended from registering with the Federal Revenue Service until such regularization.
Tax and accounting
A source of anxiety for international organizations is the complexity of Brazilian rules and regulations on accounting and taxes. There are dozens of different tax regimes, and businesses must comply with tax regulations at the city, state, and federal levels.
“Despite the progress made in recent years towards digitalization and simpler taxes, including the launch of an eSocial digital system, 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 paid, companies must identify correctly which tax structure applies to their company. Factors such as the classification of the entity concerned and the type of business carried on are taken into consideration in determining this.
For some time, the Brazilian Congress has been contemplating reforming the tax system, to make it leaner and simpler for both foreign entities and domestic businesses. Until meaningful changes are implemented, the tax and financial reporting landscape remains difficult to navigate.
Supervision and punishment
The Central Bank of Brazil (BCB) has taken a more proactive stance and is increasingly examining the accuracy and validity of corporate financial reporting, especially with regard to foreign capital. BCB has the power to impose hefty penalties for misreporting, so lack of awareness of the financial reporting regulations and mandatory certification required by BCB can be costly.
There are obligations that companies must pay attention to, such as mandatory declarations of financial transactions, as well as renewals throughout the fiscal year.
There are also strict rules regarding the Ultimate Beneficial Owner (UBO) business. Since the regulation in 2017, companies are required to submit their UBO identity statement. This information must be provided to the Brazilian Federal Receita (RFB) within 90 days of establishment, whether they are a Brazilian or foreign entity. Failure to do so, or incorrect UBO reporting, carries a severe penalty – the suspension of the company’s National Corporate Taxpayer Registration (CNPJ), effectively halting the company’s operations in Brazil.
Change on the horizon
As governments look inward to protect national interests amid the COVID-19 pandemic, they also recognize the need to attract foreign investment to boost their economies.
In addition to assistance schemes that extend deadlines for financial reporting and allow businesses to apply for support, efforts are being made to streamline processes around compliance and incorporation in Brazil, to make this market more attractive to foreign investors.
The way businesses interact with authorities is being improved, with the introduction of systems such as eSocial, and the digitization of administrative procedures such as notaries. Due to Brazil’s regional structure, the level of sophistication and adoption can still vary between states.
The government is also working to simplify the business environment and harmonize it globally by signing international agreements. It aims to bring Brazil in line with other countries, by adopting international standard requirements around which business information must be provided to authorities when entering or submitting financial reports.
We can help
Brazil’s complex and evolving compliance environment is difficult to negotiate. Investors and companies looking to expand internationally and explore new opportunities in this market can easily bypass rules and regulations, and penalties for doing so can be expensive.
We TMF Brazil experts can help you explore the country’s compliance landscape. We can help you manage your risk and regulatory obligations to stay compliant. Our work ranges from local legal bookkeeping to filing compliance and managing tax and reporting obligations.
The contents of this article are intended to provide general guidance on the subject matter. Specialist advice should be sought about your particular circumstances.