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Paulo Roberto Gallo

Director of Authomathika, CeiseBr and Ciesp


Can we stand this burden?

The theme of this year’s Forum has been much debated among corporate leaders in Sertãozinho. There are 550 industrial companies in town, most of which predominantly cater to the sugar-based energy industry. The relation between suppliers to the sugar-based energy industry and the sugar-based energy industry itself is a very old one, and has been a healthy win-win one. With the introduction of the “Proálcool” program, suppliers to the sugar-based energy industry further intensified this relation, given the need to come up with solutions.

Among all the companies, Dedini and Zanini stood out. To have an idea of the importance of Zanini for Sertãozinho and the industry, for example, more than 70 industrial companies, with operations in this town, derived from Zanini, specifically to cater to the sugar and ethanol industry.

Of this client-supplier symbiosis resulted the capital goods industry aimed at the agroenergy sector, which nowadays holds all the production technology in the industry. Brazilian industry’s pride.

However, there is room for additional gains. In today’s globalized world, we have to be more competitive, because globalization is no longer an academic issue, but rather, the everyday operational reality of our companies. We are competently at work. But not all depends on our good will. What is so frustrating is that one must carry around increasingly heavier burdens and, unfortunately, for which no solution is in sight, and no progress has been made going in that direction.

A study developed by the World Bank called “Doing Business in 2012”, in partnership with local entities and organizations of countries around the world – that are familiar with the difficulties and hardships of each country, analyzes and details ten corporate entrepreneurship sustainability indices, involving legislation and rules on the registration of property, obtainment of credit, investor protection, taxes and dues, execution of contracts, opening and closing of businesses, among others.

Of the 183 countries assessed, Singapore is the most competitive country in the world in terms of business facilitation, followed by Hong Kong, China, New Zealand, the United States, and Denmark. Brazil ranks 126th. This means that of a total of 183 economies, in 125 it is easier to do business than in Brazil. Obviously, this affects our capital goods industry, the agroenergy industry, as well as the Brazilian industrial production system. We have excessive taxation, excessive legislation, and excessive bureaucracy.

To assess such scenario, let us detail three of the more common obstacles of industrial activity: the tax issue, labor legislation and access to credit.

Taxation: When talking about tax reform, one does not talk of reducing the total amount of revenues the State collects, but rather, of paying taxes in a more civilized manner, in a way so as to increase the number of companies in the taxpayer universe, while decreasing the tax burden, because nowadays few pay a lot and many pay nothing.

When will we have people with the power and the will to decide on a solution for this issue? We are always imagining whether now is the right time, but one government follows another and nothing happens. We hope this time will really be the right time. Let’s hope we can convince this government to truly act in the best interest of our nation. This is a very old issue. Given its importance, I suggest from now on we call it the Tax Revolution.

Brazil’s overall tax burden is 34% of GDP, much higher than in all other countries comprising BRIC, our direct competitors in development, given that in Russia it is 23%, in China it is 20%, and in India it is only 12%. How to compete with this disproportion? A part of this absurd cost will be transferred to the product price and absorbed by the client, and the other by the producer, reducing profitability and hence, investment, expansion and research. There is nothing we can do. These costs do not depend on any action we may take. No matter how efficient we are, no rationalization can reduce them.

This is the total tax burden in relation to GDP. In the capital goods industry this penalization is even more abusive. The typical tax burden on equipment in this industry is 15% of “IPI”, 18% of “ICMS” and 9.25% of “PIS/COFINS”, totaling unbelievable 42.25% in direct taxes, generated upon issuance of the invoice. This does not include corporate taxes at the end of the year, the Social Contribution on Net Profit, which already chops off 35% of companies’ net profit. Also not included are the enormous labor obligations.

There are other primary distortions. The “ICMS” tax, for example, is applied to the equipment cost that already entails the “IPI” tax in the case of a sale to an end consumer, characterizing double taxation, which is unconstitutional. In the case of equipment sold as installed, labor costs for the installation comprise the “ICMS” tax calculation basis, which then in turn reflects on the IPI tax, increasing it.

Current legislation (“LC116/2003”) contributes to the fight of municipalities over the service tax (“ISSQN”), generating legal battles and unnecessary costs for companies, due to dubious interpretations of the legal norm. One of the consequences is the possible taxation in duplicate, both in the municipality where services are rendered, and in the municipality in which the supplier company is headquartered. To put this into numbers, assuming equipment with a price tag of R$1 million, and based on average figures, the company will be able to achieve a net operational result of about R$46,530.00, i.e., 4.65%, with a final tax burden in the magnitude of 49.05%.

The tax payment method is also complicated because the tax is due regardless of whether revenues materialize, given that the tax generating fact is the issuance of the invoice. Payment schedules are very “tight”, set for preset fixed dates, with no flexibility. The financial cost in the event of default is exorbitant. In São Paulo, for example, delay in payment of the “ICMS” tax is penalized at 3% per month, applying a compounded interest rate. This is the bleeding companies making a 4% profit have to endure.

Labor legislation: Another burden is the labor legislation. It was enacted in 1943, during World War II. It is outdated in light of the world’s post-globalization reality, it lacks flexibility in terms of capital-labor relations, and makes labor contract negotiations impossible when one considers the different realities facing companies.
Labor litigation widely favors employees; the burden of proof is strongly on companies; employers are presumed guilty in advance; there is an underlining common perception that they abusively use their economic power.

All this results in ludicrous lawsuits, often bordering on bad faith. Brazil is faced with, on average, 2 million labor lawsuits as compared to 75,000 in the USA, 70,000 in France and 2,500 in Japan.

From a conservative perspective, labor obligations add up to 59.22%. However, when taking everything into consideration, such as labor contract rescission costs, etc., this figure reaches 103.46%, so, for each R$1,000.00 paid into an employee’s pocket, R$ 1,003.46 are spent on obligations. This is an absurdly high burden and needs to be reviewed.

Credit: Another burden to tackle is the financial issue.

After the 2008 crisis, the world decided to bring down the rates to a minimum, experiencing the moment one was living, reaching rates of 1% per year, which, when considering local inflation, resulted in negative return rates. Not so in Brazil. We have the world’s highest real interest rates, along with guarantee requirements that make most loans impossible.

There is a lack of interest on the part of financial agents to do transactions with “BNDES” funding, which require intermediaries. For instance, the lack of interest in the FINAME program when it involves amounts under R$ 10 million. The intermediary assumes the risk and is relatively poorly compensated, making the transaction unattractive. Furthermore, restrictions applicable to individuals disproportionately affect the credit of corporations.

The banks prefer lending to the government, which is a safe investment, because Brazil enjoys the investment grade ranking and pays very high interest. Why should they lend to industry at 2%, if they can get 14% from the government. Now, when considering the exchange rate issue...

Not by chance does one start to hear of the concern about Brazil’s deindustrialization. It is worthwhile talking about these issues touched on here, mainly in meetings of our class associations and that have greater political force. We cannot just wait for somebody to start this movement.