Brazil Is Booming (and Maddening)

As the world's 10^th largest economy and one of the fastest to emerge from the global recession, Brazil is the hot market of the moment, and not just because of its famous beaches. With a stable currency; a growing, consumption-oriented middle class; and a gross domestic product expected to rise at 4% to 5% per year over the next 10 years, it's no surprise that Latin America's biggest market is attracting CFOs' attention: nearly one-third of finance chiefs considering international market expansion over the next two years have set their sights on Brazil, according to the Duke University/CFO Magazine Global Business Outlook Survey.

But the promise of growth — so enticing in the face of a weak recovery in the United States and Europe — doesn't come without strings attached. Finance chiefs and other experts who have been in the market for years warn that Brazil's tax and legal systems are among the world's most convoluted. A thicket of labor laws can also ensnare unsuspecting businesses, and corruption and personal security remain much more significant concerns than in more-fully developed markets.

Yet despite these serious risks, companies continue to flock to Brazil. Larry Harding, president of High Street Partners, an international business-services firm that advises companies on overseas expansion, has more clients interested in entering the country than ever before. High Street recently opened a Miami office to serve as a support hub for its growing volume of business in Brazil.

Paul Lehmann, finance chief at Overhead Door, a maker of residential and commercial garage doors, began researching the opportunities in Brazil in 2007. Although the company sells doors there through its international sales group, it has yet to establish its own subsidiary in the region. "Brazil is certainly on our radar screen," Lehmann says, "not only for its own population, but also as a portal to the rest of Latin America." Still, he notes that the country's infrastructure continues to develop, posing potential distribution challenges, and that for a small company like Overhead Door, import duties are prohibitively high. As a result, "we're hunting for joint-venture partners that would allow us to expand there." Lehmann is also considering partnerships in other Latin American countries that might provide entree to Brazil without the crippling import taxes.

"Brazil is an interesting and unique blend of opportunity and risk," says Thack Brown, CFO of SAP Latin America and a nine-year resident of the country. "The biggest advice I would give to someone looking to expand into Brazil would be to take the time to really understand the environment. You want to get into Brazil a little bit slower than you would some other more-developed, more-transparent markets."

To that end, here are a few of the most commonly cited stumbling blocks on the road to success in Brazil, and some seasoned market participants' suggestions for avoiding them.

Taxing Terrain
Finance chiefs love to complain about taxes the world over, but Brazilian taxes are in a class of their own, say many CFOs. "If it's not the most complicated tax system in the world, it's certainly right up there," says Mark Buthman, finance chief at Kimberly-Clark, the consumer packaged goods giant, which has approximately 3,000 people in its Brazilian operation. "It's not uncommon to have disagreements with the taxing authorities that you have to work through over time." Often, the existing tax rules do not apply neatly to a modern business's products or services, which can lead to misinterpretation, notes Brown.

Developing an awareness of Brazil's complex tax environment before entering the market is helpful, says Harding, but he adds that many clients don't fully understand just how complicated it can be until he walks them through some examples. "Everything in Brazil tends to have a different applicable tax rate," he says. "Even the simple fact of selling to a Brazilian customer is vastly more complicated than any other place a client might be used to." For example, "if you have a million-dollar sale as a foreign company in Brazil, there's a significant withholding tax. If you send a million-dollar invoice, you will get paid $800,000 and the other $200,000 will go off to a bunch of different places in the government," he explains. (See "No Day at the Beach" at the end of this article.)

A strong local tax team is thus a top requirement for a finance chief preparing to establish a presence in Brazil. Strong internal experts as well as sophisticated external advisers, such as an accounting firm and a law firm, are critical, says Buthman. At Kimberly-Clark, about 70 people work in the company's finance group in Brazil, and most are native Brazilians or longtime residents. "We have good access to strong, seasoned finance talent there," says Buthman, in part due to a university recruiting program.

Global consulting, law, or audit firms, and fellow CFOs who are already in the market, can provide helpful services and leads. While such expertise can be pricey, "this is a country where you should feel comfortable spending a little bit more than you might elsewhere to keep up with the tax system," says SAP's Brown. The U.S. State Department also regularly fields inquiries from companies looking to vet local service providers. The American Chamber of Commerce has a strong presence in Brazil as well.

• 1
• 2
• 3
• next »

LinkedIn Company Connections:

• High Street Partners |
• Overhead Door |
• SAP Latin America |
• Kimberly-Clark |
• Aon |
• United Technologies