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Remote Selling into Brazil

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A Practical Guide for Direct Mail and Web Merchants


Remote Selling into Brazil

A Practical Guide for Direct Mail and Web

Remote Selling into Brazil A Practical Guide for Direct Mail and Web Merchants Twenty years ago Brazil was famous for string bikinis, Copacabana, rampant inflation and unimaginable levels of crime. Brazil’s economic conditions have now changed beyond any expectation, however, the payments culture of Brazil remains mysterious and complex and poses a significant barrier to foreign entry to the market. The BRIC economies are often touted as the ‘next big thing’, and heralded as the growth economies - the engines of the civilized world. This may be true for major multinationals, but is it true for SMEs? Are these countries really the next big thing for direct response marketers? The answer is, respectfully, no. The hype generated around sales opportunities in these economies ignores one fateful fact: they are all monetarily ring-fenced countries with high regulatory and tax burdens, and it is exceedingly difficult for a remote seller to break into the market with any degree of success.

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A recently published document on payment processing in these countries recited impressive economic data and outlined the basics of payment

methodology in each. However, it didn’t really provide much meat about the practicalities of selling there. In its discussion of Brazil it stated that taking money out of Brazil may attract a 25% export tax. This statement is incorrect; the author has unfortunately confused the retention tax on corporate profits with the conversion costs of exporting currency. This paper will concentrate on the real barriers to entry into Brazil and suggest some solutions for overcoming them. There are three fundamental aspects to payments work in Brazil, all with severe challenges: collecting funds from customers, getting those funds out of Brazil and, where necessary, making payments within Brazil. We will deal with each in turn, but first let’s prepare the backdrop for a basic understanding of how payments are conducted in Brazil.

Working for the Government Turn the clock back to 1990. If you were on the ground in Brazil and wanted to shop for imported products, you would have been hard pressed to find anything to buy. A massive import tax regime, known today as a “protectionist” policy, put huge tariffs and small quotas on imported products and effectively barred entry to all but the most essential supplies. Over the last two decades the rates have been lowered, but they are still significant. For example, import duties on cosmetics average 47% (of a government valuation, not the actual wholesale price), and internal sales taxes add another significant element (they are hidden in the retail price). If you head to a shopping mall in a Brazilian city you will pay on average three times the typical European retail price for a perfume, skin cream or soap imported from Europe or the States. 2

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Remote Selling into Brazil

A Practical Guide for Direct Mail and Web

Inflated prices would be a positive thing, if it weren’t for the bureaucracy and practical barriers to sales in the Brazilian market. Being able to accept payments in the ways Brazilians like to pay - which are unique - is the key to success. Unfortunately, accepting local payments means paying local taxes.

Tax is Everywhere Although Brazilian commerce restrictions have loosened slightly in the last decade, the country’s social and political landscape still bears many of the marks of totalitarianism. One of the most prevalent of these is the national ID system. Every person and every company has a tax number, which is publicly available information. For individuals the code is known as a CPF, and for companies it is a CPNJ. It is virtually impossible to do anything financially in Brazil without one. Without a tax number, neither an individual nor a company can open a bank account. Money cannot be received into a bank account unless the sender has the tax number of the payee. An individual cannot open a company or serve as a director of one without a tax number, and a company can’t import goods or services without one. The tax number is not secret and enjoys no privacy protection whatsoever; for example, if you key in an individual’s bank account number to make a transfer at an ATM, the CPF number will often be displayed on the confirmation screen. With some difficulty and a suitable degree of explanation and justification, it is possible for a foreigner to obtain a Brazilian tax number. This quest is not for the faint of heart; nevertheless, trying to establish a meaningful local presence in Brazil without one is a fool’s errand.

Apart from filing tax returns, how is the CPF used? It is the engine of identification for a million small things in Brazilian life; we have mentioned bank accounts but it is also used at retail sales points; there is a system of minor tax credits based on providing one’s CPF every time one buys goods at a supermarket or other store; in reality, this also allows the government to check spending by residents and ensure that it is in line with declared taxable income. The CPF also enables black listing of people who are financially irresponsible; as will be discussed in more detail below, one’s history of making payments reliably, whether by cheque or boleto, can be checked by future intended creditors of vendors using the CPF number. Get a black mark against your CPF, and life will become extremely difficult, as you will not be able to obtain a bank account, rent a car, register your children in private school, buy or rent a property - the list is endless.

No Local Presence? If, and these are big ifs, you are only going to sell product valued at $50 USD or less, accept only cheques for payment (for Rs. 100 or less, never more) and ship it to consumers from outside the country, you don’t need a local presence. For any other payment types, and if you intend to import your product in bulk and distribute it in country, then you need a local presence for various reasons. Each of these conditions can be prohibitive, for reasons that will become plain.

Can my payment processor sidestep these rules? Not really. The restriction on negotiability of cheques will prevent you taking larger payments 3

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Remote Selling into Brazil

A Practical Guide for Direct Mail and Web

by cheque; your payment processor will not be involved in importation, and the reliability of the mail system for items shipped from outside the country is much lower than internal shipment. So not only will you have a price restriction but you will need to figure in a percentage for lost goods which have to be replaced. A successful sales programme in Brazil is going to require local handling, that’s just the way it is. Digital delivery of products is more exciting in this context, in that there are no postal losses.

Importing Goods - Wholesale and Retail As noted above, goods valued under $50, shipped individually, pass duty-free into Brazil. For anything with a higher value, the recipient, whether a company or an individual is going to get a hefty tax bill. Like all large countries Brazil has a long list of goods types with various tariffs (typically four different taxes are levied on imports), but a fair rule of thumb is that the importer (which may be the retail recipient if the goods are shipped individually) is going to get a big tax bill - an average of 50% of the retail value of the goods. Brazilian customs, too, are savvy about values, so don’t plan on under-declaring goods. It’s also worth noting here that customs have the power to decide for themselves what the value is, regardless of what is actually paid. We have seen examples of customs valuations at 3x the actual wholesale price, meaning that the 50% tax levied translates into a real rate of 150%. If you wish to ship your goods in bulk to Brazil and have them distributed locally, whether by an agent or your own employee, the agent will be required to import the goods and pay the taxes. The agent will need a Brazilian entity and a CNPJ to clear them. If the goods are sent by courier, such as FedEx, then customs clearance will be provided; if sent by post then self-clearing via the

postal channel is a possibility. And finally, just to confuse the picture further: many types of goods shipped into Brazil require import permits in addition to payment of taxes. It can, and usually does, require many months after application by a local agent (with CNPJ, of course) to obtain the import permit along with a classification and valuation of the product. An obvious example is cosmetic products - highly desirable in Brazil and commanding strong retail prices, but fraught with bureaucracy, rules and taxes.

Owning a Brazilian Company Assuming you are not on the ground in Brazil, but want to own and operate a local entity, you can establish one, though be warned that it will be costly. You will need: • an address (you can rent one professionally) • two Brazilian shareholders (with CPFs) who are prepared to be on record as owner/ managers • a “contabilidad” – which is an accountant who prepares your monthly tax returns for submission along with paying multiple tax assessments on your behalf • an effective way of communicating with all of these people Establishment costs are not high; if you have your people lined up then it can cost less than £1500. However, you need to consider your ongoing costs, before accounting, for taxes on any sales or profits of £200 to £300 per month. If you make it more complicated, costs will spiral upwards dramatically.

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Remote Selling into Brazil

A Practical Guide for Direct Mail and Web

Part I: Accepting Payments From Consumers How do Brazilians pay for things? In asking this question, we open Pandora’s Box and find a raft of unfamiliar payment types, each with their own idiosyncrasies and profound differences as compared to the features of similar products as used in other countries. All payment types in Brazil function in rather a unique way, and each has to be considered individually.

1. Cheques Most Brazilians to whom you could sell something by mail (meaning literate Brazilians with some money) have a bank account and a cheque book. Cheques are typically printed on demand at the ATM and customers are normally restricted to having 8 or 12 at a time. Bank computer systems keep long term records of blank cheques issued. Cheques are, despite the restrictions, widely used in Brazil and it is not unusual to see residents using cheques to pay for retail purchases at the supermarket or pharmacy. There is a high degree of trust in cheques, as a person who bounces two or more is likely to be noted on the national black list (referenced via CPF) and experience both commercial and personal difficulties until the matter is cleared up. In short, accepting cheques in payment for goods is a worthwhile practice, particularly if orders are to be made by mail. However, if you intend or need to accept cheques for more than 100 BRL, then you need your own company. Cheques for 100 Rs or less can be consigned to a payment processor with a Brazilian unit (like PacNet do Brasil) and deposited on your behalf. Cheques for 100 BRL or more, however, need to be either deposited in your own bank account (thus you need a company with a CNPJ) or endorsed by the company

named on the front (including the CNPJ).

2. Credit/Debit Cards Most Brazilians who have a bank account, also have a credit or debit card. Cards are issued largely under the Visa and MasterCard brand logos, though there are other bank debit cards that are not card scheme-branded. This sounds good for international sales until you contemplate several limiting factors. First, most Brazilian cards are enabled for intra-national use only; they only work if processed by a Brazilian company through its acquirer. Second, the banks in Brazil do not provide acquiring services for their merchants; instead, independent acquirers (of which the largest and best-known is Cielo) provide merchant services and only settle the net funds to bank accounts. If, therefore, you accept credit cards through an international acquirer, or try to run them through the machine/software provided by your bank outside Brazil, most of the transactions will be declined.

“Parcelled” pricing. Note that the product is actually 2 cents cheaper on installment than if paid for immediately.

It gets worse. While most of the world is used to taking single payments on credit cards, the entire Brazilian retail economy runs on a practice of “parcelization” of transactions. That is to say, if 5

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Remote Selling into Brazil

A Practical Guide for Direct Mail and Web

you go to a store to buy a pair of shoes, the price will be displayed as something like “Rs.100 / 10 x 10.� Meaning, you can buy the goods with 10 payments of 10 Rs. The credit card regime accommodates this, and at the time of sale the machine/software asks the sales person how many parcels the payment is to be split into. This is something people outside Brazil are not used to, and it requires a fundmental shift in marketing thinking to realize it is something Brazilians think of as normal, and expect.

3. Cash in the Mail In short, a non-starter. Brazil is a high fraud risk country, and postal losses are frequent. Asking for cash to be put into the mail, especially if sent overseas, will garner no response.

Settlement times are slow. It is not uncommon for new merchants to wait 30 days for their funds from the card processor. And MDRs (Merchant Discount Rates, or the commission charged by the card schemes) are high - quotes of 8 to 10 percent are not unusual. Basically, if you want to accept Brazilian credit cards, you will need a bank account to receive your proceeds, a company (with CNPJ) to contract with the acquiring company, and the cash flow to fund your sales for a protracted period while the acquirer settles. And don’t forget the tax. You will be required to include the appropriate rate of sales tax (typically about 18%) in your price, and remit it to the government on a monthly basis. If you use a domestic payment processor for your credit cards, some of these hurdles can be overcome. The taxes and costs will remain, however, and of course be slightly marked up to give a margin to the payment processor - if you sell something for BRL 100, you are likely to see only 70 BRL of that money in your own hands at the end of the process. Your international processor can connect you to the domestic acquiring system, but cannot avoid the taxes or timelines that are intrinsic to Brazilian acquiring.

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4. Boleto Bancario (a.k.a. Cobranca) According to marketing statistics, 70% of all remote Brazilian payments are made by Boleto Bancario. This is a unique Brazilian payment form (though there are variants in e.g. Chile, Cupones de Pago), and is best understood thoroughly if you plan to sell to Brazilian consumers. Imagine if you will a national settlements system. Any customer of any bank can sign up to issue, through the bank, electronic invoices, which contain a bar code and a numerical reference. The boleto can be sent by mail by the vendor, 6

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Remote Selling into Brazil

A Practical Guide for Direct Mail and Web

or by the bank, or delivered digitally by email or internet. And once received, it can be paid at any one of literally millions of outlets: grocery stores, in banks, at ATMs, at the post office, at lottery booths, and hundreds of other types of processors. Almost magically, funds paid in at the payment point, sent by electronic banking, or transferred at the ATM, are credited within 5 days to the bank account of the issuer. All of this is made possible because the tax number system is tied into bank accounts; no matter where funds are paid in, if a valid boleto number is either typed or scanned in, the funds will arrive in the issuer’s bank account. That’s the broad brush description. It will be immediately obvious that to issue boletos you need a bank account; and that to have a bank account you need a CFP or CNPJ; and therefore you need a Brazilian identity or company (or both). Inevitably, the tax authorities have their hands on the whole system and there is no way to avoid liability for reporting or taxes if you collect boletos in Brazil, no matter if your payment processor issues the boletos for you. In order to issue a boleto you must have the CPF or CPNJ of the customer. Therefore, obtaining this is a fundamental and regular part of the order taking process. There are several refinements to this general description. At the legal level, when issuing a boleto you can choose whether to have it registered or unregistered. If it is registered, then the bank will maintain a record of it, and issue reminders to the payer automatically if it is not paid. More significantly, if it is unpaid the bank will report the consumer to the Central Bank, and a register exists (not surprisingly, accessed via CPF number) of unpaid boletos; you can therefore assess the creditworthiness of a potential customer by checking their record for

leaving boletos unpaid. Access to this database is via a paid subscription to a private third party service, and is surprisingly cheap - a matter of a few dollars a month. This serves as a powerful incentive for consumers to pay boletos. If the boleto is registered, the bank takes an active role in encouraging its payment. If it is unregistered, then the bank’s role is confined to passive acceptance of payment and advising the merchant when the funds arrive. A boleto can be cancelled after issue. Another refinement is that a boleto can contain a discount for early payment, or a premium for late payment. These terms are at the discretion of the merchant and can be quite generous or severe. Where boletos issued via a bank by the account holder (which may be the merchant or the PSP) fall down, is that most banks do not have particularly sophisticated software for their creation, especially for providing quick boleto production via the web. A number of third party providers have sprung up to master this process and provide back office support for the related accounting. The best known is probably the giant Braspag organization, but there are smaller (and more nimble) operators providing similar niche products. What happens when they are employed is that a multi-party contract is created allowing the local specialist to link to the bank account and the bank’s software; it then works with the merchant’s site to create a “pay by boleto” pop-up, captures the boleto data, receives reporting of paid boletos from the bank and provides reconciliation data to the merchant. A payment processor can be inserted into this process between the merchant and the bank, in which case the merchant’s bank account is the one employed. Utilization of such a specialist is a must for online sales organizations and a significant plus for anyone with a high volume of boleto payments to administer. 7

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Remote Selling into Brazil

A Practical Guide for Direct Mail and Web

Compared to the other payment methods in Brazil, boleto is significantly more successful and less expensive than most. Expect to pay less than 3 Rs (£1 or $2) for issued and paid boletos, a few cents per transaction to a web creation service, and perhaps 2 or 3% to the PSP. All in, for goods sold at 60 Rs or more, your costs should come in below 5% - but don’t forget the taxes.

5. Direct Bank Transfer Brazilian consumers are used to paying for things by direct bank transfer, either from internet banking or from street merchants, particularly for higher ticket, urgent goods like medicines and specialty clothing. If you have a bank account (meaning you must have a CNPJ and Brazilian company) you can provide the details and your consumers can deposit directly to you. Delivery of funds is fast, typically same day (same bank) and next day (different bank). Costs are low for same bank (often free) but expensive for other bank typically 8 Rs or more. There is also a division of values; most banks make the difference at 3,000 Reales, allowing transfer by DOC (less expensive) up to this value but TED (more expensive) above it. What makes bank transfers cumbersome for larger transfers, however, is the security surrounding the transaction. Consumers can typically log into their internet banking and make small transfers immediately; for larger amounts, however, the bank usually requires production of a paper authority to register the payee, which must be physically taken to the bank and signed in front of an officer. Bank Transfers are not a way to avoid taxes; details of every transaction will be logged to your bank account and available to the government for inspection on demand.

6. Direct Debit Brazil has a well developed direct debit system, and it is on the English model - the main constituency of users is regular issuers of irregular amounts (utilities being the obvious candidate). Direct debit is however largely unsuitable for remote selling as there is a paper burden surrounding the set-up and origination of direct debits. Naturally in order to commence doing business in this manner you need a Brazilian entity, CNPJ and bank account.

Part II: Taking Money Out of Brazil Once you have had success selling in Brazil, the most complex part of the entire process is how and when to take money out of Brazil. Currency is controlled in Brazil and simply transferring your proceeds out, as you could in most developed countries, is prohibited. The first rule is, never take out money (by any method) that you may subsequently need to use in Brazil. Make all of your local payments: refunds, rebates, prizes - with the same Reais that you accept from your consumers, whether they are in your hands or those of your PSP. Getting them back into Brazil is almost as difficult - and exponentially more expensive - than using them there in the first place. If you have set up a Brazilian company, made an inward investment (through the Central Bank), conducted your business in a compliant manner and made a genuine profit (these are massive if’s), then you can apply to remit your profits out of the country. A 25% withholding tax on the profits will apply, this will substitute for the corporate income tax you might have paid as a Brazilian company, and will be adjusted when you file your tax returns.

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Remote Selling into Brazil

A Practical Guide for Direct Mail and Web

If you have worked through a PSP, paid your taxes, but have no Brazilian entity of your own, then you have a problem and you will need help from one of several specialized participants. Your PSP will advise you on these and the associated risks. In short, however, and vendors who have worked with India or China will be familiar with similar routines, you need to be married up in a relationship with a business which has funds going in the opposite direction, such as a remittance agency or introductions bureau. What happens then is that domestic transactions are conducted in parallel, with the party outside Brazil receiving foreign currency proceeds of one deal, and compensating the partner by making a required payment in Brazil. It works and there is a massive industry around it. You can expect, however, to pay between 6 and 8 percent for the service, so there is a further burden on the already thin profits to be made in Brazil after payment of all the taxes.

payment before funds are released. However, local payments go through seamlessly. The options for payments to Brazilian consumers and companies mirror the payment methods listed above for incoming funds; through your bank or your PSP you will be able to issue cheques, send direct bank transfers, or issue refunds to credit cards. The notion of the OFT (Original Funds Transfer) to Brazilian credit cards is still nascent, and prepaid cards have not really hit the market with any force (though an internationally enabled foreign gift card would be an interesting variant). Direct bank transfers, exactly as described for DOC and TED above, are viable options if you have the CPF or CNPJ and bank details for the consumer.

Part III: Making Payments to Brazilians If you go down the route of setting up your own company, or set up locally through agents and need to make an initial payment into Brazil, there is a legal way to do this and it’s really necessary to go through the steps so that one day, if there’s any left, you can repatriate your funds. There is no significant cost, just a lot of bureaucracy. Your Brazilian lawyers and accountants will guide you through the steps. For day-to-day payments: prizes, refunds, rebates, allowances, commissions etc., the fundamental rule is, as noted above, to use the money you already have in Brazil. Sending wires, transfers or foreign currency to Brazilian residents simply puts them to massive inconvenience. A wire transfer from outside the country will stop at the Bank of Brazil and the payee will be required to produce an invoice showing the reason for the

Photo By Jony Cunha

Summary: How Can PacNet Help? The fundamental divide remains between products priced at USD $50 or below shipped from outside, and higher value products shipped from within. We can forget about shipping high value products individually from outside, no one wants to put their customers through the hassles of self-importing products that attract high rates of duty.

Money In If you want to sell from outside, products 9

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Remote Selling into Brazil

A Practical Guide for Direct Mail and Web

valued at USD $50 or less, and ship them from outside, you can take payment by cheque, boleto, international credit card (this will be a small percentage of cardholders), and direct bank transfer. PacNet can accept and negotiate your cheques up to Rs 100 (any payee), issue and report your boletos, process the international credit cards and accept direct bank transfers. PacNet will have to collect your taxes on national payments, and all operations will be conducted through its own bank accounts. If you have an appetite for larger business and wish to establish your own company in Brazil, PacNet can provide step-by-step information, and introductions to service providers, to ensure you do it the right way. Once you have your Brazilian company with CNPJ, PacNet can then negotiate your cheques up to any value, assist you with credit card processing in the local ringfenced system, and set up high volume boleto issuing, receipt and reporting. It can also accept local bank transfers, and even, in appropriate circumstances, originate direct debits. However, it’s not a turnkey solution, and it will take the better part of a year to set up.

Money Out (Local) PacNet has established, up and running solutions which make payment of funds to Brazilian consumers and suppliers a piece of cake. Within 24 hours PacNet can enable local cheque payments, direct bank transfers by DOC and TED, and even cash deposits to resident bank accounts across the country. Refund and similar cheques can be prepared outside the country, shipped in bulk by FedEx, and distributed locally within Brazil.

Money Out (International)

achieve the effect of currency export, without breaking any laws and without risk. It is expensive - expect to pay fees of between 6 and 8 percent for export of proceeds of sales from Brazil.

Taxes PacNet will not perform operations in any country which are in breach of tax regulations. Therefore, an essential precondition to working with PacNet is that we comply with local tax regulations, and collect and remit taxes where required. Often we serve as the merchant of record for our clients, and as such we are liable to taxes should the collector come calling.

Is There Anything PacNet Can’t Do? Regrettably, PacNet is unable to offer mailbox services, mail collection and handling, order entry or telephone order services to its clients. It can offer introductions to local vendors, but without recommending or endorsing them. Logistics is for our clients; we are very able and entirely happy to assist in every aspect of the payments conundrum but that has to be the extent of our involvement.

Further Information If you are motivated to work in the Brazilian market and would like PacNet’s assistance with the monetary aspects, please contact any of our worldwide offices, info@pacnetservices.com, or write directly to PacNet’s country specialist, paul@pacnetservices.com. Information is entirely free. Brazil is not for the faint of heart but there are rewards for getting it right and doing it properly.

PacNet has engineered a number of innovative solutions which legally 10

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Remote Selling into Brazil