Foreword by Andrew Chilvers
Despite these uncertain times, expanding overseas can be a key driver for future growth for an ambitious business. International expansion can breathe new life into a company, drive huge value and set it on a path of continued success.
Expanding a business overseas is a strategic opportunity that will help diversify revenue streams, revitalise product development and give high returns on investment. But expanding a business into different jurisdictions takes time – this is a long distance run, not a sudden sprint to the finish line. Furthermore, expanding operations into a new jurisdiction can be fraught with challenges and risks that need to be addressed long before the first boots are on the ground.
For any company turning up in a foreign country, a multitude of tax and legal issues need to be addressed. This can be a labyrinthine experience and not for the faint hearted – but then faint hearted businesspeople seldom set their sights on overseas expansion.
Tax and compliance have to be at the top of any board’s agenda, ensuring the correct steps are taken the moment the company representatives land in-country. It’s pivotal to learn these issues to avoid any costly mistakes from the start.
What are the main government incentives available in your jurisdiction to attract multi- nationals and FDI investment?
Brazil is a very attractive market for international investors, considering it has extensive natural resources; an internal market of more than 210 million inhabitants (6th largest population in the world); a strategic geographic location, which allows easy access to other South American countries; low external debt; a diversified economy, well-anchored in international exchanges; and a favourable exchange rate against currencies such as the US dollar and the Euro, which favours exports, especially of industrial goods.
According to the United Nations Conference on Trade and Development’s list, Brazil received $75 billion in external investment in 2019, compared to $60 billion in 2018. After this increase, Brazil took the 4th position in FDI, only behind the US, with USD251 billion; China, with USD140 billion; and Singapore, with USD110 billion.
On the other hand, Brazil’s tax burden is heavy when compared to other jurisdictions. Taxation is complex and bureaucratic, and labour legislation can be considered a strict one. However, the current federal government is committed to a deep tax reform.
In relation to the international treaties, Brazil has signed 27 bilateral investment treaties (BITs) and 19 treaties with investment provisions (TIPs), showing great institutional commitment regarding FDI.
As an incentive, dividends paid by Brazilian corporations, including stock dividends and other dividends paid to foreign investors, are currently not subject to withholding income tax (WHT) in Brazil.
The currency exchange transactions carried out for the inflow of funds to Brazil in connection with FDI are subject to tax on FX transactions (IOF/FX) at a rate of 0.0% in the case of investments in the Brazilian financial and capital markets. This is also the case with acquisitions of shares of Brazilian publicly held companies, and 0.0% for the outflow of funds from Brazil related to these types of investments, including payments of dividends and interest on shareholders’ equity and the repatriation of funds invested in the Brazilian market.
What industries do you feel there are opportunities in for international investors / businesses in your jurisdiction? What factors do you think contribute to inward investment?
The infrastructure industry has historically been highly incentivized in Brazil. Transport, logistics, power generation and basic sanitation are key issues for the development of Brazil, as well as excellent business opportunities.
According to the Ministry of Economy, Treasury and Planning, Brazil today invests BRL133 billion in infrastructure industry, but it would need to reach BRL295 billion to maintain and repair the sector.
To maintain and repair ports, airports and highways, Brazil needs BRL162 billion more than it currently invests – consequently, the government encourages the private sector to invest in this type of industry.
In this context, the federal government has some tax incentive programmes, such as REIDI and REPORTO. REIDI is a special incentive scheme for infrastructure development in which the Brazilian government grants exemptions from VAT tax PIS (Social Integration Program) and COFINS (Contribution to Social Security), to infrastructure companies in the sectors of transport, ports, energy, basic sanitation and irrigation. These companies may qualify to obtain incentives through this regime for VAT tax exemption on the acquisition of any new assets.
REPORTO is a special regime that incentivises the modernization and expansion of the port infrastructure, granting exemption from Tax on Industrial Products (IPI) and tax on imported assets and services.
There are other economic incentives in Brazil, specifically regarding technological development, which provide an effective tool to stimulate business performance in technology and innovation, providing direct tax benefits and effective cash gains.
Why is it important to hire a local firm to support international expansion? How can you help smooth the process for your clients and overcome common pitfalls?
When planning for international expansion, finding a balance between global and local advice at each new jurisdiction is a fundamental part of sound risk management. No one knows the business as well as its trusted advisors, and no one knows a new market as well as qualified local advisors. For the benefit of the client, both teams should be able to work well in coordination in order to provide strategic legal advice that is both useful and objective, in the most efficient way possible.
Organizations looking to expand internationally cannot do so without having a clear understanding of a new market’s critical laws and regulations that will apply to all relevant aspects of their business. Those that are part of legal, compliance, and risk structures of such organizations know that the process of finding and retaining the right local advisors might not be quick or easy. For companies that cannot afford to wait for the lengthy conflict checks and, later, to pay for the large overhead costs of global firms, having a trustworthy reference network can be very helpful.
This is how companies such as a Norwegian telecoms carrier were able to expand into new markets such as former Soviet Union and Asian emerging countries. For this specific company, an example that has become – literally – a business-case, is how it entered the Myanmese market by successfully managing the relevant local risk concerns involved.
This was achieved by this telecom’s ability to coordinate a centralized risk based approach with consistent local legal and compliance advice. This is no small feat considering that the concerns involved ranged from a legacy of corruption and political instability, to an estimated 50% of all potential suppliers and business partners being included in international sanction lists.