By Amy Skalmusky, Contributing Reporter

RIO DE JANEIRO, BRAZIL – It’s no secret that some items cost significantly more to buy in Brazil then they do in the U.S. or Europe. In some cases it’s even less expensive to fly home to buy items to bring back, then purchase here. There are many global trade issues at play, and the recent stand-off over cotton is an example of how government subsidization, import tariffs and taxes play a major role in the price the end consumer pays at the checkout counter.

Many items cost significantly more in Rio, photo by Jgonzalezc/Flickr Creative Commons License.
Many items cost significantly more in Rio, photo by Jgonzalezc/Flickr Creative Commons License.

Although 50 percent margins on certain products may seem outrageous, a closer look into the business landscape in Brazil may explain how high taxes, complicated regulations, workforce costs generate risks and real costs that drive up the final price of products and services.

Taxes are one of the most significant line items taking a bite out of any company’s profits. The average Brazilian company pays around 69 percent of its net profits to the government, according to the World Bank. In the United States, a company pays 46.8 percent of its profits. The United Kingdom and Canada pay even less, 37.7 and 29.9 percent respectively.

For a given invoice in Brazil, the business owner may have to pay ICMS, PIS, COFINS, IPI , ISS, CSLL, and income taxes on the total, which can add up to 50 percent. Some of the taxes may qualify for credit; however, they all must be paid when an invoice is issued – not when it’s paid. So, if a client decides to skip town, the owner may be caught holding the bag. “I had to take out a loan to pay the taxes while I waited for my client to pay,” said Anselmo Pontes, a former small business owner.

There are 62 taxes in Brazil and 3200 tax codes – including laws, provisional measures, decrees, regulations and instructions, according to the Instituto Brasileiro de Planejamento Tributário (Brazilian Institute for Tax Planning). “The tax system is so complex that even a small business has to hire the services of an accounting firm to ensure it is current with the constantly changing tax requirements,” said André Wiermann, owner of Quetzal, a small software company.

Hiring and Firing people also makes business owners plan carefully. Additional costs for employees – such as taxes, health insurance, meal stipend, grocery stipend, transport stipend, vacation pay and “thirteenth salary” (an additional month’s pay every December) add up to nearly 90 percent more than base pay – a stark contrast to the United States at 29.4 percent and the United Kingdom at 18 percent.

Laying people off can also be pricey. Depending on the amount of time with the company, a dismissed employee may cost up to 30 months of salary in Brazil.

“Many companies avoid dismissing employees regardless of the employee’s performance, because the likelihood of the labor courts finding in the employee’s favor are overwhelming,” said Stephanie Cabral, a Canadian living in Brazil for fifteen years and part owner of Plural Traduções, a translation company that specializes in legal and financial translations.

Brazilian labor laws, in place since the 1940s, were based on a model of factory work and fear of big company exploitation. According to Elizabeth Haimenis, lawyer with Kamenetz & Haimenis Advogados, many companies include a “civil contingency” in their budget, or money allocated for potential lawsuits. “The parties will usually cut a deal, which ends up being less expensive,” said Haimenis.

Aníbal Patricio of Espirito de Vinho, photo by Amy Skalmusky.
Aníbal Patricio of Espirito de Vinho, photo by Amy Skalmusky.

Problems from within are not the only ones that effect business operations. “I spend 20 percent of my time dealing with mistakes, such as incorrect deliveries, wrong charges,” said Aníbal Patricio, owner of Epiríto de Vinho, a wine boutique in Humaitá.

Just that day Patricio had received a box of six, R$500-a-bottle wine that was short one bottle. “If I hadn’t been here to check it over carefully, it would have probably passed by,” he said. According to Patricio, this type of error is not uncommon. “I’m at the store from 8AM in the morning to 8PM at night every day. As a conscientious business owner, you have to be present,” he said.

Patricios’ business requires a healthy stock of imported products, which can be especially pricey. He says there is no benefit to buying local, only extremely high taxes on imports. “You pay import taxes over not only the product, but on the shipping and insurance as well,” he said.

There is some good news on the horizon which may result in lower prices in the future. The government is implementing a new system of digital bookkeeping, called Sistema Público de Escrituração Digital (Public System of Digital Bookkeeping) or SPED, to integrate federal, state and municipal tax agencies and simplify filing for business owners. There are also new, low-interest financing options through BNDES (National Development Bank of Brazil) for all size companies.

Incentives may offer some relief; however, in the face of the numerous costs and complications many business owners face, the high prices that consumers decry may actually be the lowest prices they can offer.

13 COMMENTS

  1. Brazilians may be doing something right!
    They didn’t ship all their manufacturing overseas…and produce everything from artificial hearts and airplanes to clothes and toys…
    Maybe the cost of keeping your industry alive is worth the high prices paid by the consumer…

  2. The listed tax for the US is only the possible maximum tax. Typically US corporations pay much less than that in taxes. Another reason prices are much lower in the US is that the distribution system and retail system is very very efficient.

    Commerce in the US is brutally competitive and ultra efficient. But be careful what you wish for, the US economy results in unbelievable levels of work and stress. The Japanese talk about how much they work but they work far fewer hours than the typical American worker in a salaried position.

    I live part time in Rio and came from the US and can tell you that the Brazilian lifestyle for the typical middle class Brazilian is much more enjoyable than the US lifestyle. Of course the poorer people in the US are much better off than those in the favelas in Brazil,

  3. I have to remind that in spite of Brazilian labour legislation needing urgent reform, Brazilian salaries are ridiculously low.

    A £900 a month or £10,800 salary in Britain is considered just about enough and able to provide all basic mod-com, although still within the lower salary range. The same in here is considered a top-medium to good salary at around R$2.340 a month or R$30,420 including the 13th salary. The big difference though is your buying power which is much lower due to expensive goods (sometimes also bad quality) and services.

    The minimum expenses to live in Rio for example owning your property not necessarily in a noble aerea without leisure expenses or health insurance is of R$1,000, the minimum salary is R$510 which is what the majority gets. If you go to employment agencies it is also noted that most jobs on offer are for minimum or just above minimum salary for 6 days a week on a 8 hours minimum shift. So by far Brazilian are hugely underpaid and it is not surprise there are so many favelas around,

    I think there might be two major culprits in the equation, the government with huge taxation and some business people with practices that are only focused in the maximum profit within the shortest time spam.

  4. The differences between doing business in Rio/Brazil and US is major, and it seems to come down to administration process (and some might consider inefficient), cost of goods (which can vary wildly), and labor.

    Conventional wisdom is that labor should be inexpensive but with all the laws established over the years to protect worker exploitation – it is now a double-edged sword. As Vania points out though, the income that makes it to the average Brazilian household isn’t enough to live on.

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