Brazil Taxation

Client Profile
A global leader in the world of power generation, power transmission and rail infrastructure with 93,000 employees in 100 countries worldwide.

The Challenge
As the world’s seventh largest economy and the largest in Latin America, Brazil has rapidly become one of the busiest locations for expatriate assignments. Unfortunately, it is also a high tax location and foreign companies are discovering many unexpected and significant costs to operate in this market. One of the most significant costs is incurred when Brazilian entities pay external invoices in a foreign currency such as the euro or dollar. The Brazilian authorities impose a range of taxes (IOR, IRRF) that can increase costs by up to 40%, an expense which is often not budgeted. The tax is usually paid directly to the authorities and is not linked to the P&L item cost, so future forecasting can also be difficult.

Paragon’s Solution
Our client asked us to explore how we could help them mitigate this tax burden. The client had purchased relocation services in 2013 of almost $500,000. This left them with a tax burden approaching $200,000. By implementing a local currency billing solution, we were able to remove the foreign exchange tax costs and replace them with local PIS and COFINs taxes (social contributions on gross revenues), which were deductible against revenues in the market. With this change, the taxation burden switched to Paragon but local legislation also allowed for lower taxes to be paid on household goods, destination services and immigration costs. In this way, only Paragon’s management fee was still subject to the more prohibitive tax rates.

The Results
Incorporating a slight adjustment in our management fees to the client, we were able to deliver a full year savings of approximately $170,000. With no change in the operational process, this simple approach allowed for cost savings that could not be achieved in any normal RFP process. By being flexible and adaptable, Paragon succeeded in delivering a real advantage to the client and gained additional local business as a result.