Doing Business in BrazilInvestors doing business or looking to do business in Brazil must beware of the “Brazilian Cost.” Brazilian cost or Brazil cost is a term coined by economists and entrepreneurs to define the additional operational expending incurred when doing business in Brazil. The Brazil cost has its roots in three great cost centres: the extreme Brazil taxes, lack of investments in infrastructure and labor costs. Those additional costs reduce the country’s opportunity to compete with products produced abroad and are a burden to consumers in the internal market.

To illustrate how the Brazil taxes affect the product’s final price, imagine a simple retail sale. This sale contains four different types of tax in the same transaction. Now imagine an entrepreneur from abroad having to deal with mandatory systems to register, process, and pay those Brazil taxes. It is clear that the entrepreneur will be dealing with a cost burden, especially considering the time spent in paperwork, controls, systems and specialized staff.

The World Bank reports the annual time spent per country to prepare and pay the corporate income tax, sales tax and labor tax (including payroll taxes and social contributions) which illustrates the Brazil tax system complexity. The report informs that in Brazil the time spent in 2012 was 2,600 hours against 131 hours in Canada, 332 hours in China, 132 hours in France, 207 hours in Germany, 243 hours in India, 330 hours in Japan, 177 hours in Russia, 110 hours in United Kingdom and 175 hours in the United States. The substantial difference between hours spent in Brazil versus hours spent in developed countries and (Brazil, Russia, India and China) BRIC’s is an indicator that the tax system in place is time consuming and expensive. This cost allocated to Brazilian products reduces the country’s competitiveness.

Another factor that increases the Brazil cost is the infrastructure. When examining the infrastructure, consider the investments made in railroads, highways, airports and ports. The railroads according with the 2006 data has an extension of 28,000 km. It is a small system considering the country’s extension and the states covered. The services offered are mainly for ore, iron and grains.

The absence of railroads, especially in developed states, results in a shipping system concentrated in highways. The Brazilian highways suffer from an endemic lack of maintenance and expansion which  promotes high costs of transportation and a non reliable system of delivery. It is routine in the country to have deliveries delayed for days at a time. The estimated time of arrival (ETA) for merchandize, in general, is an item that logistics companies cannot achieve regularly. The blame falls in the country’s highway quality.

According to studies from Dom Cabral Foundation (FDC), companies are spending 13 per cent of their revenues in logistics costs. The long distance transportation is the one that has most contributed to the Brazilian infrastructure cost. The same scenario occurs with airports and ports. Investments to attend import and export activities were planned and budgetted by the Brazilian Government.

The new MP Ports legislation, currently at the Brazilian Congress to be voted, allows private sectors to create new rules for the concession of public ports and operate ports competing with the public ones. The Brazilian government intends to transform and modernize the industry by opening to new investors by changing the rules. The costs are expected to be reduced substantially and the operational efficiency improved. Nowadays, the average time a container stay in Santos is twelve days, compared to three in Hamburg, and the costs in place are considered exorbitant.

When analyzing the Brazilian costs, one item plays a very important role: the labour costs. They are the direct and indirect labour costs utilized by an entity to produce goods and services. Skilled workers are necessary to attend the demand for industrialized goods. At this point, the labour force available in the country is not able to attend the requirements of modern industries. The labour force available must be prepared and trained to perform the activities required. This is an additional cost that companies confront every moment in the country.

Another aspect to be evaluated by entrepreneurs, when budgeting their labor costs, are the Brazilian labour taxes including the payroll taxes, social contributions and the indirect costs derived from the labour system in place. Those costs can reach 103 per cent of the salary paid to an employee. The costs incurred in training and in labour taxes are aggravated, especially in times when the Brazilian currency is over evaluated when compared with the American dollar. The Brazilian products cannot compete with similar goods produced in Singapore, Taiwan, Mexico, China, India and East Europe.

The above brief descriptions of the three main components of the Brazilian costs are important indicators to be analyzed by entrepreneurs when deciding investments. The competition with similar products offered in the world market is a risk to be measured. On the other side, Brazil has a strong internal market 75 trillion representing 65 per cent of the Gross Domestic Product (GDP).

In 2020, it is predicted that 145 million inhabitants of a population of 207 million will be in the labor force. The population income per capita is expected to grow 30 per cent in classes A and B, and 50 per cent in classes C and D. Taking into consideration the Brazilian internal market, the policies adopted by authorities to protect the goods produced in the country, the policies to reduce Brazilian costs, investments in projects to attend the internal market are considered a reasonable option.

I welcome your questions and comments.