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Cash Management in Brazil Driving a Fast Car…

by Florent Michel,  Managing Partner,  Latina Finance & Co.

The growth of cross-border funds in and out of Brazil is a first in the country's history.

Busy, busy, busy Brazil - downtown Sao Paulo is a honey-pot full of bees. Luxury cars, traffic jams, designer outlets, packed business restaurants, the heat is on, there is a flurry of IPOs on the BOVESPA stock exchange, business is everywhere… One can feel the growth and the country’s booming economic power right down in the streets and the cafes. The financial sector is no exception. Brazilian companies go international and international companies go Brazilian. The growth of cross-border funds in and out of Brazil is a first in the country’s history. Political stability and strict fiscal policy governance is paying off. Brazil attracts a wealth of investors sometimes disappointed by China, Russia or India. However, bureaucracy has not disappeared and the country is developing a strong market-driven economy alongside an important public sector.

This article will provide an insight to treasury and cash management in Brazil and the latest trends in the market. But first we need to look at one important topic: taxes. Taxes are key in Brazil as in other countries in the region, but taxes are a true Brazilian specificity and as such, tax has to be one of the key drivers of any financial decision that any CFO or treasurer makes in Brazil.

Tax, tax, tax…

The Brazilian tax system is relatively complex. First because there are three levels of tax collection: federal, state and municipal. Second because while tax rates and their applications seem to be relatively well defined in the books, they are full of exceptions and rulings, depending for example on your industrial sector or on the financial situation of your company. The recommendation is therefore to appoint first a reliable tax adviser. It is also interesting to note that indirect taxes represent on average 40% to 50% of a company’s operational revenues, so it is far from being a benign item on your balance sheet.

As to taxes on financial items the most important is the IOF (Imposto sobre Operacoes Financeiras), which is a tax of 0.38% applicable to most if not all financial transactions. Unlike in Argentina or Colombia for example there are no debit/credit taxes but the IOF virtually replaces this as it touches nearly every movement of funds except bank account debits and credits (borrowings, placements, dividend pay outs, foreign exchange, banking operations, recapitalisation etc.) Foreign exchange and derivative transactions have additional taxes.

Another important point is transfer pricing. Brazil has its own ruling in that respect and does not abide by the OECD rules. Therefore tax consultation is essential in order to avoid any requalification. 

Efficient payment and collection systems

Brazil continues to be at the forefront in terms of cash management and electronic settlement of transactions. It is a highly automated environment providing the right tools for enhancing working capital. Some people say that this is  a legacy of the hyperinflation days when a day of float meant more than today. Banks are providing state of the art cash management processing platforms accommodating the needs of corporates wanting to stay manual or others which favour outsourcing. 

On the payments side the country has an RGTS for mass payment (called STR and CI-SITRAF) and another clearing house (CIO-SILOC) for payments of less than R$5000 (due to be reduced to R$3000 soon). The latter clearing house also clears the Boletos (a collection instrument taking the form of a very specific electronic invoice and widely used in Brazil). The RGTS payment system is called DOCs and it settles same-day value. The other is called TEDs and settles on D+1. For cheques there is a specific clearing house called COMPE which clears cheques on a national basis. Cheques are settled D+1 as well as Boletos. We will see later in this article how the Boleto market is also changing with new innovative features. 

SwiftNet is not especially well developed  other than for some cross-border payments,  and while Swift opened an office in Sao Paulo in 2007, the development of this platform is relatively slow as the banks have their own proprietary systems and also manage the cumbersome foreign exchange authorisation process. Brazilian banks such as Bradesco are important users. In 2009 Brazil was not even among the top 25 countries of Swift users, with  only 21 banks and 92 institutions members. Swift even registered a drop of 10% in the volume of exchanged messages.

Liquidity management is centre stage

Liquidity management remains one of the key issues and is among the most difficult things to manage in Brazil. Corporates are only allowed to have accounts in R$ which limits the room to manoeuvre especially for multinationals. However given the internationalisation of Brazilian companies in the last ten years the financial authorities have relaxed that strict rule a little. In specific cases corporates can open offshore USD accounts under the supervision and control of the central bank, Banco Central do Brasil. This concession was only available to a number of industrial sectors until recently, when the authorisation was extended to exporting companies. With such offshore accounts companies can settle their USD payments and collections without the burden of having to convert funds in B$ and pay related FX commissions and taxes. Pressure has never been so strong on the central bank to relax foreign exchange controls and companies may soon be allowed to hold foreign currency accounts in the country. 

Brazil continues to be at the forefront of cash management and electronic settlement of transactions.

For domestic funds, ZBA is commonly used in Brazil among subsidiaries of the same legal entity and banks are providing automatic transfers of end-of-day balances. Pooling among different legal entities would be IOF taxed at 0.38%, making the proposition unattractive. Corporates with large volumes are setting their own investment fund (FIDC) where they actually manage to concentrate flows using non taxable trade instruments to net their financial position. Given the burden of managing this type of structure it only make sense for large companies with yearly volumes exceeding B$100 m.

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