Overview of Foreign Investment Climate
Brazil is open to and encourages foreign investment. According to a 2009 United Nations report, Brazil is the largest foreign direct investment (FDI) recipient in Latin America, and attracted an estimated USD 42 billion in 2008 (The Brazilian Central Bank reported a slightly higher figure of USD 45 billion). The global financial crisis reduced FDI in most regions of the world in 2009, including in Brazil, where according to the Central Bank, 2009 FDI dropped to USD 25.9 billion. Incoming foreign investment to Brazil is expected to recover in 2010. The United States is a major foreign investor in Brazil. FDI is prevalent across Brazil’s economy, although certain sectors, notably media and communications, aviation, transportation and mining, are subject to foreign ownership limitations. While Brazil is generally considered a friendly environment for foreign investment, burdensome tax and regulatory requirements exist. In most cases these impediments apply without discrimination to both foreign and domestic firms. The Government of Brazil makes no distinction between foreign and national capital.
The global economic crisis cut Brazil’s GDP growth from 5.1 percent in 2008 to a current estimate of essentially flat or slightly negative growth for 2009. Despite this decline in immediate prospects, Brazil weathered the crisis better than most major economies and by the end of 2009 was in a recovery position, bolstered by strong domestic demand and a growing middle class. Conservative macroeconomic policies in the years prior to the crisis, and targeted responses during the crisis -- including credit injections in the financial system, easing monetary policy, and tax cuts on automobiles and consumer durables -- played a role in lessening the impact of the global crisis on Brazil. Growth in 2010 is expected to return to approximately five percent.
Banking: Brazil’s banking sector includes significant foreign investment and representation. While the Constitution of 1988 technically forbids new or expanded foreign investment in the banking sector, the vast majority of requests for entry or expansion have been approved on a case-by-case basis. Recent Brazilian Central Bank figures report that in September 2009 foreign banks comprised 22 of the top 50 Brazilian banks in terms of total assets, representing 19.5 percent of total financial assets less brokerage.
Insurance: Since 1996 the insurance sector has been open to foreign investors with most major U.S. firms represented via joint venture arrangements. In 2007, Complementary Law 126 was published in Brazil eliminating the previous state monopoly on reinsurance through the government-owned Brazil Reinsurance Institute (IRB), which had been in place since 1939.
Privatization: Foreign investment has played a significant role in Brazil’s privatization programs. From the early 1990s through 2009, Brazil’s privatizations realized USD 87.9 billion in sales revenue and another USD 18.1 billion in debt transfer. Foreign investment accounted for about USD 42.0 billion, or 48 percent of the total. Of this foreign investment participation, U.S. investors accounted for one third or USD 14.0 billion. After a slowdown in privatization activity in the early 2000s, the Lula administration, which came to power in 2003, revived the program with three important transactions: the 2004 privatization of the State Bank of Maranhao for USD 26.6 million, the 2005 privatization of the State Bank of Ceara for USD 297.9 million, and the 2006 privatization of Paulista Electric Energy Transmission Company for USD 230 million. In 2007 and 2008, large scale infrastructure projects were auctioned, including federal highways, high speed rail, and airports. Additional infrastructure privatization activity is planned for 2011-2015.
Ownership Restrictions: A 1995 constitutional amendment terminated the distinction between foreign and local capital in general, yet there are laws that restrict foreign ownership within some sectors, notably media and communications, and aviation.
Foreign investment restrictions remain in a limited number of other sectors, including highway freight (20 percent) and mining of radioactive ore. Foreign ownership of land within 150 km of national borders remains prohibited unless approved by Brazil's National Security Council. In October 2009, the Brazilian Chamber of Deputies approved legislation that would further restrict foreign ownership of land along Brazil’s borders, and within the Amazon. The legislation still requires committee review and passage in the Brazilian Senate, followed by presidential approval to become binding.
Media: Open broadcast (non-cable) television companies are subject to a regulation requiring that 80 percent of their programming content be domestic in origin. Additionally, Law 10610 (2002) limits foreign ownership in other media, including open broadcast and print media outlets, to 30 percent. Congressional legislation introduced in 2007 may liberalize foreign ownership in other electronic communication formats, but has not yet been passed. Foreign ownership of cable companies is limited to 49 percent, and the foreign owner must have a headquarters in Brazil and have had a presence in the country for the previous ten years. National cable and satellite operators are subject to a fixed title levy on foreign content and foreign advertising on their channels.
Aviation: The Government of Brazil currently restricts foreign investment in domestic airline companies to a maximum of 20 percent. In May of 2009, Brazil’s Civil Aviation Regulatory Agency (ANAC) proposed increasing foreign ownership in Brazilian airlines to 49 percent, and facilitating quicker entry of new airlines into the Brazilian market. These proposals may be approved by the Brazilian Congress in 2010. The Government of Brazil is considering potential privatization of commercial airport operations. The United States and Brazil liberalized cargo and passenger services in June 2008 and committed to further liberalization discussions by 2010.
Investment Goals: In May 2008, Brazil published the Productive Development Policy which encourages technological innovations and new investment opportunities in the country. It sets targets for investment spending to reach 21 percent of GDP and private investment in R&D to reach 0.64 percent of GDP by 2010. It also sets goals to increase Brazil’s share of exports to 1.25 percent of the global total and increase the number of small export businesses.
Selected Indicators from reputable third party sources:
Measure Year Brazil’s Rank/Total
TI Corruption Perceptions 2009 75/180
Heritage Economic Freedom 2009 105/179
World Bank Ease of Doing Business 2010 129/183
Conversion and Transfer Policies
There are few restrictions on converting or transferring funds associated with a foreign investment in Brazil. Foreign investors may freely convert Brazilian currency in the unified foreign exchange market wherein buy-sell rates are determined by market forces. All foreign exchange transactions, including identifying data, must be reported to the Central Bank. Foreign exchange transactions on the current account have been fully liberalized.
Foreigners investing in Brazil must register their investment with the Central Bank within 30 days of the inflow of resources to Brazil. Registration is done electronically. Investments involving royalties and technology transfer must be registered with Brazil’s patent office, the National Institute of Industrial Property (INPI). Investors must also have a local representative in Brazil. Portfolio investors must have a Brazilian financial administrator and register with the Brazilian Securities Exchange Commission (CVM).
All incoming foreign loans must be approved by the Central Bank. In most instances, the loans are automatically approved. Automatic approval is not issued when the costs of the loan are “not compatible with normal market conditions and practices.” In such instances, the Central Bank may request additional information regarding the transaction. Foreign loans obtained abroad do not require advance approval by the Central Bank, provided the recipient is not a government entity. Loans to government entities, however, require prior approval from the Brazilian Senate as well as from the Finance Ministry Treasury Secretariat, and must be registered with the Central Bank.
Interest and amortization payments specified in a loan contract can be made without additional approval from the Central Bank. Early payments can also be made without additional approvals, if the contract includes a provision for them. Otherwise, early payment requires notification to the Central Bank to ensure accurate records of Brazil’s stock of debt.
Foreign investors, upon registering their investment with the Central Bank, are able to remit dividends, capital (including capital gains), and, if applicable, royalties. Remittances must also be registered with the Central Bank. Dividends cannot exceed corporate profits. The remittance transaction may be carried out at any bank by documenting the source of the transaction (evidence of profit or sale of assets) and showing that applicable taxes have been paid.
Capital gain remittances are subject to a 15 percent income withholding tax, with the exception of the capital gains and interest payments on tax exempt domestically issued Brazilian bonds. Repatriation of the initial investment is also exempt from income tax. Lease payments are assessed a 15 percent withholding tax. Remittances related to technology transfers are not subject to the tax on credit, foreign exchange, and insurance (IOF), although they are subject to a 15 percent withholding tax and an extra 10 percent Contribution of Intervention in the Economic Domain (CIDE). Loans with terms of 90 days or less must pay the IOF (5.38 percent), while those of longer maturity, profits and FDI remittances must pay 0.38 percent.
Foreign cable and satellite television programmers are subject to an 11 percent remittance tax; however, the tax can be avoided if the programmer invests 3 percent of its remittances in co-production of Brazilian audio-visual services.
In October of 2009 the Brazilian government imposed a two percent IOF tax on capital inflows by foreigners for portfolio investment. The IOF, however, does not apply to direct investment inflows. In November of 2009 the government instituted a 1.5 percent tax when foreign investors convert American Depositary Receipts (ADRs) for Brazilian companies into receipts for shares issued locally in Brazil.
Brazil’s relatively strong recovery from the 2008 financial crisis helped to appreciate the Brazilian Real currency over 30 percent against the U.S. dollar in 2009. In particular, Brazil’s growing initial public offering (IPO) pipeline, high carry yields, and strong economic growth expectations supported the appreciating Real. In early 2010, the Real traded at 1.7 Reais/USD, and is expected to stay at approximately this rate for the remainder of the year.
Expropriation and Compensation
There have been no expropriation actions in Brazil against foreign interests in the recent past, nor have there been any signs that the current government is contemplating such actions. In the past, some claims regarding land expropriations by state agencies have been judged by courts in U.S. citizens' favor. However, compensation has not always been paid as states have filed appeals to these decisions, and the Brazilian judicial system moves slowly.
The Brazilian court system, in general, is overburdened and contract disputes can often take years to move through the system. The 2010 World Bank “Doing Business” survey found that on average it takes 45 procedures and 616 days to litigate a contract breach at an average cost of 16.5 percent of the claim. Judicial reform measures enacted in December 2004, however, have streamlined some administrative procedures, and the introduction of the concept of binding precedent should, over time, make judicial decisions more predictable.
Article 34 of Brazilian Law 9.307, the 1996 Brazilian Arbitration Act, defines a foreign arbitration judgment as any judgment rendered outside the national territory. The law established that the Brazilian Federal Supreme Court must ratify foreign arbitration awards. Law 9.307 also stipulates that the foreign arbitration award is to be recognized or executed in Brazil in conformity with the international agreements ratified by the country and, in their absence, with domestic law. (Note: A 2001 Federal Supreme Court ruling established that this 1996 Brazilian Arbitration Act, permitting international arbitration subject to Federal Supreme Court ratification of arbitration decisions, does not violate the Federal Constitution’s provision that “the law shall not exclude any injury or threat to a right from the consideration of the Judicial Power.”)
Brazil has ratified the 1975 Inter-American Convention on International Commercial Arbitration (Panama Convention), the 1979 Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitration Awards (Montevideo Convention) and the 1958 U.N. Convention on the Recognition and Enforcement of Foreign Arbitration Awards (New York Convention). Brazil, however, is not a member of the International Center for the Settlement of Investment Disputes (ICSID), also known as the Washington Convention.
Brazil has a functional commercial code that governs most aspects of commercial association, except for corporations formed for the provision of professional services, which are governed by the civil code. In 2005, bankruptcy legislation (Law 11101) went into effect creating a system, modeled on Chapter 11 of the U.S. bankruptcy code, which allows a company in financial trouble to negotiate a restructuring with its creditors outside of the courts. In the event a company does fail despite restructuring efforts, the reforms give creditors improved ability to recover their debts.
Brazil has both a federal and a state court system and jurisprudence is based on civil law. Federal judges hear most disputes in which one of the parties is the State and rule on lawsuits between a foreign State or international organization and a municipality or a person residing in Brazil. Five regional federal courts hear the appeals of the federal judge decisions.
Performance Requirements and Incentives
The Brazilian government uses a variety of tax incentives and attractive financing through the National Bank for Economic and Social Development (BNDES)to actively encourage both national and foreign investment in traditionally underserved regions of the country and other potentially marginally profitable ventures. The Southeast has benefited the most from these initiatives having received 53 percent of funds distributed by BNDES for this purpose with the South receiving 16 percent, the Northeast 15, the Mid-West 8, and the North 8. The vast majority of the funding (82 percent) has gone to large companies versus medium or small companies. A 2004 Public-Private Partnership (PPP) investment law promotes joint ventures in otherwise marginally profitable infrastructure investments. The federal government has not yet put out any PPP projects for public bids.
In 2007, the Brazilian government launched the Program to Accelerate Growth (PAC) with the goal of using government resources to attract private sector investment to improve Brazil’s infrastructure. To date, however, implementation of the PAC has been slow although major projects are in process throughout the country. Attracting foreign investment to fund infrastructure projects, including via the PAC, continues to be a government priority.
The Government of Brazil extends tax benefits for investment in less developed parts of the country, for example the Northeast and the Amazon regions, with equal application to foreign and domestic investors. These incentives have been successful in attracting major foreign plants to areas like the Manaus Free Trade Zone, but most foreign investment remains concentrated in the more industrialized southern part of Brazil. Individual states have sought to attract investment by offering ad hoc tax benefits and infrastructure support to specific companies, negotiated on a case by case basis. These have proven controversial, with other states challenging them as harmful fiscal competition. A tax reform proposal attempting to limit states’ ability to offer special tax incentives to attract investment away from other states has been awaiting Congressional action since August 2009.
In 2007, Brazil restored tax breaks to exporters with the enactment of Law 11529 with the stated intention to help industries hurt by the strengthening Real. This law allows certain Brazilian industrial sectors (textiles, furniture, ornamental stones, woodworking, leatherworking, shoes, leather goods, heavy and agricultural machinery manufacturers, apparel and automotive - including automotive parts) to apply PIS-COFINS (social integration program) tax credits for the purchase of capital goods, both domestic and imported, that are used for manufacturing finished products. The law also expands the government's program to exporting companies purchasing capital goods. To be exempt from paying the 9.25 percent PIS-COFINS tax on these purchases, companies normally must prove they derive at least 70 percent of their revenues from exports. This benchmark was lowered to 60 percent for companies in the sectors covered by the legislation.
In November of 2009, the Ministry of Communications (MOC) unveiled a national plan for broadband infrastructure development that would be dependent on private sector investment. Under the proposal, PIS-COFINS and other tax breaks, and attractive lines of credit from BNDES would be offered to IT companies participating in broadband infrastructure development. The government of Brazil is currently evaluating the MOC proposal.
To promote Brazilian industry, the Special Agency for Industrial Financing (FINAME) of BNDES provides financing for Brazilian firms to purchase Brazilian-made machinery and equipment and capital goods with a high level of domestic content. The interest rates charged by BNDES are often lower than the prevailing market interest rates for domestic financing.
Brazil is not a signatory to the WTO Agreement on Government Procurement (GPA), and transparency in Brazil's procurement processes is at times lacking. U.S. companies have found it difficult to participate in Brazil’s public sector procurement unless they are associated with a local firm. Without a significant in-country presence, U.S. companies regularly face significant obstacles in winning government contracts and are often more successful in subcontracting with larger Brazilian firms.
Law 8666 (1993) covers most government procurement other than information technology/telecommunications and requires non-discriminatory treatment for all bidders regardless of nationality or origin of the product or service. Brazilian government procurement rules apply to purchases by government entities and state-owned companies. Brazil has an open competition process for major government procurements. By law, the Brazilian government may not make a distinction between domestic and foreign-owned companies during the tendering process; however, when two equally qualified vendors are considered, the law’s implementing regulations provide for a preference to Brazilian goods and services. Under Brazilian law, price is to be the overriding factor in selecting suppliers. However, the law's implementing regulations also allow for the consideration of non-price factors, giving preferences to certain goods produced in Brazil and stipulating local content requirements for fiscal benefits eligibility. Additionally, nearly all bids require establishment of a local representative for any foreign company bidding.
Regulations allow a Brazilian state enterprise to subcontract services to a foreign firm only if domestic expertise is unavailable. Additionally, U.S. and other foreign firms may only bid to provide technical services where there are no qualified Brazilian firms available.
Decree 1070 (1994), which regulates the procurement of information technology goods and services, requires federal agencies and parastatal entities to give preferential treatment to locally produced computer products based on a complicated and nontransparent price/technology matrix. However, Brazil permits foreign companies that have established legal entities in Brazil to compete for procurement-related contracts funded by multilateral development bank loans.
Right to Private Ownership and Establishment
Foreign and domestic private entities may establish, own, and dispose of business enterprises.
Protection of Property Rights
Brazil has a system in place for mortgage registration, but implementation is uneven and there is no standardized contract. Foreign individuals or foreign-owned companies can purchase real property in Brazil. These buyers frequently arrange alternative financing in their own countries, where rates may be more attractive. Law 9514 (1997) helped spur the mortgage industry by establishing a legal framework for a secondary market in mortgages and streamlining the foreclosure process, but the mortgage market in Brazil is still underdeveloped and foreigners may have difficulty obtaining mortgage financing. Large U.S. real estate firms, however, are expanding their portfolios in Brazil.
Intellectual Property Rights
Brazil is a signatory to the GATT Uruguay Round Accords, including the Trade Related Aspects of Intellectual Property (TRIPs) Agreement, signed in April 1994. Brazil is a signatory of the Bern Convention on Artistic Property, the Patent Cooperation Treaty, the Convention on Plant Variety Protection, and the Paris Convention on Protection of Intellectual Property.
Brazil is not a party to the WIPO Copyright Treaty or the WIPO Performances and Phonograms Treaty (collectively, the "WIPO Internet Treaties"). In 2006, Brazil announced plans to join the Madrid Agreement Concerning the International Registration of Marks ("Madrid Protocol"), but the executive branch has yet to submit this proposal to the Brazilian Congress for approval.
In most respects, Brazil’s 1996 Industrial Property Law (Law 9279) meets international standards specified in the TRIPs Agreement regarding patent and trademark protection. However, the law permits the grant of a compulsory license if a patent owner has failed to locally manufacture the patented invention in Brazil within three years of patent issuance, a form of compulsory licensing that the United States believes would be inconsistent with Articles 27.1 and 28.1 of TRIPs. On May 4, 2007, invoking TRIPS provisions for public health emergencies, Brazil issued a compulsory license for an anti-retroviral drug used in treating HIV/AIDS.
The United States continues to raise concerns regarding Brazil’s Law 10196 (2001), which includes a requirement for National Health Surveillance Agency (ANVISA) approval prior to the issuance of a pharmaceutical patent. On June 23, 2008, ANVISA issued Resolution RDC 45 standardizing, to some extent, the procedures for review of such patent applications. Nonetheless, ANVISA’s role in reviewing pharmaceutical patent applications remains non-transparent and has contributed to an increasing backlog in the issuance of patents. On October 16, 2009, the Brazilian Federal Attorney General (AGU) presented Opinion No. 210 stating that ANVISA should examine pharmaceutical patent applications only from a public health perspective. The opinion states that the National Institute of Industrial Property (INPI) is the only agency with the competency to review the patentability requirements of such applications. The AGU non-binding opinion has been submitted to Brazil’s Office of the President for analysis.
Transparency of the Regulatory System
In the 2010 World Bank “Doing Business” report, Brazil ranked 129th out of 183 countries in terms of overall ease of doing business. According to the study, it takes an average of 16 procedures and 120 days to start a new business. The study noted that the annual administrative burden to a medium-size business of tax payments in Brazil is an average of 2,600 hours versus 194 hours in the high-income (OECD) economies. According to this same study, the total tax rate for Brazil’s medium-sized business is 69.2 percent of profits, compared to 44.5 percent in the OECD countries.
Tax regulations, while burdensome and numerous, do not differentiate between foreign and domestic firms. However, there have been instances of complaints that the value-added tax collected by individual states (ICMS) favors local companies. Although the tax is designed to be refunded upon export of goods outside of the country, exporters in many states have had difficulty receiving their ICMS rebates. Taxes on commercial and financial transactions are particularly burdensome, and businesses complain that these taxes hinder the international competitiveness of Brazilian products. A government proposal to streamline the tax collection system is currently under consideration by the Brazilian Congress, but remains stalled.
ANVISA, the Brazilian FDA equivalent, has regulatory authority over the production and marketing of food, drugs and medical devices. ANATEL, the country's telecommunication agency, handles licensing and assigns bandwidth. ANP, the National Petroleum Agency, has been commended by the industry for its fair handling of auctions of oil exploration blocks and for its willingness to support the simplification of regulatory procedures such as environmental licensing. However, following the discoveries of new oil reserves in late 2007, auctions have been discontinued for off-shore blocks as the government deliberates over a new regulatory structure for the oil and gas sector.
The civil aviation regulator (ANAC) began functioning in 2006 with a mandate to increase competition within Brazil’s civil aviation industry. Taking over responsibilities that had previously resided with the Brazilian Air Force, ANAC has begun to take steps to liberalize the Brazilian market, although court challenges have slowed some proposed initiatives such as price liberalization that was intended to be phased in over 2009.
Foreign investors have encountered obstacles when interfacing with regulatory agencies. Notable examples include companies in the electric power sector that have complained about the high level of regulatory risk, for example the tariff review process and the implementation of Brazil's new proposed energy model. Additionally, some industries have reported challenges in obtaining licenses from IBAMA, the environmental regulator, citing unpredictability in IBAMA’s licensing requirements, though the process has reportedly become more streamlined since 2008. Brazilian private sector organizations, which often include foreign companies, are vocal and involved in industry standards setting.
A bill (PL 3937/04) to modernize Brazil’s antitrust review and to combine the antitrust functions of the Ministry of Justice and the Ministry of Finance (MoF) into those of the Administrative Council for Economic Defense (CADE) passed the Chamber of Deputies in December 2008. The bill, which would also revise the country’s licensing and anti-cartel system, is currently awaiting consideration by the Senate.
Recent Concerns over Proposals and Legislation Regulating Business Operations
In 2009, the Brazilian government proposed an overhaul of Brazil’s oil regulatory system in order to allow greater government take and control in the promising deep water oil reserves found off Brazil’s coast. The new regime would replace Brazil’s former concessions model with a production sharing system. The legislation proposed by the government is divided into four bills which establish the production sharing regime, create a new government entity to represent the government in any agreements, give sole operator status to the parastatal oil company Petrobras and allow the government to capitalize it, and establishes a social fund to administer the government’s proceeds. Private industry has concerns about the proposal, with some noting a preference for maintaining the current system. The legislation is currently before the Brazilian Congress.
In late 2009, the Ministry of Mines and Energy previewed a proposal to replace the code for the regulatory framework for minerals in order to provide more sovereign control over mineral resources. In addition to changes to the terms of concession contracts, the proposal would create a National Council of Mineral Resources to function both as a minerals regulator and advisory body to the President and would raise the royalties on mineral production. Private industry has expressed concerns that the proposal may impact competition within the industry. The proposal has not yet moved to the Brazilian legislature for consideration.
U.S. express delivery service (EDS) companies face significant challenges in the Brazilian market due to numerous limitations established by the Brazilian government such as high import taxes, a new, partially functioning automated express delivery clearance system, low maximum value limits for express export and import shipments, and the possible approval of a damaging postal reform law that could undermine current levels of market access for private EDS companies.
Brazil enacted a law in December 2008 (Decree 6523 - SAC) that implements numerous new requirements for customer support and call centers operating in Brazil. The provisions of the law are perceived as onerous and operationally intrusive to private business. Among the laws many provisions are the requirements that a company operate customer service call centers 24 hours a day, year round, and an obligation to record and store call data. The enforcement of the decree and sanctions for noncompliance are covered under article 56 of Law 8078, adopted in 1990.
All proposed federal legislation is available to the general public via the internet.
Chamber of Deputies: http://www2.camara.gov.br/proposicoes
Federal Senate: http://www.senado.gov.br/sf/atividade/default.asp
Efficient Capital Markets and Portfolio Investment
The Brazilian financial sector is large and sophisticated. Banks lend at the Brazilian market rate which remains extremely high due to taxation, repayment risk, a lack of judicial enforcement of contracts, high mandatory reserve requirements, and administrative overhead.
The financial sector is concentrated, with 2009 Central Bank data indicating that the 10 largest commercial banking institutions account for approximately 84.4 percent of financial sector assets, less brokerages (approx. USD 1.54 trillion). Two of the five largest banks (in assets) in the country are federally owned. Lending by the large banking institutions is focused on the largest companies, while small and medium banks primarily serve small and medium-sized companies, but with a much smaller capital base.
The Central Bank has strengthened bank audits, implemented more stringent internal control requirements, and tightened capital adequacy rules to better reflect risk. It also established loan classification and provisioning requirements. These measures are applied to private and publicly owned banks alike. The Brazilian Securities Exchange Commission (CVM) independently regulates the stock exchanges, brokers, distributors, pension funds, mutual funds, and leasing companies with penalties against insider trading.
BNDES, the government national development bank, is the primary Brazilian source of longer-term credit, and also provides export credits. FINAME (the Special Agency for Industrial Financing) provides foreign and domestic companies operating in Brazil financing for the manufacturing and marketing of capital goods. FINAMEX (Export Financing), which finances capital good exports for both foreign and domestic companies, is a part of FINAME. One of the goals of these financing options is to support the purchase of domestic over imported equipment and machinery.
PROEX, an export credit program financed by the National Treasury offers assistance in the areas of interest rate equalization, capital and other goods exports, and service exports (See OPIC and Other Investment Insurance Programs section for more information on credit availability).
As of 2000 all stock trading is performed on the Sao Paulo Stock Exchange (BOVESPA), while trading of public securities is conducted on the Rio de Janeiro market. In 2008, the Brazilian Mercantile & Futures Exchange (BM&F) merged with the BOVESPA to form the form the second largest exchange in the Western Hemisphere. BOVESPA has launched a "New Market," in which the listed companies comply with stricter corporate governance requirements. In June 2004, BOVESPA’s new market had 18 listed companies; by 2008 there were 105. (Note: A majority of the Initial Public Offerings are listed on the New Market). In 2009, there were six new IPOs representing R$ 7.5 billion in raised capital; approximately 70 percent of this amount was foreign capital.
The total number of companies listed on the BOVESPA has modestly grown over recent years, though 2009 reversed the trend. The year ended with a reduction in the total number of companies. There were 394 companies in 2006, 424 in 2008, but the total was reduced to 386 by the end of December 2009. Total daily trading volume rose from R$ 2.4 billion in 2006 to R$ 5.3 billion in 2009. Trading is highly concentrated with the top ten stocks accounting for 50 percent of 2009’s trading volume. A total of 79 Brazilian firms are also listed on the NYSE via American Depository Receipts (ADR's). Conversely, the Brazilian subsidiaries of some U.S. companies have issued shares on the BOVESPA.
Foreign investors, both institutions and individuals, can directly invest in equities, securities and derivatives. Foreign investors are required to trade derivatives and stocks of publicly held companies on established markets. At year-end 2009, foreign investors accounted for 34.2 percent of the total turnover on the BOVESPA. Individual investors were the second most active category of market participants, accounting for 30.5 percent of BOVESPA transactions, while domestic institutional investors accounted for 25.7 percent. In addition, financial institutions accounted for 7.4 percent, and companies accounted for 2.1 percent. In 2001, law 10303 went into effect limiting preferred shares for new issuances to 50 percent and strengthening rights for minority shareholders.
Brazilian law recognizes mergers and consolidations. Although the stock market is growing in popularity, sales of Brazilian companies usually result from private negotiations, rather than stock exchange activities. Acquisitions resulting in market concentration in excess of 20 percent are subject to review by the Administrative Council for Economic Defense (CADE) under Brazil's 1994 Anti-trust Law.
Wholly owned subsidiaries of multinational accounting firms, including the major U.S. firms, are present in Brazil. As of 1996, auditors are personally liable for the accuracy of accounting statements prepared for banks.
Competition from State Owned Enterprises
Since the early 1990’s, the Brazilian government has aggressively privatized state enterprises across a broad spectrum of industries, including mining, steel, aeronautics, banking, energy, and electricity generation and distribution. While the government has divested itself from many of its state-owned companies, it maintains partial control (at both the federal and state level) of previously wholly state-owned enterprises. Notable examples of partially federally-controlled firms include energy giant Petrobras and power utility Eletrobras. Both Petrobras and Eletrobras include non-government shareholders, are listed on both the Brazilian and NYSE stock exchanges, and are subject to the same accounting and audit regulations as all publicly traded Brazilian companies.
In addition to major players like Petrobras and Eletrobras, the Brazilian government, at both the federal and state level, maintains ownership interests in a variety of other smaller enterprises. Typically, corporate governance is led by a board comprised of directors elected by the state or federal government with additional directors elected by the other non-government shareholders. Brazilian enterprises with state ownership are concentrated in the energy, electricity generation and distribution, transportation, and banking sectors. Many of these firms are also publically traded companies on the Brazilian and other stock exchanges.
Recent potentially large deep sea oil discoveries in Brazil’s pre-salt coastal regions prompted 2009 legislative proposals that would extend government control and regulation over oil exploration and potentially reduce the private sector’s role. Although any private enterprise, including foreign entities, would be allowed to compete with public enterprise to secure future oil blocks, the terms and conditions may favor Petrobras. The Brazilian Congress is expected to vote on the legislation in 2010.
In December of 2008, the Brazilian Ministry of Finance established a sovereign wealth fund (SWF) with initial capital of R$ 14.2 billion financed through a government bond issuance. Brazil’s SWF is managed by the Fiscal Investment and Stabilization Fund (FFIE), a vehicle established for the sole purpose of managing the fund. The FFIE is structured similarly to any other financial fund manager in Brazil and subject to the same regulatory and transparency guidelines, including external and independent auditing. The SWF was designed to be an anti-cyclical tool to help absorb the impacts of financial downturns. There are no material restrictions on how the SWF can be used, apart from the fact that it must maintain a tolerable risk profile. Currently the SWF is entirely domestically focused, but international investment is permitted. Detailed public information relating to the SWF is available on a Ministry of Finance website, and the Brazilian Congress receives regular performance reports.
Corporate Social Responsibility
Most state-owned and private sector corporations of any significant size in Brazil pursue corporate social responsibility (CSR) activities. Many corporations support local education, health and other programs in the communities where they have a presence. Brazilian consumers, especially the local citizenry where a corporation has or is planning a local presence, expect CSR activity. It is not uncommon that corporate officials will meet with community members prior to building a new plant or factory to review what types of local services the corporation will commit to providing. Foreign and local enterprises in Brazil often advance United Nations Development Program (UNDP) Millennium Development Goals (MDGs) as part of their CSR activity, and will cite their local contributions to MDGs such as universal primary education and environmental sustainability.
The U.S. Diplomatic Mission in Brazil supports American business CSR activities through the +Unidos Group (Mais Unidos), a partnership between the U.S. Agency for International Development (USAID) and American companies established in Brazilian territory. Additional information on how the partnership supports public and private alliances in Brazil can be found on their website: www.maisunidos.org.
Political and labor strikes and demonstrations occur sporadically in urban areas and may cause temporary disruption to public transportation. Naturally, protests anywhere in the world have the potential to become violent. In addition, criminal organizations in Sao Paulo occasionally stage campaigns against public institutions. While it is unlikely that U.S. citizens would be targeted during such events, U.S. citizens traveling or residing in Brazil are advised to take common-sense precautions and avoid any large gatherings or any other event where crowds have congregated to demonstrate or protest. Transnational crime is known to occur in Brazil involving individuals with ties to criminal entities active in the trafficking of illicit goods.
Colombian terrorist groups have been known to operate in the border areas of neighboring countries. Although there have been reports of isolated small-scale armed incursions from Colombia into Brazil in the past, the U.S. Government knows of no specific threat directed against U.S. citizens across the border in Brazil at this time. Colombian groups have perpetrated kidnappings of residents and tourists in border areas of Colombia's neighbors. Therefore, U.S. citizens traveling or residing in areas of Brazil near the Colombian border are urged to exercise caution. U.S. citizens are urged to take care when visiting remote parts of the Amazon basin and respect local laws and customs.
Corruption can be an obstacle to investment in Brazil. In 2009, Brazil ranked 75th (among 180 countries) in Transparency International's Corruption Perception Index. Brazil ranked below Chile and Uruguay in South America, tied with Colombia and Peru, and ranked above Argentina and Venezuela. With regard to major emerging economies, Brazil ranked above India, China, Russia, Egypt, and Indonesia, and below South Africa and Turkey. In general terms, businesses find corruption an obstacle in government procurement and at some levels of the judiciary.
Corruption scandals are a regular feature of Brazilian political life. The GOB continued to investigate a series of corruption scandals, of unusual scope, that emerged in 2005. Parallel Brazilian congressional and law enforcement authorities’ investigations revealed illicit financing by some political parties of their 2002 presidential campaigns, as well as a related scheme involving vote-buying in Congress by some elements within the ruling party and the executive branch, possibly financed by illegal rebates on contracts. In December 2007, the Brazilian Senate President resigned the presidency due to a separate ethics scandal. A series of separate corruption investigations, involving politicians from both opposition and government coalition parties, were conducted over the course of 2009. Brazil's anti-money laundering mechanisms and relatively independent prosecutorial and oversight institutions have played useful roles in the investigation of such cases.
Brazil is a signatory to the Organization for Economic Cooperation and Development (OECD) Anti-Bribery Convention. Brazil has laws, regulations and penalties to combat corruption, but their effectiveness is inconsistent. Bribery is illegal and a bribe by a local company to a foreign official is a criminal act. A company cannot deduct a bribe to a foreign official from its taxes. While federal government authorities generally investigate allegations of corruption, there are inconsistencies in the level of enforcement among individual states. Corruption remains problematic in business dealings with some parts of the Brazilian government, particularly on the local level.
Bilateral Investment Agreements
Brazil does not have a Bilateral Investment Treaty with the United States. While Brazil had signed BITs with Belgium and Luxembourg, Chile, Cuba, Denmark, Finland, France, Germany, Italy, Republic of Korea, Netherlands, Portugal, Switzerland, United Kingdom and Venezuela, none of these were ratified by the Brazilian Congress. Brazil also has not ratified the Mercosul investment protocol.
Brazil has no double taxation treaty with the United States, but does have such treaties with 24 other countries, including, among others, Japan, France, Italy, the Netherlands, Canada and Argentina. Brazil signed a Tax Information Exchange Agreement with the United States in March 2007 that passed the Brazilian Chamber in December 2009 and awaits action in the Brazilian Senate.
OPIC and Other Investment Insurance Programs
Programs of the Overseas Private Investment Corporation (OPIC) are fully available, and activity has increased in recent years. The size of OPIC's exposure in Brazil may occasionally limit its capacity for new coverage. Brazil became a member of the Multilateral Investment Guarantee Agency (MIGA) in 1992.
The 86 million strong Brazilian labor force comprises a wide range of skills covering a broad array of occupations and industries. Three fifths of the labor force is employed in the service sector, 17 percent in the agriculture sector, and the civil construction and manufacturing sectors combined employ the remaining 23 percent.
Brazil has signed on to a large number of International Labor Organization (ILO) conventions. Brazil is party to the U.N. Convention on the Rights of the Child and major ILO conventions concerning the prohibition of child labor, forced labor and discrimination.
The labor code is highly detailed and relatively generous to workers. Formal sector workers are guaranteed 30 days of annual leave, an annual bonus equal to one month's salary, and severance pay in the case of dismissal without cause. Brazil also has a system of labor courts that are charged with resolving routine cases involving unfair dismissal, working conditions, salary disputes, and other grievances. Labor courts have the power to impose an agreement on employers and unions if negotiations break down and either side appeals to the court system. As a result, labor courts routinely are called upon to determine wages and working conditions in industries across the country. The system is tantamount to compulsory arbitration and does not encourage collective bargaining. In recent years, however, both labor and management have become more flexible and collective bargaining has assumed greater relevance.
The Ministry of Labor estimates that there are over 16,000 labor unions in Brazil, but Ministry officials note that these figures are inexact. Labor unions, especially in sectors such as metalworking and banking, tend to be well-organized and aggressive in defending wages and working conditions and account for approximately 19 percent of the official workforce according to the last IBGE release (2005). Strikes are frequent, particularly among public sector unions. While some labor organizations and their leadership operate independently of the government and of political parties, others are viewed as closely associated with political parties.
In firms employing three or more persons, Brazilian nationals must constitute at least two-thirds of all employees and receive at least two-thirds of total payroll. Foreign specialists in fields where Brazilians are unavailable are not counted in calculating the one-third permitted for non-Brazilians.
The Brazilian Institute of Geography and Statistics (IBGE) estimated unemployment as of November 2009 at 7.4 percent (versus 7.6 percent in November 2008). Unemployment statistics range significantly across regions.
IBGE reports that real wages have trended higher in recent years. The average monthly wage in Brazil's six largest cities was around 1,344 Reais in November 2009 (approximately USD 768 based on average exchange rates for that month), and the minimum monthly wage has periodically increased in recent years from 380 Reais in 2007 to 510 Reais in January 2010. Earnings also vary significantly by region and industry and there is significant wage inequality between Brazil’s poor and wealthy.
Employer federations, supported by mandatory fees based on payroll, play a significant role in both public policy and labor relations. Each state has its own federation, which reports to CNI (National Confederation of Industries), headquartered in Brasilia.
Foreign Trade Zones
The federal government has granted tax benefits for certain free trade zones. The most prominent of these is the Manaus Free Trade Zone, in Amazonas State, which has attracted significant foreign investment, including from U.S. companies. Most of these free trade zones aim to attract investment to the North and Northeast of Brazil.
Foreign Direct Investment
According to the Central Bank's most recent foreign-capital census (2000), the United States had the largest share of accumulated foreign-capital stock in Brazil, 23.8 percent of the total. Spain had 11.9 percent and The Netherlands 10.7 percent. Investment inflows between the years 2000 to 2006 have amounted to about USD 117 billion, exclusive of depreciation and capital repatriation. The Central Bank has not yet published updated investment stock figures which were originally expected in early 2007.
Brazilian Central Bank data estimate total net FDI inflows were USD 34.6 billion in 2007, USD 45.1 billion in 2008, and USD 25.9 billion in 2009. According to the U.S. Bureau of Economic Analysis, FDI inflows from the United States to Brazil were USD 4.1 billion in 2008 and United States’ FDI stock was USD 45.5 billion as of 2008.
Brazil's Top 20 multinationals have USD 56 billion assets abroad, equivalent to over half of the country's outward FDI stock. A 2007 survey by the Columbia Program on International Investment (CPII) and the Brazil-based Fundacao Dom Cabral (FDC) in New York indicated that Brazil's top multinational enterprises (MNEs) made the country the second largest outward investor among developing countries in terms of foreign direct investment (FDI) outflows in 2006.
FDI as a Percentage of GDP: 2003 – 2009
|Year||FDI (USD Billions)||Percentage of GDP|