Country report Brazil

Economic overview

The evolution of the macroeconomy is a reflection of the pandemic: Brazil enters a technical recession, with the second consecutive quarter of growth with the minus sign ahead. Between July and September 2021, GDP fell by 0.1%, after -0.4% in the second quarter and + 1.2% in the first. The most affected sector was agriculture, with a decline of 8%. The growth rate of consumer prices exceeds 10% per year. Stagflation is therefore emerging: that macroeconomic phenomenon characterized by stagnation and inflation.

Paulo Guedes, current Minister of Economy, defends himself by showing the G20 figures, a generalized surge in inflation. “The growth rate of consumer prices is recorded everywhere and the factors that determine its rapid rise are 3: the surge in consumption after the restrictions due to the pandemic, the increase in oil prices, new consumer habits”.

Main sectors of industry

The Brazilian manufacturing sector is the third largest in the Americas.

Brazil is recognized as a significant player in the oil and gas industries in the region. It also ranks as the second largest producer of ethanol-based fuel in the world. The country’s energy sector has benefited immensely from the market liberalization implemented in the late 1990s and early 2000s. Over 50 oil companies operate oil exploration activities in Brazil.

The steel industries in the country benefited from government support in the mid-20th century as steel was considered the key commodity to facilitate economic growth. Industries were created in regions rich in iron minerals such as the State of Minas Gerais, São Paulo and Volta Redonda.

Brazil’s machinery and equipment sector accounts for approximately 7% of the national industrial production index. The subsectors of agriculture and transport are particularly profitable. 90% of the agricultural machines used in the country are purchased domestically and used in the cultivation of crops such as wheat, soy, rice and corn. Machines enjoy a significant regional market and wheeled tractors are also a major export. The country’s mechanical industry also produces road equipment.

Agriculture is a fundamental aspect of the Brazilian economy. Vast sugar cane plantations characterized colonial Brazil, where European settlers employed local or African labor in the form of slaves. Coffee plantations were also created and, after independence, the production of the crop was concentrated in the southeastern region. The cultivation of rubber, cocoa and tobacco gained popularity in the 19th century.

The country’s textile sector is worth $ 63 billion and is made up of 30,000 companies with an annual production of 9.5 million garments. The industry workforce is the second largest in the nation. Brazil is one of the few nations that still uses all links in the textile industry, i.e. from sourcing the fiber to designing and manufacturing.

Taxation for businesses in Brazil

Taxation on companies and permanent establishments resident and located in Brazil is quite significant, as Brazilian companies can opt annually to be taxed on their real income (“real profit”) or – under certain conditions – on their own presumed income (“presumed profit”). The nominal rate of taxation of corporate income is 15%, to which, however, a 10% surcharge and a “Contribuição Social sobre o Lucro Líquido” tax rate of 9% are added, which bring the total tax rate of tax on corporate income at 34% overall.

Small companies that do not exceed a gross income of 3.6 million Brazilian Real (approximately € 900,000) can opt instead for a simplified taxation regime that covers, in addition to corporate tax, social security contributions, Federal VAT and a number of other indirect taxes.

In addition, it should be noted that the federal tax legislation provides for contributions aimed at financing the social security and welfare system that are parameterized on the gross turnover of companies such as c, d. “COFINS” (3%) and the so-called “PIS” (0.65%). There is also a Financial Transaction Tax (“IOF”).

In the context of direct taxation, it should also be noted that some specific anti-avoidance provisions are present, such as the thin-capitalization rule (with a level of debt that cannot exceed the ratio of 2: 1 with respect to equity), “black- list cost rule ”and a specific regulation on transfer pricing which is absolutely not in compliance with that adopted by the OECD. In addition, except in limited circumstances, payments for services in Brazil are subject to withholding tax. In this last regard, it should be noted that Brazil currently has 28 agreements in force with foreign countries, including the one with Italy, to avoid double taxation).

Investing in Brazil

In the last 12 months, inflows of foreign direct investment (FDI) have already been much lower than in previous years and the most likely scenario for the next twelve months is that the level of inward FDI will not increase. In 2020, total FDI inflows to the South American country, equal to US $ 44.7 billion, were 35.4% lower than in 2019. However, this reduction has not prevented Brazil from remaining the first recipient of FDI in America Latin and Caribbean, but globally it fell from sixth place in 2019 to eleventh place in 2020. In this panorama, Italian investments were an exception: in 2020 thanks to a new investment by the Enel group, the flows of Italian FDI in Brazil increased by 69.6%, to represent 3% of the total FDI received by Brazil.

Thanks to a strong fiscal expansion, the contraction in economic activity in 2020 was contained to -4.1%. At this moment the Brazilian economy is showing a robust recovery and this year could close with an expansion of the GDP equal to 5.2%, while the forecast for 2022 is for growth that is steady at 1.5%. Growth will be lower not only due to restrictive monetary policy, but also due to less expansionary fiscal policy: in 2020 the total balance of the public budget had reached – 13.4% of GDP, while in 2021 the deficit should fall to -6. ,2%. The ratio of gross public debt to GDP, which had reached almost 100% in 2020, is expected to drop to 90.6% at the end of 2021, thanks to GDP growth.