V. MARKETING U.S. PRODUCTS AND SERVICES - Distribution and Sales Channels All the customary import channels exist in Brazil: agents, distributors, import houses, trading companies, subsidiaries of foreign firms, etc. The typical import transaction is the importation of capital goods or raw materials by an individual firm for its own use. Brazilian import firms do not generally maintain stocks of capital equipment or raw materials. This is partly due to a shortage of working capital. Some flexibility in the maintenance of stocks in the country has been opened up by legislation enlarging the operations of bonded warehouses. Implementing regulations are contained in Decree Law Number 71,866, dated February 26, 1973. - Use of Agents/Distributors; Finding a Partner As in other countries, the selection of an agent in Brazil requires careful consideration. A unique factor in the Brazilian situation is that a prospective agent may not be able to cover the entire country adequately. A regional orientation still prevails in Brazil, despite improved internal transportation and communications. A S o Paulo-based agent, for example, may want to split the commission with a subagent in Porto Alegre who would cover southern Brazil. This kind of arrangement is not always attractive to an agent in Porto Alegre, who is accustomed to operating independently. The ability of an agent to cover the country depends in large part on the item being sold; certain types of sophisticated machinery may have only a dozen or so potential buyers in Brazil, making marketing relatively simple. On the other hand, less expensive equipment with a wide potential market and the need for countrywide service facilities puts much greater organizational demands on an agent. Brazilian income tax may be levied on a foreign exporter if there is evidence that the exporter is "present" in Brazil (Article 76 of Law Number 3470/58). This presence is determined basically by two interrelated factors -- the closing of sales contracts in Brazil and the existence of either an express or tacit power of attorney granted to an agent or representative in Brazil. In such cases, the taxable income is estimated at 20 percent of the total price of the product imported into Brazil. The precise applicability of this law to any particular transaction or agent-principal relationship is best determined by a Brazilian tax lawyer. Once the agent-principal contract is signed, a Brazilian agent is protected by law from unilateral termination of the contract by the foreign principal without "just cause." The definition of just cause is limited to the following: the agent's negligence; the agent's breach of contract; acts by the agent damaging to the principal; and conviction of the agent for a serious criminal offense. The legislation governing contract stipulations and conditions for termination of agency agreements in Brazil is contained in Articles 27-39 of Law Number 4886, of December 10, 1965. - Trading Companies The trading company is another type of import marketing organization in Brazil. Although principally designed as an export promotion tool, trading companies may play a role in importing through direct purchase or countertrade activities. The operation of Brazilian trading companies is open to foreign as well as national interests. Basic legislation defining the operations of trading companies is contained in Decree Law Number 1248 of November 29, 1972. Brazilian trading companies were modeled to some extent after foreign trading companies, principally German and Japanese. In Brazil trading companies are called empresas comerciais exportadoras, companhias comerciais, or companhias de com rcio exterior. They are set up to give small and medium-sized manufacturers the same operational flexibility as large manufacturers in promoting Brazilian exports, especially of nontraditional exports. Trading companies may act as principals, acquiring goods from Brazilian producers for the specific purpose of exporting, assuming all commercial risks and exporting under their own names. Alternatively, trading companies may act as intermediaries. In this role, they operate as commercial agents, utilizing their functional structure to provide complementary services. - Franchising Franchising has been growing rapidly in Brazil over the last 15-20 years, showing high growth rates in Brazil. Franchising was introduced in Brazil in the mid seventies, but it was not until the opening of the first McDonald's outlet in Rio de Janeiro in the early eighties, that this marketing technique established its firm hold in the Brazilian marketplace. There is no formal legislation in Brazil regulating franchising. The legislation that does apply to franchising agreements is found in the Civil and Commercial Codes and other rules applicable to commercial contracts. Up to 1992, franchise contracts established between a local party and a foreign group were not recognized by the Brazilian Institute of Industrial Property (INPI), the government agency responsible for examining and approving trademark and patent licensing and transfer of technology agreements. INPI's recognition of such contracts is necessary to obtain the authorization of the Brazilian Central Bank for foreign remittances. In June 1992 INPI issued Resolution No. 35/92 that states that franchising agreements must be registered with INPI when they involve trademark licenses, technical assistance services or any other form of technology transfer necessary for the development of a franchise project. All agreements that provide for remittance of royalties abroad must be registered at INPI and then submitted to the Central Bank for foreign remittances. Regarding trademarks, foreign franchisors should register with INPI prior to negotiations with local companies. Lists of attorneys specializing in franchise and trademark registration are available at the U.S. Commercial Center in S o Paulo. - Direct Marketing Firms importing into Brazil must be registered with the Industry Commerce and Tourism Secretariat (SECEX) of the Ministry of Foreign Trade. SECEX plays a central role through its implementation of directives issued by the National Council of Foreign Trade (CONCEX), one of the national trade policy making bodies. Through the registration process, the government is able to monitor companies that import. The registration requirement does not apply to government agencies and mixed (public and private) capital companies with government-controlled import budgets. Following registration with SECEX, companies must apply for an import license, which allows them to proceed with a planned shipment. The procedure is normally routine, with a license granted within five days. SECEX has a computerized registration system, called "SISCOMEX", for all export transactions. By January 1995, import transactions will also be included in this system, which will enable importers to receive licenses automatically via modem. - Typical Import Steps There are numerous procedural requirements associated with importing into Brazil. They warrant careful consideration, as failure to comply with regulations may result in fines and delays. Typically a Brazilian importer will follow the steps outlined below. 1. The importer files an application for an import permit (pedido de guia de importa o) for a specific transaction, accompanied by a foreign supplier's pro forma invoice for the product(s) to be imported. 2. Once the application is approved by SECEX, the importer notifies the supplier to ship the product(s) and to send all shipment documents and commercial invoices along with the exporter's statement, certified by any chamber of commerce or Brazilian consulate, that the prices quoted are those prevailing for goods for export. (Goods should not be shipped until SECEX has granted an import permit.) 3. The importer arranges for a Brazilian government licensed customs broker to clear the goods and pay customs duties and other taxes (typically, Industrial Products Tax (IPI) and Merchandise Circulation Tax (ICM). 4. A copy of the import license (pedido de guia de importa o) and the paid customs declaration are sent to the importer's exchange broker, typically a bank, for closing the foreign exchange transaction. An importer may deal with SECEX directly or through an expediter (despachante). It is generally advisable for an importer to retain an expediter to assist in moving the import request through the bureaucratic approval process with SECEX and the customs authority. Many government companies, agencies, and the military import directly, without SECEX authorization, and are exempt from all taxes and duties. Hypothetical Cost Buildup for an Imported Product * Cost Buildup in $U.S. FOB Price of Product $10,000.00 Freight and Insurance $ 1,000.00 (9% and 1%, respectively) Total c.i.f. of Product $11,000.00 Bank Charges (90 days at $ 1,320.00 4% per month) c.i.f. Plus Bank Charge $12,320.00 Landing Charges AMMF (Merchant Marine Tax: 25% of Ocean Freight) $ 225.00 Import Duty (20% of c.i.f.) $ 2,200.00 Port Costs (2.5% of import duty, including warehousing & expenditures) $ 33.00 IPI (Manufactured Products Tax -- 12% on c.i.f. plus import duty) $ 1,584.00 ICM ** (Value-added Tax -- 17% on c.i.f. plus duty plus IPI) $ 2,513.28 Syndicate Fee (2.2% of c.i.f.) $ 242.00 TOTAL FINAL COST $19,177.28 * FOB value, insurance, freight, bank charges, IPI and duties are all assumed numbers. ** ICM usually is 18 percent, but might be 10 percent or 12 percent in some states. If the product enters a state with 17 percent ICM, the difference must be paid. A March 13, 1992 regulation (Normative Instruction 32) allows imports of merchandise by mail, including mail order catalog shipments, up to a value of $500 ($1000 for computer software) without the requirement of an import license, provided the item is not for resale. Items valued no more than $50 are duty free and are deliverable to the addressee; parcels above this value can be picked up at the post office upon payment of import duties. Imports that are prohibited or subject to special regulations must comply with applicable Brazilian government provisions. Identical shipments from the same source to the same person or address in Brazil within a 90 day period are considered part of the same shipment and may be subject to confiscation (medication is exempted from this restriction). Payments can be made using international credit cards, an international money order, or bank transfer. Other merchandise that usually enters duty free includes items such as newspapers, maps, books, and magazines. Passenger baggage, such as personal clothing and line, jewelry, consumption goods and other objects for the passenger's professional or domestic use, is exempt from import tax. Souvenirs with a value not exceeding $500 or its equivalent in other currencies are also duty free. Personal effects of individuals transferring residence to Brazil are duty free if accompanied by an authorization issued by the Brazilian Embassy or Consulate at the country of origin. - Joint Ventures/Licensing Establishment of joint ventures is a common practice in Brazil, often used to pair U.S. firms with Brazilian partners to compete in segments of the government procurement market or other markets subject to government regulation. Examples are found in telecommunications, computers, and capital goods. Formation of a joint venture can be accomplished through a variety of business entities, the most common of which are corporations and "limitadas." Licensing agreements are common forms of accessing the Brazilian market, but must be handled carefully to avoid taxation, remittance or intellectual property protection problems. Use of a competent local attorney in structuring such an arrangement is fundamental. For more information, see section on protection of intellectual property rights later in this report. - Steps to Establishing an Office Either setting up an entity in Brazil or acquiring an existing entity are options for investing in Brazil. Setting up new companies is relatively easy and inexpensive. Acquisitions of existing companies is monitored by the Central Bank. Branch offices are difficult to form, whereas corporations (sociedades anonimas) and limited liability companies (limitadas) are relatively easy to form. Capital registration with the Central Bank is required for access to foreign exchange, capital repatriation, and profit remittance rights. Brazil's minimal capital requirements are nominal in general, but are significant for establishment of financial institutions. When selecting the site of an investment, potential local investment incentives should be carefully considered. - Selling Factors/Techniques Sales of industrial products are typically price-driven. However, with the opening of the market to imports in the early nineties, quality has become increasingly more important, particularly for companies seeking to modernize their production methods. Following price and quality are delivery and after-sales servicing. Sales of consumer goods, on the other hand, tend to be principally affected by brand name rather than price and quality. Special price discounts are a common sales tool in the industrial and consumer/retail segments. As a standard rule, most final sale products tend to have substantial markups, thereby allowing for a price reduction when the actual sale takes place. - Advertising and Trade Promotion Advertising in specialized trade and technical publications is extremely important marketing tool in the Brazilian market. With its well established and diversified industrial sector, Brazil houses a variety of quality specialized publications that serve the industrial and business communities. U.S. firms wishing to sell in the Brazilian market cannot ignore advertising in these trade publications. Brazil is home for well-established and sophisticated advertising agencies, with first-world standards and level of creativity. TV advertising is highly developed and plays an important role in the promotion of consumer goods and food products. Participation in Brazilian trade fairs is another important marketing tool. The city of S o Paulo alone hosts around 300 trade fairs per year, many of international quality and reputation. The U.S. Department of Commerce participated with a U.S. pavilion in a number of these high quality trade shows in Brazil. With the opening of the U.S. Commercial Trade Center in S o Paulo, U.S. companies may also make use of its facilities for solo events, technical seminars and special meetings. FCS Brazil's Trade Events Schedule for 1995 may be found (Appendix E) in this Commercial Guide. - Pricing Product With the high inflation rates that prevailed in Brazil for more than two decades, product pricing was an inexact methodology at best. Only very large companies were able to establish reasonable or regular pricing methods. However, even these, with inflation rates averaging 30% per month, were employed just add the "expected" monthly inflation rate to the current price. When sales needs to be pushed upward, the method of increasing the price followed by a "discount" is commonly used. This pricing practice applies to both the industrial and the consumer segments. A markup of close to 50% is not unusual in Brazil. However, with the July 1st implementation of the new currency, the "Real", and an expected monthly inflation rate below 5%, pricing methodologies are currently being reconsidered and revised. - Sales Service/Customer Support Sales Service is considered of utmost importance by most buyers of industrial goods. However, small and medium size suppliers have not always been able to keep high level after-sales and customer support services because of the continuous economic instability and uncertainty in the market. Good after-sales and customer support service is offered by large manufacturers. Quality control, however, is in increasing demand. Even small companies are seeking to implement quality control and customer servicing policies to improve sales. Until recently, sales of consumer goods lacked adequate customer support and after-sales servicing. However, with the approval of the Consumer Protection Law in March 1992, Brazilian consumers are gradually becoming more aware of the need to require these services. A good number of manufacturers of consumer goods, including food processors, now have customer support services, which include free toll telephone numbers. - Selling to the Government Brazilian government procurement policies apply to purchases by government entities and by parastatal companies. Government procurement regulations are contained in Law 8666 of August 1993, which establishes an open competitive process for major government procurements. Under Law 8666, price is the determining factor in selecting suppliers, and most government procurements are opened to international competition either through direct bidding, consortia, or through imports. International bidding is allowed for all procurements with related international development bank (IDB, World Bank, etc.) funding. Government procurement of telecommunications equipment and information processing (informatics) equipment are exempted from the above. Special requirements were established in 1993 and early 1994 allowing locally manufactured telecommunications and informatics products to receive preferential treatment in government procurement, and to be are eligible for tax and other fiscal benefits based on meeting local content and other requirements. In practice, it is difficult for foreign service firms to operate in the public sector in Brazil unless work is performed in association with a local firm. To be considered Brazilian, a firm must have majority Brazilian capital participation and decision making authority -- "operational control." A Brazilian state enterprise is permitted to subcontract services to a foreign firm if domestic expertise is not available for the specific task. A foreign firm may only bid for government contracts to provide technical services when no qualified Brazilian firm exists. In case of international bidding to supply goods and services or specific government projects, successful bidders are required to have local representation -- i.e., "legal presence" in Brazil. Since the open period for bidding is often as short as one month, it is highly advisable to have a permanent resident in Brazil able to act on tenders as soon as they are announced. A U.S. supplier may find that including local purchases of Brazilian goods and services within its bid, or significant subcontract association with a Brazilian firm, will improve the changes for success. Similarly, a financing proposal that includes credit for purchase of local goods and services for the same project will be more attractive than one that ignores local business. The US&FCS Brazil advises U.S. exporters interested in supplying goods and services for Brazilian Government projects that advance descriptions of U.S. suppliers' capabilities can often be influential in gaining a sale. These early proposals can be effective even before the exact terms of an investment plan are defined or the design of a project's specifications is completed. Such a proposal should include financing, engineering, and equipment presentations. - Protecting your Products from IPR Infringement A major concern of foreign companies trading with Brazil is that protection of intellectual property rights is often inadequate and uncertain. Brazil is a signatory to the Paris, Bern, and Universal Copyright conventions on intellectual property rights (IPR) protection. Most of the country's statutes on IPR are consistent with Western standards. However, serious gaps exist regarding patent protection for pharmaceuticals (current laws do not provide for pharmaceutical patent protection), trademarks (protection for well known marks is not universally granted), and trade secrets (weak enforcement provisions). Legislation is before Brazil's congress to address most of these issues. Brazil's technology-transfer regulations affect most IPR protection -- from trade secrets to computer software. By law, the Brazilian National Industrial Property Institute (INPI) is required to approve all transfer-of-technology agreement and all patent and trademark licenses. Brazil does not have a statute that specifically provides protection to trade secrets or know-how. There is only an indirect form of protection, normally of five-years' duration, derived from the unfair competition section of Brazil's Industrial Property Code, Article 178, Item XII. Issues of concern to foreign patent holders are INPI's slow processing of patent applications: the federal judiciary's uncertain application of patent law; the potential for arbitrary interpretation of compulsory licensing requirements; and Brazil's statutory prohibition against either process or product protection for pharmaceutical patents. A bill is pending before Brazil's congress which would address many of these concerns. The bill's projected date of passage is uncertain. - Need for a Local Attorney Securing competent local legal representation is a fundamental step in establishing a commercial presence in Brazil when intellectual property licensing or protection is involved, or where investments involve local manufacturing or local investment incentives. Lists of attorneys are available from US&FCS Brazil offices.