For many reasons, Brazil should remain an attractive, lively market for investment. KPMG’s Mark Barnes and Jarib Fogaca explain why.

Brazil continues expanding its global market presence, supported by large and well developed agricultural, mining, manufacturing, and service sectors and a growing middle class. As an increasing number of overseas companies add Brazil to their list of potential new locations, it’s worthwhile to review opportunities and challenges that may arise.
Diverse Economy Fuels Growth
In March, the Brazilian Government reported GDP growth of 7.5 percent in 2010—the highest in 25 years—and announced that the country was now the world’s seventh-largest economy. Brazil’s GDP is projected to grow another 4.5 percent in 2011 and 4.1 percent in 2012, according to the Jan. 25 IMF “World Economic Outlook Update.”

The Economist Intelligence Unit reports that when comparing Brazil to other Latin American countries, Brazilian nominal GDP in 2010 doubled that of Mexico’s, the country with the second-highest nominal GDP. Brazil is rich with natural resources/commodities; demand for these exports is high. Further, the country’s strong and growing middle class—with its disposable income and an appetite for new goods and services—makes Brazil an appealing market for companies looking to expand their customer base.

For these reasons, Brazil should continue to remain an attractive destination for foreign investors worldwide.

For example, in a recent KPMG survey, 41 percent of more than 185 business executives with current investments in Brazil said they were interested in expanding in the country. Separately, when asked to identify the primary driver for their company to invest in Brazil, 66 percent said it was expanding their customer base through access to local and regional markets.

Facts bear this out: After foreign direct investment reached US $45 billion in 2008 and dropped to US $25 billion in 2009, it increased to US $48 billion in 2010. Projections indicate that it will remain in the US $40 billion range for the next few years, according to The Economist Intelligence Unit.

For companies looking to establish or expand manufacturing operations, the country is particularly noteworthy. It is realistic to expect that Brazil’s political stability and support for business, increased consumption of goods and services by the country’s growing lower middle class, and upcoming events on the world’s stage will create opportunities for a multitude of industries to support them.

However, organizations looking to establish a presence or expand in Latin America must consider several factors:

  • Complex tax regimes
  • Range of risk
  • Governance
  • Compliance-related issues

By successfully navigating these challenges, businesses can better take advantage of opportunities in Brazil and in the region.

Political Stability and Business Support
Dilma Rousseff became president this year, taking over from mentor Luiz Inacio Lula da Silva, who completed two terms as the most popular president in the country’s history. Also, in what represented a significant milestone in the Brazil-U.S. relationship, in March she hosted U.S. President Barack Obama and a large political and commercial delegation.

Da Silva’s administration placed a sharp focus on improving the plight of the country’s impoverished. According to a Dec. 31, 2010 article in The New York Times, his government’s programs pulled more than 20 million people out of poverty and helped Brazil add 29 million people to the middle class since 2002. One way his government achieved these results was by working with businesses to create an increased number of better-paying jobs that could be done by Brazil’s poor. Several economic policies supported companies that manufacture goods in the country and, in turn, fostered job creation. For instance, the Central Bank provided financing and low interest rates for multinational companies investing in the country. Mercedes Benz received $1.2 billion Reais to help fund the expansion of its manufacturing facilities, according to Brazilian newspaper O Estado de S. Paulo (March 6, 2010). Such economic policies helped Brazil rise to sixth in global auto industry production in 2009. The country will soon rise to fifth, anticipates Anfavea and the OICA (Brazilian auto industries associations).

Da Silva handpicked Rousseff to succeed him. So, expect a continuation of da Silva’s economic policies, which triggered economic growth and increased the nation’s wealth and prosperity. “To add value to our industrial base and to expand its strength with exports will be a permanent goal,” Rousseff stated in her inaugural speech.

Growing Middle Class
Manufacturing of computers, home appliances, and consumer electronics also has proliferated, as the lower middle class continues to grow and has increasing amounts of disposable income. GDP per capita in Brazil is now more than U.S. $10,000 – the highest ever, according to International Monetary Fund data.

The channeling money to the poor (through assistance programs such as Bolsa Familia) has created a new consumer class. Since 2003, some 24 million Brazilians have arisen from absolute poverty, and 20 million have progressed into the middle class, according to Brazilian government figures. (But keep in mind, the definition of middle class is low by Western standards; a family earning between 1,115 and 4,807 Brazilian reals [BRLs] a month [$632 and $2,727, respectively] is considered middle class.)

New Opportunities: Upcoming World Events
Brazil will host two significant global sporting events: the 2014 World Cup and 2016 Olympics. These will create opportunities for various industries.

Existing infrastructure (e.g., roads and airports) must be improved. Indeed, that’s a top priority for Brazil’s growth. Manufacturers of equipment for construction-related work are likely to benefit; items such as building materials and construction vehicles will prove necessary. Investments in energy (gas, electricity, and water supply enhancements) and energy infrastructure will also be necessary. Makers of networking and communications equipment also may benefit, as their products and services will likely be required. Security-related manufacturers of scanners, cameras and other equipment could see opportunities as well.

Overcoming Challenges
Companies seeking business in Brazil face significant challenges (the aforementioned tax, risk, governance and compliance issues). For example, foreign investment must be registered with the Central Bank in Brazil, while financial statements and reports must be prepared in local currency and according to Brazilian accounting practices.

The 2007 enactment of Brazilian Law No. 11638 started the harmonization process of Brazilian accounting principles (“BR GAAP”) with international accounting standards, with the intention of fully adopting the IFRS (International Financial Reporting Standards) rules in the near future. For Brazilian publicly traded companies, the requirement to fully adopt IFRS is already in place for the year ended December 31, 2010.

In general, laws governing commerce and industry throughout Latin America (including South America) are more complex than in North America because of the interplay of Roman, Spanish and Portuguese legal systems; Brazil is no exception.

The federal, state and municipal tax regimes can also be difficult to navigate, with several different types of registrations required in each of these levels of government. In a recent KPMG survey, 52 percent of respondents identified complex and high taxation as a potential barrier to investment in Brazil. However, the various tax regimes also provide incentives and benefits for companies establishing manufacturing operations in the country. For example:

  • At the federal level, companies that bring in sophisticated types of production equipment for manufacturing purposes can claim a double depreciation rate on that equipment for tax purposes. This incentive can help increase cash flow.
  • At the state level, tax incentives are available for companies that invest in specific states. An example of one type of incentive available is a deferral of tax payments for five years without interest. Operating much like a subsidized loan, this incentive may benefit various businesses.
  • Certain cities offer incentives as well. Some offer land for manufacturing plants at a very low cost, essentially “donating” it in anticipation of the jobs and other economic benefits that will be created as a result of the business setting up operations in the area. Others offer property tax breaks in which rates will be lowered for a specified amount of time.

Assistance from professionals can help companies anticipate and manage the barriers to investment that exist, while also enhancing the benefits available to those setting up manufacturing operations in the country via tax incentives and other means.

Like every market, Brazil has its challenges. However, the country is still one of the fastest growing economies in the world and its upside and positives continue to make it an attractive market.

Mark Barnes is national leader of KPMG LLP’s U.S.-High-Growth Markets practice. Jarib Fogaca is a partner with KPMG in Brazil. Information contained in this article is of a general nature and based on authorities subject to change. Applicability of information to specific situations should be determined through consultation with a tax adviser. Views expressed are the authors’ and don’t necessarily represent views or professional advice of KPMG LLP.