Brazil is a large market and buys millions in services and software abroad monthly. What companies do not realize is that receiving for the services abroad, from clients in Brazil, can be extremely costly.
Services company not established in Brazil may pay up to 42% in several Withholding Taxes upon remitting the payments abroad, and just part of this amount is offsetable in foreign jurisdictions.
To illustrate this point, let us present you with 2 tables below, one for regular jurisdictions and other for tax havens:
Regular Jurisdiction
Tax Haven Jurisdiction
The services provider can always gross up the non-refundable taxation above, but it certainly runs the risk of being out of the market, for price reasons.
What can be done to avoid this? Incorporating in Brazil can be one possibility, and sourcing locally (workforce, etc). That should be carefully analyze, notwithstanding, due to the implications in other taxation, such as Corporate Income Tax (that can be calculated either by the actual taxable income or based on a “presumed” rate based on gross revenues).
Incorporating in Brazil is tricky, but it was a lot harder in the past. Brazil is making some effort as to make the incorporation of companies easier, but it is still a convoluted process.
Some time ago one of our colleagues asked us to study a specific situation much like the above ones. We have diligently put together some 10 scenarios, that involved costs, prices and margins, in order to obtain the “sweet spot” for the company to be established here (or not). The results, as much as we understand, were catastrophic, due to our inability to convey the small bits of the transactions and its huge number of developments. It is always better, in some professionals` minds, to keep all simple. We tend to agree. Except that in the specific case of Brazil, nothing is exactly simple.
Anyway, the message here is relatively simple – hold on, do your math and offer your client all the options, and let your client choose from the multiple alternatives, given their willingness and flexibility to apportion costs, hiring locally, and bargaining prices with clientele.
We are at your disposal to support but send an early warning: do not kill the messenger! It is what is it, but it pays off big time, when you are well established in Brazil.
Source: Wesley Figueira – Managing Partner