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Tax planning in BrazilPosted 17/10/2019
In order to talk about tax planning in Brazil, first we have to understand how the current macroeconomic context is. It is characterized by the combination of a challenging foreign scenery, assuming the dollar’s strengthening in the international market and the bigger vulnerability of emerging economies, and of a domestic scenery that shows a recovery of the economic activity, inflation under control and gradual tax adjustment in progress following the new government of 2019.
On the external scenery, the normalization of the monetary policy of central countries is resumed in an environment of maintenance of economic growth.
The American economy follows its process of monetary policy adjustment, which is expected to last until 2020, with a robust growth of domestic activities, heated job market and gradual acceleration of inflation. On the other hand, tensions rising from the USA-China trade war continue to be a background to this scenery, bringing volatility to markets.
As a consequence, the uncertainty about a more intense deceleration of activities in China and in countries with high commercial exposure to the US has been increasing.
Besides, the fiscal matter in Italy and the Brexit deadlock are additional risk factors to be observed in the following months.
Challenging scenery for emerging countries
In general, this more challenging external scenery has been affecting emerging countries, in particular, the countries that are more dependent of foreign capital, such as Argentina and Turkey, but they can also bring changes to the scenery of other economies, such as Brazil, due to its fiscal challenges and the resumption of growth.
International accountants’ analysis
In an analysis of our international accountants, although the external picture has repercussions for Brazil’s internal scenery, the external Brazilian accounts keep a highly positive performance, with a reduced account deficit, high external investment (IDP; Investimento Direto no País, the Direct Investment into the Country) and foreign reserves of around US$ 380 billion, which puts Brazil in a more favorable situation than more fragile emerging countries; see the chart from 2015 to September 2018.
See the Brazilian Central Bank chart showing the evolution of the exchange rate
On the domestic sphere, after going through one of the longest and deepest recessions of its history, in the 2015-2016 period, the Brazilian economy has been showing signs of recovery since 2017.
If, on one hand, there’s no doubt about the recovery in progress, on the other hand, it’s been slower and more gradual than previously anticipated. In the beginning of the year, for example, the market’s expectations projected a growth of around 3,0% in 2018. The current expectation is of 1.35%, according to the Focus Market Report. For 2019, the expectation is of 2.50%.
In face of the serious fiscal and structural challenges, the resumption of the economy’s growth in 2019 is strongly supported by the assurance of the economic stability and by the increase of efficiency, through the passing of tax and microeconomic reforms. Only with a strong shock on reliability will the Brazilian economy be able to reach more robust growth rates for 2019 and beyond, in the presence of a new government which continues the reforming agenda.
The sectorial probing show that the tendency of elevation of the economic agents’ trust, which had been occurring since 2016, has lost momentum through the first semester of this year and was shaken by the truckers’ strike at the end of May.
The relative stability of the reliability indicators for the last months in a level way below the historical average indicates that the economic agents keep on standby in an environment still marked by uncertainties.
The more recent results show that the negative factors, such as the worsening of the foreign scenario and the slow rhythm of the economy continue to lower the business belief on the economic recovery.
However, the market opportunities in Brazil continue and attract new investors; this could help raise the reliability indicators. Aiming at the future, tax planning will be a strategic tendency to avoid surprises with the resumption of growth for the next years.
Currently in 2019 the Brazilian job market follows a slow recovery trajectory, with impacts on families’ consuming and, consequently, on the GDP. The recent fall of the PNADC (Pesquisa Nacional por Amostra de Domicílios; the Continuous National Household Sample Survey) unemployment rate and the positive balances of CAGED (Cadastro Geral de Empregados e Desempregados; the General Register of Employed and Unemployed Persons) throughout the last months, the unemployment rate continues around 12.0%, showing what a big challenge is to be tackled in the following yeas and how urgent are measures that aim at the economic stability and the tax adjustment, with elements favorable to the economic growth and to the job creation.
The improvement of the reliability rates holds on also due to the perspective of continuity of the policy of structural reforms of the economy.
Inflation expectations for 2019 and 2020
Inflation registered in 2017 the lowest high since 1998 (2.95%), reflecting, mainly, the food price deflation and the deceleration of services prices. In 2018, more recent market expectations point to a result that is under the 4.5% goal and expectations for 2019 and 2020 keep anchored.
The variable behavior of prices, the credibility of the monetary authority, the idleness of the Brazilian economy, as well as the passing of the spending cap amendment (EC 95/2016) have acted decisively for the anchorage of the inflation expectations.
Selic rate drop
This context allowed for the drop of the Selic rate to the lowest percentage of its historical series (6.5% a year), a number that has been kept since the beginning of the year. Recently, COPOM (Comitê de Política Monetária, the Monetary Policy Committee) stressed that the economic conjuncture still prescribes an expansive monetary policy and that this stimulus will begin to be removed gradually only if the prospective scenery for inflation in the horizon relevant to the policy, or the balance of risks, show a worsening.
For these historical reasons the tax planning needs to be well defined, and for that it is necessary that the accountancy knows the Brazilian tax panorama and presents strategies to all tax layers and how they must act to shield investors from surveillance, in a way that they don’t make mistakes and end up caught in the crosshairs.
If you are an investor, entrepreneur or businessperson and intend to commence commercial operations in Brazil, talk to the Europartner team and have a complete international accounting assistance with experience in Brazil
Our team of accountants has been in Brazil for over 15 years assisting companies from Europe, North America and Asia in establishing themselves in Brazil. Send an e-mail with your doubts and we’ll be in touch.Author's post: Europartner Accounting