Skola, Thomas J.

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University of Miami School of Law

University of Miami Law SchoolInstitutional RepositoryUniversity of Miami Inter-American Law Review12-1-1982An Update on Brazilian Trading Companies andExport CreditThomas J. SkolaFollow this and additional works at: http://repository.law.miami.edu/umialrPart of the International Trade CommonsThis Comment is brought to you for free and open access by Institutional Repository. It has been accepted for inclusion in University of Miami Inter-American Law Review by an authorized administrator of Institutional Repository. For more information, please contact library@law.miami.edu.Recommended CitationThomas J. Skola, An Update on Brazilian Trading Companies and Export Credit, 13 U. Miami Inter-Am. L. Rev. 421 (1981)Available at: http://repository.law.miami.edu/umialr/vol13/iss3/5An Update on Brazilian Trading Companiesand Export Credit*THOMAS J. SKOLA**Because of its pressing balance-of-payments problems, Brazil hasmade exportation of manufactured goods a high priority. Since theeconomics of Brazil's foreign trade is constantly changing, so are therules and policies governing export activities, including, inter alia,institutions, procedures, financing and incentives. This brief commentdepicts an important Brazilian export institution, the "trading com-pany," and summarizes the current status of the "export credit."I. Brazilian Trading CompaniesA. Nature. The "commercial export company" (empresa comer-cial exportadora), commonly referred to in Brazil as a "trading" or"trading company," was created in 1972 by special legislation. 1 Thetrading company is the major exception to the general rule in Brazilthat export incentives may only benefit the manufacturer who directlyexports his products.In addition to the general rules governing legal entities, tradingcompanies must comply with the following specific requirements:1. all voting power in the form of registered (nominative) stock;2. a minimum capital equivalent to the par value of 114,000Readjustable Treasury Bonds (ORTNs) as of April of eachyear (approximately Cr $191,877,960 or U.S. $1,297,875 atthe exchange rate prevailing on April 5, 1982); and3. specific registration with the Foreign Commerce Board of theBank of Brazil and the Brazilian Internal Revenue Service.B. Purpose. A trading company is primarily a commercial entityand, as such, may undertake all activities permitted by applicable lawand its by-laws. In addition to normal commercial operations, how-ever, a trading company enjoys special benefits when it purchases*This study is based partly on information appearing in the March 15 and 19,1982 issues of Boletim Injormativo published by Editores Aduaneiras Ltda., SioPaulo, Brazil.**A member of the Bar of the Federative Republic of Brazil ("Ordem dos Advo-gados do Brasil") and the Bars of Florida, New York and Washington, D.C., cur-rently practicing law in Miami, Florida.1. Decree-Law 1.248 of Nov. 29, 1972.LAWYER OF THE AMERICASproducts specifically for export.2 Thus, trading companies may un-dertake both taxable and tax-exempt types of activities. Among theactivities of a trading company subject to normal taxation are thepurchase and sale of goods in the domestic market, importation ofgoods for resale in Brazil, brokerage of transactions either in Brazil orabroad, and rendering of services in general. Unless a product isspecifically purchased by a trading company for export, export bene-fits under Decree-Law 1.248 are normally unavailable. Nevertheless,if a trading company eventually exports a product not specificallypurchased for export, it may still obtain an export credit and recoupany Industrialized Products Tax (IPI) included in its price. If thetrading company purchased any such product from merchants exemptfrom payment of the IPI, part of the IPI payments may be recoupedby applying the rate in effect on the date of purchase against fiftypercent of the purchase price.Trading company transactions qualifying for financial and taxbenefits are purchases of products within Brazil for the specific pur-pose of exportation. All such transactions must comply with these twoconditions:1. the goods must be invoiced by the manufacturer-seller directlyto the trading company with specific reference to Decree-Law1.248; and2. the goods must be delivered to the trading company directlyat certain places established by the law (e.g., port, airport orwarehousing facility in a free-trade zone or special exportcustoms area), from which such goods will be exported di-rectly abroad.C. Role. In export transactions, the trading company plays therole of a wholesaler purchasing domestic goods for sale outside Brazil.The trading company simplifies sales for the domestic manufacturerand qualifies such transactions for certain preferential treatment andincentives. Direct exportation requires manufacturers to assume allrisks and costs related to the sale of their products outside Brazil,including inter alia, identification and penetration of the foreignmarket, credit risks, and foreign exchange risks. Since many smaller2. Brazilian legislation places the trading company in the same position as amanufacturer that directly exports its products, thereby extending certain financialand tax benefits to the trading company. The expressions "trading" and "tradingcompany" have evolved to distinguish this particular institution from other commer-cial entities also active in export activities and generally labeled commercial exportcompanies.COMMENT: BRAZILIAN TRADING COMPANIESand medium size firms lack the infrastructure and staff required fordirect exportation, conducting export sales through the intermediaryof a trading company is a sensible alternative. From the Brazilianmanufacturer's standpoint, a sale to a trading company is completedupon invoicing and delivering export goods to a place established bylaw. All costs and risks of the export transaction pass to the tradingcompany at the time of delivery. As a result, the export transaction isgreatly simplified for the local manufacturer, who may more rapidlytake advantage of the applicable export incentives and benefits.D. Supplier Benefits. A local manufacturer exporting directly orthrough a trading company normally qualifies for the following bene-fits and incentives: exemption from IPI, 3 exemption from the Tax onthe Circulation of Merchandise (ICM), reapplication of IPI and ICMcredits to the components of the exported product, income tax credits,import access under a drawback regime, and access to export financ-ing. 4 These benefits and incentives are practically the same whetherthe local manufacturer exports its products directly or through atrading company, with the exception of the export credit, discussedbelow in more detail. Many local manufacturers prefer to exportthrough a trading company because they can obtain virtually thesame export incentives and benefits without the costs and risks nor-mally associated with direct sales abroad.E. Trading Company Benefits. In addition to the availability offavorable financing, the trading company enjoys certain direct andindirect tax benefits. The indirect tax benefits result from purchasinggoods exempt from normal duties and taxes (e.g., IPI and ICM). Thedirect tax benefits are the income tax deduction of the trading compa-ny's export profits and the export credit. For purposes of computing itsincome tax, the trading company may deduct from its net profit5 itsgross export profit. 6 In order to determine its gross export profit forany given export transaction, the trading company may add to theFOB sales price all amounts relating to freight and insurance, pro-vided that Brazilian ships and insurance companies are utilized insuch transactions. A trading company has an incentive to engage innon-export as well as export transactions, since it loses a potentiallysignificant income tax benefit if its gross export profits exceed its totalnet profits.3. Recently confirmed in Normative Instruction SRF 11 of Mar. 12, 1982.4. Central Bank Res. 674.5. "Net profits- means the total net profits of the trading company, as reflectedon its balance sheet, from all of its activities, including export transactions.6. -Gross export profits" means the difference between the domestic purchaseprice and the FOB sales price paid abroad.LAWYER OF THE AMERICASIn addition to these tax benefits, a trading company can takeadvantage of many pre-export and export credit lines. For example, atrading company can obtain cash advances against foreign exchangecontracts relating to its purchase orders. Subsidized credit for the saleof capital and durable consumer goods abroad is obtainable,7 as isfinancing for, inter alia, foreign research and promotional expenses,consignment sales, and the acquisition of capital in foreign compan-ies.8 Under certain conditions, a trading company may also qualifyfor financing the discounting of warehouse deposit receipts. 9II. Export CreditAn important export incentive in Brazil is the "export credit"(premio de exportaf do),*I Although generally regarded as an in-centive within the IPI incentive program, it is more commonly re-ferred to as simply the export credit, and is normally paid in the formof a cash refund.The export credit is tied to the nature of the underlying exporttransaction and the type of product being exported. As a general rule,this credit applies only to foreign sales of qualified products in readilyconvertible foreign exchange. All products qualify for this incentiveunless expressly excluded by pertinent legislation." For example,imported products that are subsequently exported will only qualify iftransformed, improved or assembled in Brazil; exports of used prod-ucts and scrap iron do not qualify for the export credit. On the otherhand, products exported on consignment and for industrial fairs andexpositions do qualify for this credit, as do goods supplied for use orconsumption aboard vessels or airplanes operating in internationalroutes, provided that payment is made in convertible foreign ex-change. Curiously, a product need not actually be exported abroad toqualify for the export credit. Capital goods sold to leasing companiesabroad for use in Brazil in commercial leasing transactions qualify forthis export incentive if they produce convertible foreign exchange, asdo locally manufactured products sold to PETROBRAS (the statepetroleum monopoly), its contractors or subcontractors (includingthose active in risk contract activities offshore), so long as they areinvoiced in convertible foreign exchange. Similarly, domestic products7. Central Bank Res. 509.8. CONCEX Res. 68.9. CJ. Central Bank Res. 330.10. Decree-Law 491 of Mar. 5, 1969.11. A list of non-qualifying products was first published in Ministry of FinanceRuling 78 of April 1, 1981.COMMENT: BRAZILIAN TRADING COMPANIESused in the repair of ships, airplanes and certain industrial and agri-cultural equipment also qualify, as do investments made abroad with-out foreign exchange coverage.The beneficiary of the export credit is always the entity whichactually does the exporting. The manufacturer of the exported prod-uct only receives this credit if it exports the product directly; manufac-turers exporting through a trading company or any other type ofcommercial intermediary will not normally qualify.The credit is computed according to fixed rates in effect on thedate of shipment of the product, deemed to be the date appearing onthe export license or declaration corresponding thereto.' 2 This exportcredit is computed on the basis of the "net FOB price," defined as theamount in foreign exchange appearing on the respective export licenseor declaration after deduction of certain items provided by law. De-ductible items include the following: commissions to be paid to agentsor representatives abroad, all deductions or discounts, fines and con-tractual penalties, the CIF price of components imported under thedrawback regime in excess of twenty-five percent of the net FOB priceof the corresponding export, and interest on financing obtained underCentral Bank Resolution No. 509/79 or on other credits obtained fromthe federal government. Once the net FOB price has been deter-mined, the foreign currency value is converted into cruzeiros at theofficial buying rate in effect on the date of shipment, as documentedin the export license or declaration.The export credit is collected by the exporter at the same bank atwhich the foreign exchange contract is negotiated pursuant to a Dec-laration of Export Credit. With respect to exports paid in cash, thecredit is to be paid to the exporter upon shipment of the goods abroad.With respect to exports sold on credit terms of 180 days or less, thecredit is to be paid to the exporter after negotiation of the correspond-ing foreign exchange contract. With respect to exports sold on creditterms exceeding 180 days, the credit is to be paid after delivery to thebank of the corresponding shipping documents.Any violation of the rules governing this incentive subjects thebeneficiary to fines and penalties, as well as to payment of interest andmonetary correction on the amount involved. For example, if theexports qualifying thereunder are not paid for, or are partially paid12. For example, if the product is shipped between April 1, 1981 and March 30,1982, the exporter will receive a 15% credit. Such credit shall be gradually reducedto 9%, starting on April 1, 1982.426 LAWYER OF THE AMERICASfor outside Brazil, the beneficiary is subject to the aforesaid penaltiesand charges. But the beneficiary is not subject to such penalties orcharges if the failure to pay for such exports is attributable to causesbeyond its reasonable control.Provided it is properly accounted for on the books of the exporter,the amount of the export credit shall be deemed to constitute "exportincome" of the exporter for purposes of all applicable income taxincentives.The above notes and comments are meant for general orientationpurposes only, since, as previously mentioned, this subject matter isconstantly suffering significant modifications and policy changes. Fre-quent updating is advisable, as well as close review of the pertinentlegal text and consultation with experienced counsel.

An Update on Brazilian Trading Companies and Export Credit

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An Update on Brazilian Trading Companies and Export Credit

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