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Laws, Business setting, Accounting regulations
Specific industry chamber information
Visit and meet people
Profa. Me. Carla Mhoura Caruso
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40% of Latin America
Population: 181 millions inhabitants
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Monarchy system from 1822-1889
Form of Government
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Political System
Constitutional democracy and its political power is divided into the Executive, Legislative and Judiciary branches.
Political/Administrative Divisions
27 partially autonomous states
One Federal District, located in the center of the country - Brasília
5 geo-economical regions: North, South, Southeast, Northeast and Mid- West.
Political System
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181.8 million, consisting of nearly 80% urban and 20% rural
Immigrants: Portuguese, Italians, Germans, Spanish, Japanese, french
Life expectancy for men is 65,1 years and 72,9 for women.
Climate and Natural Resources
Climate is mostly tropical, but it is temperate in the south.
Natural resources, such as bauxite, gold, iron ore, manganese, nickel, phosphates, platinum, tin, uranium and petroleum.
Geography and Climate
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Currency unit is the "Real" (R$). Current rate: 1US$= R$,
Fluctuating exchange rate
Main Economic Sectors
Economy
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The installed capacity of heavy and basic industries (heavy industrial machinery and equipment, shipbuilding, road building equipment, railway equipment, equipment for hydroelectric plants, offshore drilling equipment, steel, cement, aluminium, pulp, paper, etc.) is significant and provides the infrastructure to manufacture the capital goods necessary to increase the country's productive capacity or to earn additional foreign currency from exports. Capital investments had been increased in recent years, in light of the new currency.
Industry
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Brazil's electricity is almost entirely generated by water power even though a considerable proportion of the nation's hydroelectric potential remains untapped. Total hydropower potential amounts to 259.7 gig watts, of which only 25 percent has been tapped
Power Generation
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The renewed dynamism and modernization of the Brazilian automotive industry has caused Brazil to move up from tenth to eighth place in world output.
Motor Vehicles
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Today the success of planes wholly designed and manufactured in Brazil, mainly by Embraer, and exported to countries on every continent, makes Brazil's aircraft industry one of the largest in the world. Most of Embraer's planes have been sold to customers in the United States (more than 700 aircraft currently in service) and in Europe.
Aircraft Industry
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Agriculture
Record of harvest in 2003 with more than 123 millions of tons of crops, like corn, and soy beam.
Environmental Protection
Increasing adoption of environment friendly farming practices. One example is the direct planting technique, where croplands make use of organic waste from previous harvests
AGRICULTURE AND ENVIRONMENT
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GNP of about US$1.000 billion – 9th economy in the world
Inflation Rate and GNP
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The National Privatization Program (PND) was created in 1990
The constitutional reform of 1995 may be highlighted, for the establishment of:
the flexibility of state monopolies in telecommunications, electric power, oil and natural gas;
the widening of the definition of a "Brazilian company", allowing for foreign companies headquartered in Brazil to exploit services, that until then were restricted to Brazilian companies of national capital; and
the opening of mining activities and the exploitation of hydraulic power potentials for foreign investors.
PRIVATIZATION PROGRAM
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exploit services, that until then were restricted to Brazilian companies of national capital; and
the opening of mining activities and the exploitation of hydraulic power potentials for foreign investors.
private sector participation into cellular telephone system, satellite services, limited services and services of added value;
Decree 2003/96, which established the rules applicable the independent production and the self-production of electrical power, as well as to Cable TV and Multipoint Multichannel Distribution Service-MMDS.
PRIVATIZATION PROGRAM (CONT)
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Since the creation of the PND, 64 companies owned by the federal government and other companies under minority control have been transferred to the private sector especially from the steel, chemical, petrochemical, fertilizer, electricity and telecommunications sectors, as shown in the chart below:
PRIVATIZATION PROGRAM (CONT)
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Proceeds by Sectors - PND (US$ million)
Sector
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For the year 2000, the main event in the privatization program was the sale of Brazil's sixth largest bank, Banespa, originally owned by the State of São Paulo but under federal administration since 1998. The total proceeds from this operation were over US$ 3 billion.
Profa. Me. Carla Mhoura Caruso
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Brazil is the leader country of Mercosur (Southern Common Market), a common market created by the Treaty of Asunción signed by Argentina, Brazil, Paraguay and Uruguay on March 26, 1991 Chile, Bolivia were associated in 1996.
Some of the objectives settled in this Treaty are:
the free transit of production goods and services between the member states;
the elimination of customs rights and lifting of non tariff barriers on the flow of goods;
the adoption of a common trade policy with regard to non-member states or groups of states; and
the coordination of positions in regional and international commercial and economic meetings.
TRADE OPPORTUNITIES
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When compared to other emerging economies, Brazil relies on major comparative advantages such as:
huge territorial extent, with plenty of natural resources, some of them entirely unexplored;
enormous population with a dynamic and fast growing internal consumer market, a tendency being boosted by the income resulting from the sharp drop in the inflation rate;
economical integration within Mercosur, with the corresponding expansion of market and business opportunities;
deep-rooted, dynamic, and profitable capitalist economy with availability of skilled labour force, including management levels;
Brazil advantages as a partner
Profa. Me. Carla Mhoura Caruso
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relevant presence of foreign capital, particularly on the industrial structure, that accounts for 30% of the production;
well-developed industrial center, with a diversified export agenda that ranges from iron ore and orange juice to highly value-added manufactured products such as cars, airplanes, ships and capital goods;
diversified export markets;
modern and integrated agriculture presenting one of the world's largest harvests of around 115 million tons;
stability of the democratic political institutions.
Brazil advantages as a partner
Profa. Me. Carla Mhoura Caruso
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Normally, prior permission is not required to establish a business in Brazil, except for some areas requiring government agency to analyze the project from an environmental standpoint. Also, certain limitations are imposed on foreign companies, in areas such as shipping, newspapers and other publications, radio and television, health care, mining, banking and alcohol production.
Foreign investors may organize their entrepreneurial activities in Brazil as:
a Corporation ("Sociedade Anônima"),
a limited liability companies ("Sociedade por Quotas de Responsabilidade Limitada")
or a branch. Operating through a branch is also quite uncommon, since setting up a branch in Brazil involves enormous bureaucratic requirements, including presidential authorization.
BUSINESS PRESENCE
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A Corporation must, upon its incorporation:
deposit 10% of its capital in a bank. In addition, it must
allocate 5% of its annual profits to a legal reserve until the reserve reaches 20% of capital
a minimum of two shareholders and two directors is required.
the directors must be Brazilian residents and the shareholders, if they are not residents, must have legal representatives in Brazil.
BUSINESS PRESENCE
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Open (public) corporations (" Companhia de Capital Aberto ") must have external auditors. A corporation must pay several registration fees and emoluments upon incorporation. The major advantage offered by a corporation structure is that capital may be raised through the public offering of shares or debentures. Limited-liability companies may not raise capital through public offerings.
Unlike the "Sociedade Anônima", a limited-liability company is not required to maintain a legal reserve. There is only one class of ownership, the registered quota (the amount to which each partner limits his liability). The limited-liability company must have a minimum of two quota holders. There is no nationality or residence requirement to participate in a limited liability company. A quota holder may not sell his quota without the consent of all quota holders. However, non-resident quota holders need to have a resident legal representative in Brazil.
BUSINESS PRESENCE
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The limited-liability company is the corporate structure most often used by foreign investors. Foreign investors generally do not have any commercial or other interest in making public the administrative acts and financial statements of their Brazilian subsidiaries, and are not required to do so under Brazilian law. In addition, because limited liability companies have fewer bureaucratic requirements than corporations, companies operating as limited liabilities can make corporate decisions more quickly, which is a significant advantage in the constantly changing legal and economic environment of Brazil.
BUSINESS PRESENCE
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In Brazil, a joint venture may be set up in several ways, but the main type is the equity joint venture.
This type of joint venture is by far the most common form of partnership involving foreign investment. They occasionally involve participation by two or more partners in the equity company, but much more frequently in the incorporation of a new company in which each partner owns a certain portion of the equity capital.
A joint venture may be established through a corporation or a limited-liability company.
Joint Venture and Economic Interest Groups
Profa. Me. Carla Mhoura Caruso
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Corporate entities and individuals engaged in commercial activities must maintain proper accounting books and record transactions in these books as required by law.
Corporate entities must keep the following books and records:
- a general journal (diário);
- book of calculation of taxable income (LALUR); and
- registry of inventory and goods shipped and received.
Official records must be written in Portuguese with values expressed in Reais. Transactions must be recorded in chronological order. Manual or computerized subsidiary journals for cash receipts and disbursements and for purchases and sales are permitted if they are properly registered. Records must be clear and without erasures. Blank lines and alterations are not permitted.
Tax Year, Financial Reporting and
Accounting Standards
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Companies in Brazil must use the accrual method for computing the results of their activities.
Corporations must prepare financial statements annually, transcribing them into the general journal. Limited liability companies are not subject to reporting requirements (Exception are companies with more than 10 quota holders – by the new Civil Law (2003) .
Corporations with publicly traded shares or other securities must have their financial statements audited and publish the independent auditor's report together with the statements. Financial institutions, including leasing companies, must publish semi-annual audited financial statements. All publicly held companies must prepare and publish consolidated financial statements in addition to their own financial statements.
Tax Year, Financial Reporting and
Accounting Standards
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Brazilian accounting principles are established by Law 6404 of 1976(changed by Law 10303 of 2001) and by accounting professionals, by means of the Brazilian Institute of Accountants (IBRACON) and the Federal Board of Accountancy (CFC). IBRACON issues technical pronouncements and guidelines for all basic generally accepted accounting principles (GAAP).
The Securities Commission has the authority to specify the accounting and reporting practices for publicly traded companies. The commission establishes disclosure requirements for the quarterly and annual financial reports of publicly held companies. Although the commission has determined some accounting rules, it generally relies on IBRACON and the CFC to establish accounting standards.
Country's Location and Language
Accounting Standards
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Companies in banking, insurance and other specialized business sectors must comply with the specific accounting practices established by the regulatory agencies with responsibility for their sectors.
Publicly held companies, under control of CVM, must publish audited financial statements annually, together with the auditors' report. The financial statements consist of a balance sheet, an income statement, a statement of retained earnings (usually provided as a part of the statement of shareholders' equity), a statement of the source and application of funds (working capital), and notes to the financial statements. The audited financial statements must be submitted to the CVM annually, to the appropriate government agency if the company is of public utility, and to the BACEN and other regulatory agencies if the company is engaged in banking, leasing or insurance activities.
Tax Year, Financial Reporting and
Accounting Standards
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In Brazil, the fundamental accounting concepts of going concern, consistency and prudence must be respected. The FIFO method and average cost method are permissible. The LIFO method can not be used for financial tax accounting.
Brazil is a member of the International Accounting Standards Committee (IASB). In general, accounting principles prescribed in Brazil are comparable to those prescribed by the IASB because IBRACON and the CFC take IASB pronouncements into consideration when preparing accounting pronouncements. The main areas in which Brazilian standards differ significantly from international standards are summarized below.
Significant Accounting Principles and Practices
Profa. Me. Carla Mhoura Caruso
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Brazilian accounting principles governing leases do not follow IAS 17 on accounting for leases. In Brazil, lease contracts are recorded as rental expenses by lessees (as the lease installments are paid) and as property, plant and equipment by lessors, regardless of whether the contract provides for a finance lease or an operating lease. However, the BACEN and the CVM require that the income of lessors be adjusted through a provision to reflect the substance of finance lease agreements.
Leases
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IAS 3 on consolidated financial statements requires companies to supplement consolidated statements with separate financial statements of subsidiaries excluded from the consolidation. In Brazil, only publicly traded companies must prepare consolidated financial statements. However, an investment in an excluded subsidiary is carried at equity, and the notes to the consolidated financial statements must disclose relevant data concerning such an investment.
Consolidated Financial Statements
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Corporations must prepare financial statements annually, transcribing them in the general journal. Required financial statements include a balance sheet and statements of results of operations, changes in financial position and changes in shareholders' equity (if not disclosed in the notes). Assets and liabilities are presented in the order of liquidity. In addition, notes to the financial statements are required, including disclosures of the accounting policies adopted by the company. All Corporations must publish two-year comparative financial statements in the Official Gazette and in at least one well-known newspaper.
Closely held corporations are subject to disclosure requirements similar to those of publicly traded companies, but their statements are not required to be audited. Limited-liability companies are not required to disclose their financial statements to the public.
General Requirements for Financial Reporting
Profa. Me. Carla Mhoura Caruso
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- Current assets;
- Long-term assets;
- Current liabilities;
- Long-term liabilities;
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At a minimum, the income statement must disclose the following items of income and expense:
- Gross income from sales of goods and services, sales deductions, discounts and taxes on sales;
- Net proceeds from sales of goods and services, cost of goods and services sold, and gross profit;
- Selling expenses, financial expenses (less financial income), administrative expenses and other operational expenses;
- Income (or losses) from operations, non-operational income and expenses;
- Income for the year before income taxes;
- Income taxes;
- Participation in profit payable to employees and directors and contributions to employees' pension and welfare funds;
- Net income; and
Income Statement
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The statement of cash flows must include the sources and applications of funds, any increase or decrease in net working capital, and the balance of current assets and liabilities at the beginning and end of the fiscal year.
Statement of Cash Flows
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To comply with Law 6,404 of 1976 (changed by Law 10303 of 2001) and subsequent accounting regulations, corporations must provide the following information in the notes to their financial statements to the extent the information is applicable:
- the main accounting policies used in preparing and presenting the financial statements, including the method used for valuing inventories and determining depreciation, amortization and depletion; the basis for provision for expenses and risk; and adjustments made to cover losses expected to be incurred on the disposal of assets;
- the basis of consolidation and the companies included in consolidation;
- the major categories of all significant accounts, for example, inventories and fixed assets.
Notes to the Financial Statements
Profa. Me. Carla Mhoura Caruso
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- details of material investments in other companies;
- increases in the carrying values of fixed assets as a result of spontaneous revaluation;
- pledges of assets, guarantees given to third parties and other contingent liabilities;
- interest rates, maturity dates and guarantees for long-term loans;
- the number, type and classes of the company's shares;
- dividend distribution policies;
- prior year adjustments, which are made for a variety of reasons (often involving immaterial amounts);
- significant events occurring after the balance sheet date that have or might have a material effect on the company's financial position or on the results of future operations.
Notes to the Financial Statements
Profa. Me. Carla Mhoura Caruso
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Publicly traded companies must issue directors' report containing basic information about the company, any significant changes and information on the business segments in which the company is engaged. In addition, they must supply detailed annual and quarterly information to the CVM, information that is similar to but much less extensive than that required by the Securities and Exchange Commission (SEC) of the United States. Independent auditors must review the quarterly financial information submitted to the commission by publicly traded companies with gross sales of R$ 100 million or more.
Directors' Report
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General Description of the Tax System
The concept of doing business in Brazil is related to the existence of permanent establishment in the country, i.e., subsidiary or a branch.
TAXATION
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