HfS: Brazil must stop taxing exports

As part of IT Decisions‘ series of comments around president Obama’s visit to Brazil, we contacted chief operating officer of Horses for Sources (HfS) research, Esteban Herrera to discuss opportunities and issues faced by those trying to do business in technology between Brazil and the US.

Now based in Dallas, Texas, Herrera is a regular visitor to Brazil and spent two years based in São Paulo as head of one of the offshore businesses run by Accenture here. He has some strong views about barriers imposed by the Brazilian government, such as its onerous tax system.

“Brazil taxes service exports, and is pretty much the only country that does this. You can obtain offsetting tax breaks locally, but they rarely amount to enough and require navigating an obnoxious, ornery bureaucracy that can take years,” Herrera said.

“Brazil’s payroll tax and benefits load is the highest in the world. In the US, a typical load factor on an employee with an excellent benefits package is 33% of salary. In Brazil, it is rarely less than 100%,” he added.

Herrera also complained that local business leaders don’t yet see IT as a tool that can change their business – it’s not yet sexy and remains stuck with accountancy in terms of interest for most leaders. Time for a sitcom from ‘IT Crowd’ writer Graham Linehan perhaps?

He also mentioned that there is rarely a labor arbitrage when working with Brazil – it costs just as much as working locally so there is almost no financial advantage in working here. Further to that, he said that most of the good people you would want to hire are all based around São Paulo or other cities in the south – education levels in other areas “drop precipitously.”

However, this issue over cost is a complex debate. Even regions popularized as low-cost – such as India – have found it difficult to keep on using that as a calling card.

Herrera mentioned that Brazilians find it hard to work within very structured formal frameworks.

“[There is] a cultural inability to follow rules—its just not how Brazilians think about work. This frustrates would-be international providers and clients who value ‘process’ above all else. But in my opinion, Brazil is the best place to ship work that requires critical thinking and creativity,” he said.

And this is an important point. It was the creation and use of highly structured frameworks that allowed companies from one side of the world to pitch for business elsewhere – because they could create highly repeatable processes that can be easily measured and controlled. Many companies that have entered into large outsourcing arrangements have found that a life spent monitoring Key Performance Indicators and Service Level Agreements does not lead to a partnership though.

Herrera also mentioned the Brazilian government itself as another barrier, until recently led by the wildly popular president Lula and now his chosen successor Dilma Rousseff.

“Lula’s government was not that outwardly friendly to the US. He did nothing to deteriorate the relationship – maybe rolling out the red carpet for Ahmadinejad and friendship with Chavez was not the smartest move – he also did nothing to improve it,” he added.

“Brazil’s international standing climbed so much over the last 12 years that it has become a legitimate diplomatic competitor to the US on issues of international trade, armed conflict, and regional issues.”

Only time will tell how president Dilma will behave now she has control on the diplomatic steering wheel herself, but it is unlikely she will style herself as the Lady Thatcher of the Southern hemisphere.

Herrera finally summarized his thoughts with further emphasis on the cost of working with Brazil.

“Currently, the labor arbitrage is just not there. Professional salaries are high and growing; proficient English speakers are in high demand and earn a premium, the Real is very, very strong, and the overall tax load very, very high. When the Real was 4:1 against the USD, it was a different story,” he said.

“Today, there is no such luck. The cost of living, and the cost of real estate in major cities is just not very competitive, but the same can be said of the quality of the labor pool in most minor cities with the possible exception of Campinas and Porto Alegre.”

It may seem like a downbeat assessment of the potential for Brazil, but this is also a pragmatic assessment from a business leader who worked here.

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IT Decisions says

There are several positive points raised by Herrera, not least the Brazilian focus on creativity, innovation, and questioning business instructions. These are all essential attributes in a true technology partner, where the relationship runs deeper than just a standard client and supplier. The way IT buying is changing to focus on business users making IT purchasing decisions makes this even more important.

But once again the taxes and tariffs rear their ugly heads. This is where the two presidents need to focus – how can the international sale of services from Brazil be simplified and dragged into the twenty-first century.

Most governments are not taxing service exports because they want to encourage and stimulate a knowledge economy so this is a key area where president Dilma should listen to the IT industry because real jobs are being created – millions of them.

Loading employee costs on employers is another issue. It’s unlikely a single industry can change standard practices and employee expectations, but IT has a very entrepreneurial culture – there is likely to be a change in the way many people are contracted and employed.

Esteban concluded his interview by saying “Expat males are so frequently distracted by local females they never get any work done!”

Both he and I ended up marrying Brazilian girls, so that has to be another positive aspect of doing business here.

Photo by reway2007 licensed under Creative Commons