Historically, Brazil has been a challenge for multinational businesses. The large population is the ideal target for goods and resource for labor but the tax laws have made it difficult to profitably enter and grow in the market. Brazil has traditionally had a weak trade balance. With imports far outpacing exports, fiscal authorities implemented policies to control the inflow and outflow of foreign currency, which had a negative impact to foreign businesses. At one time, these types of businesses were heavily taxed if they wanted expatriate profits. Therefore, the best option was to reinvest the money in Brazil--a great policy for Brazil but a difficult choice for global businesses with fluctuating working capital requirements.
Times are changing. Brazil's trade balance is getting stronger. Reflecting this strength, Brazil has taken a more liberal approach to managing foreign exchange. In August 2006, Brazil issued several regulatory changes addressing foreign exchange. The main thrust of the changes was a new set of rules that now allow companies the ability to keep up to 100% of revenue generated from exports in offshore accounts owned by the exporter. Promulgated by Provisional Measure 315/06, which was converted into law 11,371 of 2006, this regulatory change does limit the usage of funds generated from exports. Previously, these offshore funds had to be repatriated into Brazil and taxed before they could then be sent abroad. This new legislation allows companies to skip the repatriation, and subsequent taxes, and send the funds directly from the offshore account to perform offshore payments such as the purchase of imports, financial investments and other payments due by the exporter.
Since June 2007, exporters have had to provide a detailed annual tax report to Brazil 's Tax Authority (SRF) to take advantage of this legislation. Known as DEREX (DeclaraÃƒÂ§ÃƒÂ£o sobre a UtilizaÃƒÂ§ÃƒÂ£o dos Recursos em Moeda Estrangeira Decorrentes do Recebimento de ExportaÃƒÂ§ÃƒÂµes), this tax report is due by the last day of June to Receita Federal. The report must include information on the origin and use of the export income kept abroad and any income earned from the use of it. The information must be segregated by month, country, currency and financial institution. When submitting the report, the business must disclose all account numbers, attorneys or representatives, and the names of all financial institutions that hold or use the funds. Delays in filing the reports result in a 0.5% penalty of the fund value up to a total of 15%.
Authorities want to ensure that they are not missing taxable profits. The current structure authorized by ComissÃƒÂ£o de Valores MobiliÃƒÂ¡rios (CVM), Brazil's Securities and Exchange Commission, provides companies with the flexibility to determine how to use funds generated from exports. The choices are to send funds abroad or repatriate them to Brazil and invest locally. As of today, 100% of these export funds can be exported abroad, thus enabling exporters to use the money to perform offshore payments such as financial placements, investments and other payments owed. When these funds are kept in an offshore account and used to pay invoices or debts owed to foreign entities, the business is not assessed any additional taxes than what it would normally pay to repatriate the money. If the exported funds are exchanged into a different currency they are also subject to IOF, or "tax over financial operations," which varies according to commodity. If the funds are brought into Brazil and are used for financial operations such as the payment of dividends and royalties or used for investment purposes, the business is assessed a 0.38% tax. The benefit of this legislation is that a business is no longer required to repatriate 100% of profits generated from exports before being used to pay foreign debts. If a business is found to be violating the terms of the law, they will be taxed at the standard rate in addition to being penalized at 10% of the value of the funds. Therefore, it is critical that the report clearly matches foreign receipts with foreign accounts payable information.
Now that the regulatory environment is more welcoming, many foreign businesses are starting to look at Brazil again as a growth opportunity. To assist clients with the complex and detailed tracking and reporting requirements inherent in the new legislation, J.P. Morgan has developed a solution to meet our clients' needs--Trade-X. With Trade-X, clients can easily match J.P. Morgan ACCESSSM credit and debit transactions posted in their offshore accounts with their import and export transactions reported in their ERP system and/or foreign trade data application such as J.P. Morgan's TradeSphere Latin America.
The first bank to offer end-to-end cash management, global trade and logistics management solutions, J.P. Morgan has integrated these capabilities into a solution that meets DEREX requirements by gathering data related to an organization's treasury actions and pairing it with information from the import and export groups.
Trade-X is a Web-based in-house solution that reconciles credits and debits posted to offshore accounts with underlying commercial transactions including exports, pre-payments, financials, interest, f/x closures, availability of funds abroad, loans and more. The system will:
1. Match funds received in advance to a shipment
2. Match foreign exchange contract to a previous debit and/or credit
3. Perform simultaneous foreign exchange
4. Generate foreign exchange batch and "cover"
5. Provide visualization to all matched and unmatched transactions
6. Provide capability to show different currencies (such as one currency into a credit/debit and another one into a shipment)
7. Match debits to credits or vice-versa depending on which takes place first
Users log into our market leading global treasury management system, J.P. Morgan ACCESS, and download credit and debit transaction data posted in their offshore accounts. The file is then saved onto the company's server to be uploaded when the user logs into Trade-X. Then Trade-X reconciles this data with import/export transaction data and suggests matches from the money's usage to its origin according to regulatory requirements.In addition to the DEREX report, Trade-X saves time by providing a library of complex reports that provide more visibility into data such as:1. Forecast on International Cash Flow2. Account Balance3. Maturity FX Closure4. DEREX (Brazilian Tax Authority Report)5. Audit Report6. Bank FeesAbout the Author: Leonardo da Silva leads the Latin American product management team for the Global Trade Services business at J.P. Morgan where his primary responsibility is developing solutions that integrate and leverage information in a corporation's physical and financial supply chains. He joined J.P. Morgan in 2006 after developing a product management career working for the Latin American operations of a major automotive manufacturer. With more than five years of experience in supply chain and logistics management, Mr. da Silva has led sourcing and procurement operations in Europe on behalf of Latin America-based suppliers and has worked for several large foreign trade management companies in Brazil. He received a Bachelor of Arts degree in Foreign Trade business and holds a Masters of Business Administration from FIA USP (Sao Paul University).http://www.jpmorganchase.com
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