Brazil is the second largest economy in the Western Hemisphere behind the United States, and the eighth largest economy in the world, according to the World Bank. The United Nations Conference on Trade and Development (UNCTAD) named Brazil the fourth largest destination for global Foreign Direct Investment (FDI) flows in 2017. In recent years, Brazil received more than half of South America’s total incoming FDI, and the United States is a major foreign investor in Brazil. The Brazilian Central Bank (BCB) reported the United States had the largest single-country stock of FDI by final ownership, representing 22 percent of all FDI in Brazil (USD 118.7 billion) in 2017, the latest year with available data. The Government of Brazil (GoB) prioritized attracting private investment in infrastructure during 2017 and 2018.
The current economic recovery, which started in the first quarter of 2017, ended the deepest and longest recession in Brazil’s modern history. The country’s Gross Domestic Product (GDP) expanded by 1.1 percent in 2018, below most initial market analysts’ projections of 3 percent growth in 2018. Analysts forecast a 2 percent growth rate for 2019. The unemployment rate reached 11.6 percent at the end of 2018. Brazil was the world’s fourth largest destination for FDI in 2017, with inflows of USD 62.7 billion, according to UNCTAD. The nominal budget deficit stood at 7.1 percent of GDP (USD132.5 billion) in 2018 and is projected to end 2019 at around 6.5 percent of GDP (USD 148.5 billion). Brazil’s debt-to-GDP ratio reached 76.7 percent in 2018 with projections to reach 83 percent by the end of 2019. The BCB has maintained its target for the benchmark Selic interest rate at 6.5 percent since March 2018 (from a high of 13.75 percent at the end of 2016).
President Bolsonaro took office on January 1, 2019, following the interim presidency by President Michel Temer, who had assumed office after the impeachment of former President Dilma Rousseff in August 2016. Temer’s administration pursued corrective macroeconomic policies to stabilize the economy, such as a landmark federal spending cap in December 2016 and a package of labor market reforms in 2017. President Bolsonaro’s economic team pledged to continue pushing reforms needed to help control costs of Brazil’s pension system, and has made that issue its top economic priority. Further reforms are also planned to simplify Brazil’s complex tax system. In addition to current economic difficulties, since 2014, Brazil’s anti-corruption oversight bodies have been investigating allegations of widespread corruption that have moved beyond state-owned energy firm Petrobras and a number of private construction companies to include companies in other economic sectors.
Brazil’s official investment promotion strategy prioritizes the automobile manufacturing, renewable energy, life sciences, oil and gas, and infrastructure sectors. Foreign investors in Brazil receive the same legal treatment as local investors in most economic sectors; however, there are restrictions in the health, mass media, telecommunications, aerospace, rural property, maritime, and air transport sectors. The Brazilian Congress is considering legislation to liberalize restrictions on foreign ownership of rural property and air carriers.
Analysts contend that high transportation and labor costs, low domestic productivity, and ongoing political uncertainties hamper investment in Brazil. Foreign investors also cite concerns over poor existing infrastructure, still relatively rigid labor laws, and complex tax, local content, and regulatory requirements; all part of the extra costs of doing business in Brazil.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||105 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2019||109 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||64 of 126||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical-cost basis)||2017||$68,272||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2017||$8,600||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Brazil was the world’s fourth largest destination for Foreign Direct Investment (FDI) in 2017, with inflows of USD 62.7 billion, according to UNCTAD. The GoB actively encourages FDI – particularly in the automobile, renewable energy, life sciences, oil and gas, and transportation infrastructure sectors – to introduce greater innovation into Brazil’s economy and to generate economic growth. GoB investment incentives include tax exemptions and low-cost financing with no distinction made between domestic and foreign investors. Foreign investment is restricted in the health, mass media, telecommunications, aerospace, rural property, maritime, insurance, and air transport sectors.
The Brazilian Trade and Investment Promotion Agency (APEX) plays a leading role in attracting FDI to Brazil by working to identify business opportunities, promoting strategic events, and lending support to foreign investors willing to allocate resources to Brazil. APEX is not a one-stop-shop for foreign investors, but the agency can assist in all steps of the investor’s decision-making process, to include identifying and contacting potential industry segments, sector and market analyses, and general guidelines on legal and fiscal issues. Their services are free of charge. The website for APEX is: http://www.apexbrasil.com.br/en .
Limits on Foreign Control and Right to Private Ownership and Establishment
A 1995 constitutional amendment (EC 6/1995) eliminated distinctions between foreign and local capital, ending favorable treatment (e.g. tax incentives, preference for winning bids) for companies using only local capital. However, constitutional law restricts foreign investment in the healthcare (Law 13097/2015), mass media (Law 10610/2002), telecommunications (Law 12485/2011), aerospace (Law 7565/1986 a, Decree 6834/2009, updated by Law 12970/2014, Law 13133/2015, and Law 13319/2016), rural property (Law 5709/1971), maritime (Law 9432/1997, Decree 2256/1997), insurance (Law 11371/2006), and air transport sectors (Law 13319/2016).
Screening of FDI
Foreigners investing in Brazil must electronically register their investment with the BCB within 30 days of the inflow of resources to Brazil. In cases of investments involving royalties and technology transfer, investors must register 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).
To enter Brazil’s insurance and reinsurance market, U.S. companies must establish a subsidiary, enter into a joint venture, acquire a local firm, or enter into a partnership with a local company. The BCB reviews banking license applications on a case-by-case basis. Foreign interests own or control 20 of the top 50 banks in Brazil. Santander is the only major wholly foreign-owned retail bank remaining in Brazil. Brazil’s anti-trust authorities (CADE) approved Itau bank’s purchase of Citibank’s Brazilian retail banking operation in August 2017. In June 2016, CADE approved Bradesco bank’s purchase of HSBC’s Brazilian retail banking operation.
Currently, foreign ownership of airlines is limited to 20 percent. Congressman Carlos Cadoca (PCdoB-PE) presented a bill to Brazilian Congress in August of 2015 to allow for 100 percent foreign ownership of Brazilian airlines (PL 2724/2015). The bill was approved by the lower house, and since March 2019, it is pending a Senate vote. In 2011, the United States and Brazil signed an Air Transport Agreement as a step towards an Open Skies relationship that would eliminate numerical limits on passenger and cargo flights between the two countries. Brazil’s lower house approved the agreement in December 2017, and the Senate ratified it in March 2018. The Open Skies agreement has now entered into force.
In July 2015, under National Council on Private Insurance (CNSP) Resolution 325, the Brazilian government announced a significant relaxation of some restrictions on foreign insurers’ participation in the Brazilian market, and in December 2017, the government eliminated restrictions on risk transfer operations involving companies under the same financial group. The new rules revoked the requirement to purchase a minimum percentage of reinsurance and eliminated a limitation or threshold for intra-group cession of reinsurance to companies headquartered abroad that are part of the same economic group. Rules on preferential offers to local reinsurers, which are set to decrease in increments from 40 percent in 2016 to 15 percent in 2020, remain unchanged. Foreign reinsurance firms must have a representation office in Brazil to qualify as an admitted reinsurer. Insurance and reinsurance companies must maintain an active registration with Brazil’s insurance regulator, the Superintendence of Private Insurance (SUSEP) and maintaining a minimum solvency classification issued by a risk classification agency equal to Standard & Poor’s or Fitch ratings of at least BBB-.
In September 2011, Law 12485/2011 removed a 49 percent limit on foreign ownership of cable TV companies, and allowed telecom companies to offer television packages with their service. Content quotas require every channel to air at least three and a half hours per week of Brazilian programming during primetime. Additionally, one-third of all channels included in any TV package have to be Brazilian.
The National Land Reform and Settlement Institute administers the purchase and lease of Brazilian agricultural land by foreigners. Under the applicable rules, the area of agricultural land bought or leased by foreigners cannot account for more than 25 percent of the overall land area in a given municipal district. Additionally, no more than 10 percent of agricultural land in any given municipal district may be owned or leased by foreign nationals from the same country. The law also states that prior consent is needed for purchase of land in areas considered indispensable to national security and for land along the border. The rules also make it necessary to obtain congressional approval before large plots of agricultural land can be purchased by foreign nationals, foreign companies, or Brazilian companies with majority foreign shareholding. Draft Law 4059/2012, which would lift the limits on foreign ownership of agricultural land,
has been awaiting a vote in the Brazilian Congress since 2015.
Brazil is not a signatory to the World Trade Organization (WTO) Agreement on Government Procurement (GPA), but became an observer in October 2017. By statute, a Brazilian state enterprise may 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 when there are no qualified Brazilian firms. U.S. companies need to enter into partnerships with local firms or have operations in Brazil in order to be eligible for “margins of preference” offered to domestic firms to participate in Brazil’s public sector procurement to help these firms win government tenders. Foreign companies are often successful in obtaining subcontracting opportunities with large Brazilian firms that win government contracts. Under trade bloc Mercosul’s Government Procurement Protocol, member nations Brazil, Argentina, Paraguay, and Uruguay are entitled to non-discriminatory treatment of government-procured goods, services, and public works originating from each other’s suppliers and providers. However, only Argentina has ratified the protocol, and per the Brazilian Ministry of Economy website, this protocol has been in revision since 2010, so it has not yet entered into force.
Other Investment Policy Reviews
The Organization for Economic Co-operation and Development’s (OECD) 2018 Brazil Economic Survey of Brazil highlights Brazil as a leading global economy. However, it notes that high commodity prices and labor force growth will no longer be able to sustain Brazil’s economic growth without deep structural reforms. While praising the Temer government for its reform plans, the OECD urged Brazil to pass all needed reforms to realize their full benefit. The OECD cautions about low investment rates in Brazil, and cites a World Economic Forum survey that ranks Brazil 116 out of 138 countries on infrastructure as an area in which Brazil must improve to maintain competitiveness.
The OECD’s March 15, 2019 Enlarged Investment Committee Report BRAZIL: Position Under the OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations noted several areas in which Brazil needs to improve. These observations include, but are not limited to: restrictions to FDI requiring investors to incorporate or acquire residency in order to invest; lack of generalized screening or approval mechanisms for new investments in Brazil; sectoral restrictions on foreign ownership in media, private security and surveillance, air transport, mining, telecommunication services; and, restrictions for non-residents to own Brazilian flag vessels. The report did highlight several areas of improvement and the GoB’s pledge to ameliorate several ongoing irritants as well.
The IMF’s 2018 Country Report No. 18/253 on Brazil highlights that a mild recovery supported by accommodative monetary and fiscal policies is currently underway. But the economy is underperforming relative to its potential, public debt is high and increasing, and, more importantly, medium-term growth prospects remain uninspiring, absent further reforms. The IMF advises that against the backdrop of tightening global financial conditions, placing Brazil on a path of strong, balanced, and durable growth requires a committed pursuit of fiscal consolidation, ambitious structural reforms, and a strengthening of the financial sector architecture. The WTO’s 2017 Trade Policy Review of Brazil notes the country’s open stance towards foreign investment, but also points to the many sector-specific limitations (see above). All three reports highlight the uncertainty regarding reform plans as the most significant political risk to the economy. These reports are located at the following links:
https://www.imf.org/~/media/Files/Publications/CR/2017/cr17216.ashx , and https://www.wto.org/english/tratop_e/tpr_e/tp458_e.htm .
A company must register with the National Revenue Service (Receita) to obtain a business license and be placed on the National Registry of Legal Entities (CNPJ). Brazil’s Export Promotion and Investment Agency (APEX) has a mandate to facilitate foreign investment. The agency’s services are available to all investors, foreign and domestic. Foreign companies interested in investing in Brazil have access to many benefits and tax incentives granted by the Brazilian government at the municipal, state, and federal levels. Most incentives target specific sectors, amounts invested, and job generation. Brazil’s business registration website can be found at http://receita.economia.gov.br/orientacao/tributaria/cadastros/cadastro-nacional-de-pessoas-juridicas-cnpj .
Brazil does not restrict domestic investors from investing abroad, and APEX-Brasil supports Brazilian companies’ efforts to invest abroad under its “internationalization program”: http://www.apexbrasil.com.br/como-a-apex-brasil-pode-ajudar-na-internacionalizacao-de-sua-empresa . Apex-Brasil frequently highlights the United States as an excellent destination for outbound investment. Apex-Brasil and SelectUSA (the U.S. government’s investment promotion office at the U.S. Department of Commerce) signed a memorandum of cooperation to promote bilateral investment in February 2014.
2. Bilateral Investment Agreements and Taxation Treaties
Brazil does not have a Bilateral Investment Treaty (BIT) with the United States. In the 1990s, Brazil signed BITs with Belgium, Luxembourg, Chile, Cuba, Denmark, Finland, France, Germany, Italy, the Republic of Korea, the Netherlands, Portugal, Switzerland, the United Kingdom, and Venezuela. The Brazilian Congress has not ratified any of these agreements. In 2002, the Executive branch withdrew the agreements from Congress after determining that treaty provisions on international Investor-State Dispute Settlement (ISDS) were unconstitutional.
In 2015, Brazil developed a state-to-state Cooperation and Facilitation Investment Agreement (CFIA) which, unlike traditional BITs, does not provide for an ISDS mechanism. CFIAs instead outline progressive steps for the settlement of “issue[s] of interest to an investor,” including: 1) an ombudsmen and a Joint Committee appointed by the two governments will act as mediators to amicably settle any dispute; 2) if amicable settlement fails, either of the two governments may bring the dispute to the attention of the Joint Committee; 3) if the dispute is not settled within the Joint Committee, the two governments may resort to interstate arbitration mechanisms.” The GOB has signed several CFIAs since 2015 with: Mozambique (April 2015), Angola (May 2015), Mexico (May 2015), Malawi (October 2015), Colombia (October 2015), Peru (October 2015), Chile (November 2015), Iran (November 2016), Azerbaijan (December 2016), Armenia (November 2017), Ethiopia (April 2018), Suriname (May 2018), Guyana (December 2018), and the United Arab Emirates (March 2019). The following CFIAs are in force: Mexico, Angola, Armenia, Azerbaijan, and Peru. A few CFIAs have received Congressional ratification in Brazil and are pending ratification by the other country: Mozambique, Malawi, and Colombia (https://concordia.itamaraty.gov.br/ ). Brazil also negotiated an intra-Mercosul protocol similar to the CFIA in April 2017, which was ratified on December 21, 2018. (See sections on responsible business conduct and dispute settlement.)
Brazil does not have a double taxation treaty with the United States, but it does have such treaties with 34 other countries, including: Japan, France, Italy, the Netherlands, Canada, Spain, Portugal, and Argentina. Brazil signed a Tax Information Exchange Agreement (TIEA) with the United States in March 2007, which entered into force on May 15, 2013. In September 2014, Brazil and the United States signed an intergovernmental agreement to improve international tax compliance and to implement the Foreign Account Tax Compliance Act (FATCA). This agreement went into effect in August 2015.
3. Legal Regime
Transparency of the Regulatory System
In the 2019 World Bank Doing Business report, Brazil ranked 109th out of 190 countries in terms of overall ease of doing business in 2018, an improvement of 16 positions compared to the 2018 report. According to the World Bank, it takes approximately 20.5 days to start a business in Brazil. Brazil is seeking to streamline the process and decrease the amount to time it takes to open a small or medium enterprise (SME) to five days through its RedeSimples Program. Similarly, the government has reduced regulatory compliance burdens for SMEs through the continued use of the SIMPLES program, which simplifies the collection of up to eight federal, state, and municipal-level taxes into one single payment.
The 2019 World Bank study noted that the annual administrative burden for a medium-size business to comply with Brazilian tax codes is an average of 1,958 hours versus 160.7 hours in OECD high-income economies. The total tax rate for a medium-sized business in Rio de Janeiro is 69 percent of profits, compared to the average of 40.1 percent in the OECD high-income economies. Business managers often complain of not being able to understand complex, and sometimes contradictory, tax regulations, despite their housing large local tax and accounting departments in their companies.
Tax regulations, while burdensome and numerous, do not generally differentiate between foreign and domestic firms. However, some investors complain that in certain instances the value-added tax collected by individual states (ICMS) favors locally-based companies that export their goods. Exporters in many states report difficulty receiving their ICMS rebates when their goods are exported. Taxes on commercial and financial transactions are particularly burdensome, and businesses complain that these taxes hinder the international competitiveness of Brazilian-made products.
Of Brazil’s ten federal regulatory agencies, the most prominent include:
- ANVISA, the Brazilian counterpart to the U.S. Food and Drug Administration, which has regulatory authority over the production and marketing of food, drugs, and medical devices;
- ANATEL, the country’s telecommunications agency, which handles telecommunications, and licensing and assigning of radio spectrum bandwidth;
- ANP, the National Petroleum Agency, which regulates oil and gas contracts and oversees auctions for oil and natural gas exploration and production, including for offshore pre-salt oil and natural gas;
- ANAC, Brazil’s civil aviation agency;
- IBAMA, Brazil’s environmental licensing and enforcement agency; and
- ANEEL, Brazil’s electric energy regulator that regulates Brazil’s power electricity sector and oversees auctions for electricity transmission, generation, and distribution contracts.
In addition to these federal regulatory agencies, Brazil has at least 27 state-level regulatory agencies and 17 municipal-level regulatory agencies.
The Office of the Presidency’s Program for the Strengthening of Institutional Capacity for Management in Regulation (PRO-REG) has introduced a broad program for improving Brazil’s regulatory framework. PRO-REG and the U.S. White House Office of Information and Regulatory Affairs (OIRA) are collaborating to exchange best practices in developing high quality regulations that mandate the least burdensome approach to address policy implementation.
Regulatory agencies complete Regulatory Impact Analyses (RIAs) on a voluntary basis. The Senate has approved a bill on Governance and Accountability for Federal Regulatory Agencies (PLS 52/2013 in the Senate, and PL 6621/2016 in the Chamber) that is pending Senate Transparency and Governance Committee approval after the Lower House proposed changes to the text in December 2018. Among other provisions, the bill would make RIAs mandatory for regulations that affect “the general interest.” PRO-REG is drafting enabling legislation to implement this provision. While the legislation is pending, PRO-REG has been working with regulators to voluntarily make RIAs part of their internal procedures, with some success.
The Chamber of Deputies, Federal Senate, and the Office of the Presidency maintain websites providing public access to both approved and proposed federal legislation. Brazil is seeking to improve its public comment and stakeholder input process. In 2004, the GoB instituted a Transparency Portal, a website with data on funds transferred to and from the federal, state and city governments, as well as to and from foreign countries. It also includes information on civil servant salaries.
In 2018, the Department of State found Brazil to have met its minimum fiscal transparency requirements in its annual Fiscal Transparency Report. The Open Budget Index ranked Brazil on par with the United States in terms of budget transparency in its most recent (2017) index. The Brazilian government demonstrates adequate fiscal transparency in managing its federal accounts, although there is room for improvement in terms of completeness of federal budget documentation. Brazil’s budget documents are publically available, widely accessible, and sufficiently detailed. They provide a relatively full picture of the GoB’s planned expenditures and revenue streams. The information in publicly available budget documents is considered credible and reasonably accurate.
International Regulatory Considerations
Brazil is a member of Mercosul – a South American trade bloc whose full members include Argentina, Paraguay, and Uruguay – and routinely implements Mercosul common regulations, but still adheres to Brazilian regulations.
Brazil is a member of the WTO, and the government regularly notifies draft technical regulations, such as agricultural potential barriers, to the WTO Committee on Technical Barriers to Trade (TBT).
Legal System and Judicial Independence
Brazil has a civil legal system structured around courts at the state and federal level. Investors can seek to enforce contracts through the court system or via mediation, although both processes can be lengthy. The Brazilian Superior Court of Justice (STJ) must accept foreign contract enforcement judgments for the judgments to be considered valid in Brazil. Among other considerations, the foreign judgement must not contradict any prior decisions by a Brazilian court in the same dispute. The Brazilian Civil Code, enacted in 2002, regulates commercial disputes, although commercial cases involving maritime law follow an older, largely superseded Commercial Code. Federal judges hear most disputes in which one of the parties is the Brazilian State, and also rule on lawsuits between a foreign state or international organization and a municipality or a person residing in Brazil.
The judicial system is generally independent. The Supreme Federal Court (STF), charged with constitutional cases, frequently rules on politically sensitive issues. State court judges and federal level judges below the STF are career officials selected through a meritocratic examination process. The judicial system is backlogged, however, and disputes or trials of any sort frequently require years to arrive at a final resolution, including all available appeals. Regulations and enforcement actions can be litigated in the court system, which contains mechanisms for appeal depending upon the level at which the case is filed. The STF is the ultimate court of appeal on constitutional grounds; the STJ is the ultimate court of appeal for cases not involving constitutional issues.
Laws and Regulations on Foreign Direct Investment
Foreigners investing in Brazil must electronically register their investment with the BCB within 30 days of the inflow of resources to Brazil. Investors must register investments involving royalties and technology transfer 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).
Brazil does not offer a “one-stop-shop” for international investors. There have been plans to do so for several years, but nothing has been officially created to facilitate foreign investment in Brazil. The BCB website offers some useful information, but is not a catchall for those seeking guidance on necessary procedures and requirements. The BCB’s website in English is: https://www.bcb.gov.br/en#!/home .
Competition and Anti-Trust Laws
The Administrative Council for Economic Defense (CADE), which falls under the purview of the Ministry of Justice, is responsible for enforcing competition laws, consumer protection, and carrying out regulatory reviews of mergers and acquisitions. Law 12529 from 2011 established CADE in an effort to modernize Brazil’s antitrust review process and to combine the antitrust functions of the Ministry of Justice and the Ministry of Finance into CADE. The law brought Brazil in line with U.S. and European merger review practices and allows CADE to perform pre-merger reviews, in contrast to the prior legal regime that had the government review mergers after the fact. In October 2012, CADE performed Brazil’s first pre-merger review.
In 2018, CADE conducted 74 formal investigations of cases that allegedly challenged the promotion of the free market. It also approved 390 merger and/or acquisition requests and rejected an additional 14 requests.
Expropriation and Compensation
Article 5 of the Brazilian Constitution assures property rights of both Brazilians and foreigners that live in Brazil. The Constitution does not address nationalization or expropriation. Decree-Law 3365 allows the government to exercise eminent domain under certain criteria that include, but are not limited to, national security, public transportation, safety, health, and urbanization projects. In cases of eminent domain, the government compensates owners in cash.
There are no signs that the current federal government is contemplating expropriation actions in Brazil against foreign interests. Brazilian courts have decided some claims regarding state-level land expropriations in U.S. citizens’ favor. However, as states have filed appeals to these decisions, the compensation process can be lengthy and have uncertain outcomes.
ICSID Convention and New York Convention
In 2002, Brazil ratified the 1958 Convention on the Recognition and Enforcement of Foreign Arbitration Awards. Brazil is not a member of the World Bank’s International Center for the Settlement of Investment Disputes (ICSID). Brazil joined the United Nations Commission on International Trade Law (UNCITRAL) in 2010, and its membership will expire in 2022.
Investor-State Dispute Settlement
Article 34 of the 1996 Brazilian Arbitration Act (Law 9307) defines a foreign arbitration judgment as any judgment rendered outside the national territory. The law established that the Superior Court of Justice (STJ) must ratify foreign arbitration awards. Law 9307, updated by Law 13129/2015, also stipulates that a foreign arbitration award will be recognized or executed in Brazil in conformity with the international agreements ratified by the country and, in their absence, with domestic law. A 2001 Brazilian Federal Supreme Court (STF) ruling established that the 1996 Brazilian Arbitration Act, permitting international arbitration subject to STJ 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.”
Contract disputes in Brazil can be lengthy and complex. Brazil has both a federal and a state court system, and jurisprudence is based on civil code and contract 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 appeals of federal judges’ decisions. The 2019 World Bank Doing Business report found that on average it takes 12.5 procedures and 731 days to litigate a breach of contract.
International Commercial Arbitration and Foreign Courts
Brazil ratified the 1975 Inter-American Convention on International Commercial Arbitration (Panama Convention) and the 1979 Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitration Awards (Montevideo Convention). Law 9307/1996 provides advanced legislation on arbitration, and provides guidance on governing principles and rights of participating parties. Brazil developed a new Cooperation and Facilitation Investment Agreement (CFIA) model in 2015 (https://concordia.itamaraty.gov.br/ ), but it does not include ISDS mechanisms. (See sections on bilateral investment agreements and responsible business conduct.)
Brazil’s commercial code governs most aspects of commercial association, while the civil code governs professional services corporations. In 2005, bankruptcy legislation (Law 11101) went into effect creating a system modeled on Chapter 11 of the U.S. bankruptcy code. Critics of Law 11101 argue it grants equity holders too much power in the restructuring process to detriment of debtholders. Brazil is drafting an update to the bankruptcy law aimed at increasing creditor rights, but it has not yet been presented in Congress. The World Bank’s 2019 Doing Business Report ranks Brazil 77th out of 190 countries for ease of “resolving insolvency.”
4. Industrial Policies
The GoB extends tax benefits for investments in less developed parts of the country, including the Northeast and the Amazon regions, with equal application to foreign and domestic investors. These incentives were successful in attracting major foreign plants to areas like the Manaus Free Trade Zone in Amazonas State, but most foreign investment remains concentrated in the more industrialized southern states in Brazil.
Individual states seek to attract private investment by offering tax benefits and infrastructure support to companies, negotiated on a case-by-case basis. Competition among states to attract employment-generating investment leads some states to challenge such tax benefits as beggar-thy-neighbor fiscal competition.
While local private sector banks are beginning to offer longer credit terms, the state-owned Brazilian National Development Bank (BNDES) is the traditional Brazilian source of long-term credit as well as export credits. BNDES provides foreign- and domestically-owned companies operating in Brazil financing for the manufacturing and marketing of capital goods and primary infrastructure projects. BNDES provides much of its financing at subsidized interest rates. As part of its package of fiscal tightening, in December 2014, the GoB announced its intention to scale back the expansionary activities of BNDES and ended direct Treasury support to the bank. Law 13483, from September 2017, created a new Long-Term Lending Rate (TLP) for BNDES, which will be phased-in to replace the prior subsidized loans starting on January 1, 2018. After a five-year phase in period, the TLP will float with the market and reflect a premium over Brazil’s five-year bond yield (a rate that incorporates inflation). The GoB plans to reduce BNDES’s role further as it continues to promote the development of long-term private capital markets.
In January 2015, the GoB eliminated the industrial products tax (IPI) exemptions on vehicles, while keeping all other tax incentives provided by the October 2012 Inovar-Auto program. Through Inovar-Auto, auto manufacturers were able to apply for tax credits based on their ability to meet certain criteria promoting research and development and local content. Following successful WTO challenges against the trade-restrictive impacts of some of its tax benefits, the government allowed Inovar-Auto program to expire on December 31, 2017. Although the government has announced a new package of investment incentives for the auto sector, Rota 2030, it remains at the proposal stage, with no scheduled date for a vote or implementation.
On February 27, 2015, Decree 8415 reduced tax incentives for exports, known as the Special Regime for the Reinstatement of Taxes for Exporters, or Reintegra Program. Decree 8415 reduced the previous three percent subsidy on the value of the exports to one percent for 2015, to 0.1 percent for 2016, and two percent for 2017 and 2018.
Brazil provides tax reductions and exemptions on many domestically-produced information and communication technology (ICT) and digital goods that qualify for status under the Basic Production Process (PPB). The PPB is product-specific and stipulates which stages of the manufacturing process must be carried out in Brazil in order for an ICT product to be considered produced in Brazil. The major fiscal benefits of the National Broadband Plan (PNBL) and supporting implementation plan (REPNBL-Redes) have either expired or been revoked. In 2017, Brazil held a public consultation on a National Connectivity Plan to replace the PNBL, but has not yet published a final version.
Under Law 12598/2013, Brazil offers tax incentives ranging from 13 percent to 18 percent to officially classified “Strategic Defense Firms” (must have Brazilian control of voting shares) as well as to “Defense Firms” (can be foreign-owned) that produce identified strategic defense goods. The tax incentives for strategic firms can apply to their entire supply chain, including foreign suppliers. The law is currently undergoing a revision, expected to be complete in 2018.
The InovAtiva Brasil and Startup Brasil programs support start-ups in the country. The GoB also uses free trade zones to incentivize industrial production. A complete description of the scope and scale of Brazil’s investment promotion programs and regimes can be found at: http://www.apexbrasil.com.br/en/home .
Foreign Trade Zones/Free Ports/Trade Facilitation
The federal government grants tax benefits to certain free trade zones. Most of these free trade zones aim to attract investment to the country’s relatively underdeveloped North and Northeast regions. 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. Constitutional amendment 83/2014 came into force in August 2014 and extended the status of Manaus Free Trade Zone until the year 2073.
Performance and Data Localization Requirements
Government Procurement Preferences: The GoB maintains a variety of localization barriers to trade in response to the weak competitiveness of its domestic tech industry.
- Tax incentives for locally sourced information and communication technology (ICT) goods and equipment (Basic Production Process (PPB), Law 8248/91, and Portaria 87/2013);
- Government procurement preferences for local ICT hardware and software (2014 Decrees 8184, 8185, 8186, 8194, and 2013 Decree 7903); and the CERTICS Decree (8186), which aims to certify that software programs are the result of development and technological innovation in Brazil.
Presidential Decree 8135/2013 (Decree 8135) regulated the use of IT services provided to the Federal government by privately and state-owned companies, including the provision that Federal IT communications be hosted by Federal IT agencies. In 2015, the Ministry of Planning developed regulations to implement Decree 8135, which included the requirement to disclose source code if requested. On December 26, 2018, President Michel Temer approved and signed the Decree 9.637/2018, which revoked Decree 8.135/2013 and eliminated the source code disclosure requirements.
The Institutional Security Cabinet (GSI) mandated the localization of all government data stored on the cloud during a review of cloud computing services contracted by the Brazilian government in Ordinance No. 9 (previously NC 14), this was made official in March 2018. While it does provide for the use of cloud computing for non-classified information, it imposes a data localization requirement on all use of cloud computing by the Brazil government.
Investors in certain sectors in Brazil must adhere to the country’s regulated prices, which fall into one of two groups: those regulated at the federal level by a federal company or agency, and those set by sub-national governments (states or municipalities). Regulated prices managed at the federal level include telephone services, certain refined oil and gas products (such as bottled cooking gas), electricity, and healthcare plans. Regulated prices controlled by sub-national governments include water and sewage fees, vehicle registration fees, and most fees for public transportation, such as local bus and rail services. As part of its fiscal adjustment strategy, Brazil sharply increased regulated prices in January 2015.
For 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, according to Brazilian Labor Law Articles 352 to 354. This calculation excludes foreign specialists in fields where Brazilians are unavailable.
Decree 7174 from 2010, which regulates the procurement of information technology goods and services, requires federal agencies and parastatal entities to give preferential treatment to domestically produced computer products and goods or services with technology developed in Brazil based on a complicated price/technology matrix.
Brazil’s Marco Civil, an Internet law that determines user rights and company responsibilities, states that data collected or processed in Brazil must respect Brazilian law, even if the data is subsequently stored outside the country. Penalties for non-compliance could include fines of up to 10 percent of gross Brazilian revenues and/or suspension or prohibition of related operations. Under the law, Internet connection and application providers must retain access logs for specified periods or face sanctions. While the Marco Civil does not require data to be stored in Brazil, any company investing in Brazil should closely track its provisions – as well provisions of other legislation and regulations, including a data privacy bill passed in August 2018 and cloud computing regulations.
5. 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. Foreign buyers frequently arrange alternative financing in their own countries, where rates may be more attractive. Law 9514 from 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, nonetheless, are expanding their portfolios in Brazil.
Intellectual Property Rights
The last year brought increased attention to IP in Brazil, but rights holders still face significant challenges. Brazil’s National Institute of Industrial Property (INPI) streamlined procedures for review processes to increase examiner productivity for patent and trademark decisions. Nevertheless, the wait period for a patent remains nine years and the market is flooded with counterfeits. Brazil’s IP enforcement regime is constrained by limited resources. Brazil has remained on the “Watch List” of the U.S. Trade Representative’s Special 301 report since 2007. For more information, please see: https://ustr.gov/issue-areas/intellectual-property/Special-301 .
Brazil has no physical markets listed on USTR’s 2017 Review of Notorious Markets, though the report does acknowledge a file sharing site popular among Brazilians that is known for pirated digital media. For more information, please see: https://ustr.gov/sites/default/files/files/Press/Reports/2017 percent20Notorious percent20Markets percent20List percent201.11.18.pdf .
For additional information about treaty obligations and points of contact at local IP offices, please see the World Intellectual Property Organization (WIPO)’s country profiles: http://www.wipo.int/directory/en
6. Financial Sector
Capital Markets and Portfolio Investment
The Central Bank of Brazil (BCB) embarked in October 2016 on a sustained monetary easing cycle, lowering the Special Settlement and Custody System (Selic) baseline reference rate from a high of 14 percent in October 2016 to 6.5 percent in December 2018. Inflation for 2018 was 3.67 percent, within the 1.5 percent plus/minus of the 4 percent target. In June 2018, the National Monetary Council (CMN) set the BCB’s inflation target to 4.25 percent in 2019, 4.5 percent in 2020, and 3.75 percent for 2021. Because of a heavy public debt burden and other structural factors, most analysts expect the “neutral” policy rate will remain higher than target rates in Brazil’s emerging-market peers (around five percent) over the forecast period.
After a boom in 2004-2012 that more than doubled the lending/GDP ratio (to 55 percent of GDP), the recession and higher interest rates significantly decreased lending. In fact, the lending/GDP ratio remained below 55 percent at year-end 2017. Financial analysts contend that credit will pick up again in the medium term, owing to interest rate easing and economic recovery.
The role of the state in credit markets grew steadily beginning in 2008, with public banks now accounting for over 55 percent of total loans to the private sector (up from 35 percent). Directed lending (that is, to meet mandated sectoral targets) also rose and accounts for almost half of total lending. Brazil is paring back public bank lending and trying to expand a market for long-term private capital.
While local private sector banks are beginning to offer longer credit terms, state-owned development bank BNDES is a traditional Brazilian source of long-term credit. BNDES also offers export financing. Approvals of new financing by BNDES increased 27 percent year-over-year, with the infrastructure sector receiving the majority of new capital.
The Sao Paulo Stock Exchange (BOVESPA) is the sole stock market in Brazil, while trading of public securities takes place at the Rio de Janeiro market. In 2008, the Brazilian Mercantile & Futures Exchange (BM&F) merged with the BOVESPA to form what is now the fourth largest exchange in the Western Hemisphere, after the NYSE, NASDAQ, and Canadian TSX Group exchanges. As of April 2019, there were 430 companies traded on the BM&F/BOVESPA. The BOVESPA index increased 15.03 percent in valuation during 2018. Foreign investors, both institutions and individuals, can directly invest in equities, securities, and derivatives. Foreign investors are limited to trading derivatives and stocks of publicly held companies on established markets.
Wholly owned subsidiaries of multinational accounting firms, including the major U.S. firms, are present in Brazil. Auditors are personally liable for the accuracy of accounting statements prepared for banks.
Money and Banking System
The Brazilian financial sector is large and sophisticated. Banks lend at market rates that remain relatively high compared to other emerging economies. Reasons cited by industry observers include high taxation, repayment risk, and concern over inconsistent judicial enforcement of contracts, high mandatory reserve requirements, and administrative overhead, as well as persistently high real (net of inflation) interest rates. According to BCB data collected from 2011 through the first quarter of 2019, the average rate offered by Brazilian banks was 9.22 percent, with an average monthly high of 11.34 percent in July 2016, and an average monthly rate of 7.7 percent for March 2019.
The financial sector is concentrated, with BCB data indicating that the four largest commercial banks (excluding brokerages) account for approximately 70 percent of the commercial banking sector assets, totaling USD 1.59 trillion as of Q1, 2019. Three of the five largest banks (by assets) in the country – Banco do Brasil, Caixa Economica Federal, and BNDES – are partially or completely federally owned. Large private banking institutions focus their lending on Brazil’s largest firms, while small- and medium-sized banks primarily serve small- and medium-sized companies. Citibank sold its consumer business to Itau Bank in 2016, but maintains its commercial banking interests in Brazil. It is currently the sole U.S. bank operating in the country.
In recent years, the BCB has strengthened bank audits, implemented more stringent internal control requirements, and tightened capital adequacy rules to reflect risk more accurately. It also established loan classification and provisioning requirements. These measures apply to private and publicly owned banks alike. In April 2018, Moody’s upgraded a collection of 20 Brazilian banks and their affiliates to stable from negative. The Brazilian Securities and Exchange Commission (CVM) independently regulates the stock exchanges, brokers, distributors, pension funds, mutual funds, and leasing companies with penalties against insider trading.
Foreigners may find it difficult to open an account with a Brazilian bank. The individual must present a permanent or temporary resident visa, a national tax identification number issued by the Brazilian government (CPF), either a valid passport or identity card for foreigners (CIE), proof of domicile, and proof of income. On average, this process from application to account opening lasts more than three months
Foreign Exchange and Remittances
Brazil’s foreign exchange market remains small, despite recent growth. The latest Triennial Survey by the Bank for International Settlements, conducted in December 2016, showed that the net daily turnover on Brazil’s market for OTC foreign exchange transactions (spot transactions, outright forwards, foreign-exchange swaps, currency swaps and currency options) was USD 19.7 billion, up from USD 17.2 billion in 2013. This was equivalent to around 0.3 percent of the global market in both years.
Brazil’s banking system has adequate capitalization and has traditionally been highly profitable, reflecting high interest rates and fees. Per an April 2018 Central Bank Financial Stability Report, all banks exceeded required solvency ratios, and stress testing demonstrated the banking system has adequate loss absorption capacity in all simulated scenarios. Furthermore, the report noted 99.9 percent of banks already met Basel III requirements, and possess a projected Common Equity Tier 1 (CET1) capital ratio above the minimum 7 percent required at the beginning of 2019.
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 where buy-sell rates are determined by market forces. All foreign exchange transactions, including identifying data, must be reported to the BCB. Foreign exchange transactions on the current account are fully liberalized.
The BCB must approve all incoming foreign loans. In most cases, loans are automatically approved unless loan costs are determined to be “incompatible with normal market conditions and practices.” In such cases, the BCB may request additional information regarding the transaction. Loans obtained abroad do not require advance approval by the BCB, provided the Brazilian recipient is not a government entity. Loans to government entities require prior approval from the Brazilian Senate as well as from the Economic Ministry’s Treasury Secretariat, and must be registered with the BCB.
Interest and amortization payments specified in a loan contract can be made without additional approval from the BCB. Early payments can also be made without additional approvals, if the contract includes a provision for them. Otherwise, early payment requires notification to the BCB to ensure accurate records of Brazil’s stock of debt.
In March 2014, Brazil’s Federal Revenue Service consolidated the regulations on withholding taxes (IRRF) applicable to earnings and capital gains realized by individuals and legal entities resident or domiciled outside Brazil. The regulation states that the cost of acquisition must be calculated in Brazilian currency (reais). Also, the definition of “technical services” was broadened to include administrative support and consulting services rendered by individuals (employees or not) or resulting from automated structures having clear technological content.
Upon registering investments with the BCB, foreign investors are able to remit dividends, capital (including capital gains), and, if applicable, royalties. Investors must register remittances with the BCB. Dividends cannot exceed corporate profits. Investors may carry out remittance transactions at any bank by documenting the source of the transaction (evidence of profit or sale of assets) and showing payment of applicable taxes.
Under Law 13259/2016 passed in March 2016, capital gain remittances are subject to a 15 to 22.5 percent income withholding tax, with the exception of capital gains and interest payments on tax-exempt domestically issued Brazilian bonds. The capital gains marginal tax rates are: 15 percent up to USD 1.5 million in gains; 17.5 percent for USD 1.5 million to USD 2.9 million in gains; 20 percent for USD 2.9 million to USD 8.9 million in gains; and 22.5 percent for more than USD 8.9 million in gains.
Repatriation of a foreign investor’s initial investment is also exempt from income tax under Law 4131/1962. 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, although they are subject to a 15 percent withholding tax and an extra 10 percent Contribution for Intervening in Economic Domain (CIDE) tax.
Sovereign Wealth Funds
Law 11887 established the Sovereign Fund of Brazil (FSB) in 2008. It was a non-commodity fund with a mandate to support national companies in their export activities and to offset counter-cyclical development, promoting investment in projects of strategic interest to Brazil both domestically and abroad. The GoB also had the authority to use money from this fund to help meet its fiscal targets when annual revenues were lower than expected, and to invest in state-owned companies. In May 2018, then-President Temer signed an executive order abolishing the fund. The money in the fund was earmarked for repayment of foreign debt.
7. State-Owned Enterprises
The GoB maintains ownership interests in a variety of enterprises at both the federal and state levels. Typically, boards responsible for state-owned enterprise (SOE) corporate governance are comprised of directors elected by the state or federal government with additional directors elected by any non-government shareholders. Although Brazil, a non-OECD member, has participated in many OECD working groups, it does not follow the OECD Guidelines on Corporate Governance of SOEs. Brazilian SOEs are concentrated in the oil and gas, electricity generation and distribution, transportation, and banking sectors. A number of these firms also see a portion of their shares publically traded on the Brazilian and other stock exchanges.
In the 1990s and early 2000s, the GoB privatized many state-owned enterprises across a broad spectrum of industries, including mining, steel, aeronautics, banking, and electricity generation and distribution. While the GoB divested itself from many of its SOEs, it maintained partial control (at both the federal and state level) of some previously wholly state-owned enterprises. This control can include a “golden share” whereby the government can exercise veto power over proposed mergers or acquisitions.
Notable examples of majority government owned and controlled firms include national oil and gas giant Petrobras and power conglomerate 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. Brazil previously restricted foreign investment in offshore oil and gas development through 2010 legislation that obligated Petrobras to serve as the sole operator and minimum 30 percent investor in any oil and gas exploration and production in Brazil’s prolific offshore pre-salt fields. As a result of the GoB’s desire to increase foreign investment in Brazil’s hydrocarbon sector, in October 2016 the Brazilian Congress granted foreign companies the right to serve as sole operators in pre-salt exploration and production activities and eliminated Petrobras’ obligation to serve as a minority equity holder in pre-salt oil and gas operations. Nevertheless, the 2016 law still gives Petrobras right-of-first refusal in developing pre-salt offshore fields before those areas are available for public auction. Industry estimates project bonuses of USD 26.3 billion by opening the Brazilian oil and gas market to foreign investment.
Given limited public investment funding, the GoB has focused on privatizing state–owned energy, airport, road, railway, and port assets through long-term (up to 30 year) infrastructure concession agreements. Eletrobras successfully sold its six principal, highly-indebted power distributors. The SOE is currently working to begin a capitalization process to reduce the GoB’s share holdings in the company to less than 50 percent. The process cannot move forward, however, until Congress passes a bill authorizing the reduction. In 2018, Petrobras faced criticism over its daily fuel adjustment policy and a major 12-day truckers strike hit Brazil and forced the resignation of Petrobras’ CEO Pedro Parente. To end the strike, the GoB eliminated the collection of the CIDE tax over diesel and gave a USD 3 billion subsidy to diesel producers (mainly Petrobras) to reduce the prices to consumers (primarily truckers).
In 2016, Brazil launched its newest version of these efforts to promote privatization of primary infrastructure. The Temer administration created the Investment Partnership Program (PPI) to expand and accelerate the concession of public works projects to private enterprise and the privatization of some state entities. PPI covers federal concessions in road, rail, ports, airports, municipal water treatment, electricity transmission and distribution, and oil and gas exploration and production contracts. Between 2016 and 2018, PPI auctioned off 124 projects and collected USD 62.5 billion in investments. The full list of PPI projects is located at: https://www.ppi.gov.br/schedule-of-projects
While some subsidized financing through BNDES will be available, PPI emphasizes the use of private financing and debentures for projects. All federal and state-level infrastructure concessions are open to foreign companies with no requirement to work with Brazilian partners. In 2017, Brazil launched the Agora é Avançar initiative for promoting investments in primary infrastructure, and this has supported several projects. Details can be found at: www.avancar.gov.br .The latest information available about Avançar Parcerias is from September 30, 2018. From over 7,000 projects, the program has completed 36.5 percent and 92.2 percent are in progress.
In 2008, the Ministry of Health initiated the use of Production Development Partnerships (PDPs) to reduce the increasing dependence of Brazil’s healthcare sector on international drug production and the need to control costs in the public healthcare system, services that are an entitlement enumerated in the constitution. The healthcare sector accounts for 9 percent of GDP, 10 percent of skilled jobs, and more than 25 percent of research and development nationally. These agreements provide a framework for technology transfer and development of local production by leveraging the volume purchasing power of the Ministry of Health. In the current administration, there is increasing interest in PDPs as a cost saving measure. U.S. companies have both competed for these procurements and at times raised concerns about the potential for PDPs to be used to subvert intellectual property protections under the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
8. Responsible Business Conduct
Most state-owned and private sector corporations of any significant size in Brazil pursue corporate social responsibility (CSR) activities. Brazil’s new CFIAs (see sections on bilateral investment agreements and dispute settlement) contain CSR provisions. Some corporations use CSR programs to meet local content requirements, particularly in information technology manufacturing. Many corporations support local education, health and other programs in the communities where they have a presence. Brazilian consumers, especially the local residents where a corporation has or is planning a local presence, expect CSR activity. Corporate officials frequently meet with community members prior to building a new facility to review the 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. Brazilian prosecutors and civil society can be very proactive in bringing cases against companies for failure to implement the requirements of the environmental licenses for their investments and operations. National and international nongovernmental organizations monitor corporate activities for perceived threats to Brazil’s biodiversity and tropical forests and can mount strong campaigns against alleged misdeeds.
The U.S. diplomatic mission in Brazil supports U.S. business CSR activities through the +Unidos Group (Mais Unidos), a group of more than 100 U.S. companies established in Brazil. Additional information on how the partnership supports public and private alliances in Brazil can be found at: www.maisunidos.org
Brazil has laws, regulations, and penalties to combat corruption, but their effectiveness is inconsistent. Several bills to revise the country’s regulation of the lobbying/government relations industry have been pending before Congress for years. Bribery is illegal, and a bribe by a local company to a foreign official can result in criminal penalties for individuals and administrative penalties for companies, including fines and potential disqualification from government contracts. 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 is problematic in business dealings with some authorities, particularly at the municipal level. U.S. companies operating in Brazil are subject to the U.S. Foreign Corrupt Practices Act (FCPA).
Brazil signed the UN Convention against Corruption in 2003, and ratified it in 2005. Brazil is a signatory to the OECD Anti-Bribery Convention and a participating member of the OECD Working Group on bribery. It was one of the founders, along with the United States, of the intergovernmental Open Government Partnership, which seeks to help governments increase transparency.
In 2018, Brazil ranked 105th out of 180 countries in Transparency International’s Corruption Perceptions Index. The full report can be found at: https://www.transparency.org/cpi2018
Since 2014, the federal criminal investigation known as Operação Lava Jato (Operation Car Wash) has uncovered a complex web of public sector corruption, contract fraud, money laundering, and tax evasion stemming from systematic overcharging for government contracts, particularly at parastatal oil company Petrobras. The ongoing investigation led to the arrests of Petrobras executives, oil industry suppliers including executives from Brazil’s largest construction companies, money launderers, former politicians, and political party operatives. Many sitting Brazilian politicians are currently under investigation. In July 2017, former Brazilian President Luiz Inacio Lula da Silva (Lula) was convicted of corruption and money laundering charges stemming from the Lava Jato investigation. The Brazilian authorities jailed Lula in April 2018, and the courts sentenced him in February 2019 to begin serving an almost 13-year prison sentence. In March 2019, authorities arrested former President Michel Temer on charges of corruption.
In December 2016, Brazilian construction conglomerate Odebrecht and its chemical manufacturing arm Braskem agreed to pay the largest FCPA penalty in U.S. history and plead guilty to charges filed in the United States, Brazil, and Switzerland that alleged the companies paid hundreds of millions of dollars in bribes to government officials around the world. The U.S. Department of Justice case stemmed directly from theLava Jatoinvestigation and focused on violations of the anti-bribery provisions of the FCPA. Details on the case can be found at: https://www.justice.gov/opa/pr/odebrecht-and-braskem-plead-guilty-and-agree-pay-least-35-billion-global-penalties-resolve
In January 2018, Petrobras settled a class-action lawsuit with investors in U.S. federal court for USD 3 billion, which was one of the largest securities class action settlements in U.S. history. The investors alleged that Petrobras officials accepted bribes and made decisions that had a negative impact on Petrobras’ share value. In September 2018, the U.S. Department of Justice announced that Petrobras would pay a fine of USD 853.2 million to settle charges that former executives and directors violated the FCPA through fraudulent accounting used to conceal bribe payments from investors and regulators.
In 2015, GoB prosecutors announced Operacão Zelotes (Operation Zealots), in which both domestic and foreign firms were alleged to have bribed tax officials to reduce their assessments. The operation resulted in a complete closure and overhaul of Brazilian tax courts, including a reduction in the number of courts and judges as well as more subsequent rulings in favor of tax authorities.
Resources to Report Corruption
Petalla Brandao Timo Rodrigues
International Relations Chief Advisor
Brazilian Federal Public Ministry
Bela Cintra, 409; Sao Paulo, Brasil
+55 (11) 3259-6986
10. Political and Security Environment
Strikes and demonstrations occasionally occur in urban areas and may cause temporary disruption to public transportation. Occasional port strikes continue to have an impact on commerce. Brazil has over 60,000 murders annually, with low rates of success in murder investigations and even lower conviction rates. Brazil announced emergency measures in 2017 to counter a rise in violence in Rio de Janeiro state, and approximately 8,500 military personnel deployed to the state to assist state law enforcement. In February, 2018, then-President Temer signed a federal intervention decree giving the federal government control of the state’s entire public security apparatus under the command of an Army general. The federal intervention ended on December 31, 2018, with the withdrawal of the military. Shorter-term and less expansive deployments of the military in support of police forces also occurred in other states in 2017, including Rio Grande do Norte and Roraima. The military also supported police forces in 11 states and nearly 500 cities for the 2018 general elections.
In 2016, millions peacefully demonstrated to call for and against then-President Dilma Rousseff’s impeachment and protest against corruption, which was one of the largest public protests in Brazil’s history. Non-violent pro- and anti-government demonstrations have occurred regularly in recent years.
Although U.S. citizens are usually not 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. For the latest U.S. State Department guidance on travel in Brazil, please consult www.travel.state.gov
11. Labor Policies and Practices
The Brazilian labor market is composed of approximately 124 million workers of whom 32.9 million (26.5 percent) work in the informal sector. Brazil had an unemployment rate of 12 percent as of March 2019, although that percentage was nearly double (22.6 percent) for young workers ages 18-29. Foreign workers made up less than one percent of the overall labor force, but the arrival of 160,000 economic migrants and refugees from Venezuela since 2016 has led to large local concentrations of foreign workers in the border state of Roraima and the city of Manaus. Migrant workers from within Brazil play a significant role in the agricultural sector. There are no government policies requiring the hiring of Brazilian nationals.
Low-skilled employment dominates Brazil’s labor market. During the country’s economic recession (2014-2016), eight low-skilled occupations – such as market attendants and janitors – accounted for half of the roughly 900,000 job openings added to the market. The number of professionals working as biomedical and information analysts – however small – also increased, while that of bill collectors, cashier supervisors, and welders saw declines. Sectors such as information technology services stood out among those that generated job vacancies between 2011 and 2016.
Workers in the formal sector contribute to the Time of Service Guarantee Fund (FGTS) that equates to one month’s salary over the course of a year. If a company terminates an employee, the employee can access the full amount of their FGTS contributions or 20 percent in the event they leave voluntarily. Brazil’s labor code guarantees formal sector workers 30 days of annual leave and severance pay in the case of dismissal without cause. Unemployment insurance also exists for laid off workers equal to the country’s minimum salary (or more depending on previous income levels) for six months. A labor law that went into effect in November 2017 modified 121 sections of the national labor code (CLT). The law introduced flexible working hours, eased restrictions on part-time work, relaxed how workers can divide their holidays and cut the statutory lunch hour to 30 minutes. The government does not waive labor laws to attract investment; they apply uniformly across the country.
Collective bargaining is common, and there were 11,587 labor unions operating in Brazil in 2018. Labor unions, especially in sectors such as metalworking and banking, are well organized in advocating for wages and working conditions, and account for approximately 19 percent of the official workforce according to the Brazilian Institute of Applied Economic Research (IPEA). Unions in various sectors engage in collective bargaining negotiations, often across an entire industry when mandated by federal regulation. The November 2017 labor law ended mandatory union contributions, which has reduced union finances by as much as 90 percent according to the Inter-Union Department of Statistics and Socio-economic Studies (DIESSE). DIESSE reported a significant decline in the number of collective bargaining agreements reached in 2018 (3,269) compared to 2017 (4,378).
Employer federations also play a significant role in both public policy and labor relations. Each state has its own federation, which reports to the National Confederation of Industry (CNI), headquartered in Brasilia, and the National Confederation of Commerce (CNC), headquartered in Rio de Janeiro.
Brazil has a dedicated 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 labor courts system has millions of pending legal cases on its docket, although the number of new filings has decreased since the November 2017 labor law went into effect. Nevertheless, pending legal challenges to the 2017 labor law have resulted in considerable legal uncertainty for both employers and employees.
Strikes occur periodically, particularly among public sector unions. A strike organized by truckers unions protesting increased fuel prices paralyzed the Brazilian economy in May 2018, and led to billions of dollars in losses to the economy.
Brazil has ratified 97 International Labor Organization (ILO) conventions. Furthermore, Brazil is party to the UN Convention on the Rights of the Child and major ILO conventions concerning the prohibition of child labor, forced labor, and discrimination. For the past eight years (2010-2018), the Department of Labor, in its annual publication Findings on the Worst forms of Child Labor, has recognized Brazil for its significant advancement in efforts to eliminate the worst forms of child labor. The Ministry of Labor (MTE), in 2018, inspected 231 properties, resulting in the rescue of 1,133 victims of forced labor. Additionally, MTE rescued 1,409 children working in violation of child labor laws.
On January 1, 2019, newly elected President Jair Bolsonaro extinguished MTE and divided its responsibilities between the Ministries of Economy, Justice and Social Development.
12. OPIC and Other Investment Insurance Programs
Programs of the Overseas Private Investment Corporation (OPIC) are fully available. Brazil has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1992.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
|Host Country Statistical Source*||USG or International Statistical Source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|Host Country Gross Domestic Product (GDP) ($ USD)||2017||$2,053 trillion||2017||$2.056 trillion||www.worldbank.org/en/country|
|U.S. FDI in partner country ($M USD, stock positions)
BCB data, year-end.
|2017||$95,100||2017||$68,300||BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
*U.S. is historical-cost basis
|Host country’s FDI in the United States ($M USD, stock positions)||2017||$16,070||2017||($2,030)||BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
*U.S. is historical-cost basis
|Total inbound stock of FDI as % host GDP||2017||26.29%||2017||36.4%||UNCTAD data available at
* IBGE and BCB data, year-end.
Table 3: Sources and Destination of FDI
|Direct Investment from/in Counterpart Economy Data|
|From Top Five Sources/To Top Five Destinations (US Dollars, billions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||635.12||100%||Total Outward||254.23||100%|
|United States||109.61||17.3%||British Virgin Islands||46.73||18.4%|
|“0” reflects amounts rounded to +/- USD 500,000.|
Table 4: Sources of Portfolio Investment
|Portfolio Investment Assets|
|Top Five Partners (billions, US Dollars)|
|Total||Equity Securities||Total Debt Securities|
|All Countries||40.13||100%||All Countries||31.11||100%||All Countries||9.02||100%|
|United States||13.84||34.5%||United States||10.37||33.3%||United States||3.47||38.5%|
|Cayman Islands||4.25||10.6%||Cayman Islands||3.93||12.6%||Korea, South||0.50||5.5%|
14. Contact for More Information
U.S. Embassy Brasilia