Select Committee on Trade and Industry Seventh Report


53. As we noted above, while Brazil offers significant opportunities these do not come without potentially significant barriers. UKTI summarised the situation: "Brazil in 2007, and for the foreseeable future, will likely be a very familiar place. It will be open for business and trade, but bogged down with bureaucracy and outdated legislation that hamper the realisation of its full potential", to which it also added the obstacle of the power of vested interests. [138]


54. Brazil's tax system and its underinvestment in infrastructure were highlighted in Chapter 1 as factors limiting Brazil's growth potential. UKTI outlined six main barriers to trade and investment: tariffs and customs processes, services, bureaucracy and over-regulation, the tax system, employment regulations and intellectual property issues. During our visit and in oral and written evidence we have heard about these and other barriers to trade with and investment in Brazil, which for some make trade simply too arduous and costly in comparison with the potential returns. We also sought for information via UKTI from companies that we were told had looked at or tried to trade with Brazil, and subsequently decided against it.


55. The British Chambers of Commerce in Brazil said that an ignorance of the opportunities in Brazil, particularly among SMEs, was the fundamental barrier to increased trade and investment with Brazil,[139] something they contrasted with the positive image of the UK in Brazil. However, in our parallel inquiry into UKTI and the marketing of UK Plc, British Expertise (the body representing professional services) told us that the businesses they represented by and large had no great interest in Brazil as its business structure was already sophisticated, contrasting this with China and India which do need British involvement in certain areas.[140]

56. There was almost universal acknowledgement that the complexity of the market made some form of local representation or local agent essential for success in Brazil. The University of Birmingham's SMEs and Brazil study found that assistance in Brazil, in the form of agents, partners or local staff, and personal contacts bring "valuable informal knowledge in an unfamiliar market like Brazil which has distinct regulatory systems and business practices." [141] British Expertise also told us that: "Lack of real knowledge of the region means that businesses wanting to invest or sell there must make a substantial and costly effort to penetrate the region. There is often insufficient incentive to do that, as against using resources in other parts of the world that are better known. An acquisition is one way to tackle this, but you are still left with all the other problems."[142] They also said that a professional services company looking to enter the market should be well prepared, and have representatives with a good command of the language.[143]


57. Although there are a number of Portuguese-speaking countries in Africa, Brazil is the only Portuguese-speaking country in the Western Hemisphere. The Portuguese language was cited as a difficulty by a number of witnesses, including UKTI[144] and the CBI, who said that Portuguese was not one of British business's strongest language suits.[145] The University of Birmingham SMEs & Brazil study found language to be the greatest barrier in trading with Brazil.[146] British Expertise noted that Portuguese and Spanish are less widely taught in the UK than other languages, that private firms cannot afford comprehensive language training, and also that language was a greater barrier to trade in services than goods. [147] British Expertise said that given that South America had two major languages there was an expectation that those wishing to do business there would speak at least one, which it contrasted with China and Russia.[148] While we experienced few problems in speaking English during our visits to Brazilian companies and organisations, we were told that among Brazilian middle and senior management English skills are non-existent, although younger staff have greater skills.[149] We also heard that business enquiries had met no response until they were sent in Brazilian Portuguese.[150] While language is clearly a barrier, during its inquiry into trade with China the previous Committee found that UK businesses were unlikely to be successful unless they employed Chinese speakers, suggesting that the language problem is not unique to Brazil. The damaging presumption, still too widespread in the British business and political culture, that English is the universal language of trade and the only necessary linguistic tool when doing business abroad, is harming our commercial prospects in Brazil just as it is in many other markets around the world.


58. One of the most overt barriers is the comparatively high level, by developed country standards, of import tariffs on goods. UKTI told us: "Some of the old protectionist instincts remain, as do some of the regulations that impede the import of goods and services perceived to represent a potential threat to local interests."[151] As previously noted, the Mercosur customs union is imperfect, with a number of exceptions to the Common External Tariff (CET), and since tariffs vary across the bloc its members do not have the same average tariff levels. Mercosur's CET ranges from 0% to 23%, but some goods, including electronics, are excluded from it.[152] The CBI noted that countries had unilaterally altered their tariffs from the CET, citing Argentina's recently increased import duties on consumer goods.[153]

59. Brazil's bound tariffs, the maximum tariff level consistent with its World Trade Organisation commitments, average over 31%.[154] The simple average of Brazil's applied tariffs—the import taxes actually charged—in 2006 was 12.3%, more than double that of the EU (5.4%), ranging from 10.2% on agricultural products to 12.6% on industrial products.[155] As the table below shows, Brazil's average tariffs compare favourably with those of India, which is the only genuine comparator for Brazil among the BRICs because, as a member that has acceded to the WTO since the last trade round was completed, China has taken on greater tariff commitments than either Brazil or India, while Russia is currently seeking accession to the WTO.Figure 6: Average applied tariffs, 2005/2006 (%)

Brazil (2006) 10.2 12.6 12.3
Russian Federation (2005) 13.5 11.111.4
India (2005) 37.6 16.419.2
China (2006) 15.7 9.09.9
EU25 (2006) 15.1 3.9 5.4

Source: WTO database (accessed April 2007)

60. Reductions in Brazil's industrial products tariffs in particular are a key interest for developed countries including the EU in the Doha Round negotiations at the WTO, and in any potential EU-Mercosur free trade deal (see Chapter 6). In addition to import tariffs, we were informed that imports, like other goods, face two value-added taxes which vary across the country.[156] UKTI also said that since 2004 two additional taxes have been levied on imports at a combined rate of 9.25%.[157]

61. On customs procedures, we were told of high port costs and various inefficiencies, strikes, corruption and bureaucratic barriers: UKTI said that "Paperwork must be 100% correct or serious problems will arise."[158] The University of Birmingham SME study also identified problems with clearing shipments through customs and a need to reduce the number of signatures required for import and export.[159] We saw evidence that some UK companies have been unable to clear products for exhibitions through Brazilian customs sufficiently quickly, and it can take six months to be registered on Brazil's computerized customs systems.[160] During our visit we heard about some instances of inappropriate facilitation payments for fast-tracking releases of imports: UKTI mentioned corruption in relation to ports (which we also heard about anecdotally during our visit), and SMEs reported that customs delays were "encouraged by opportunities for corruption."[161] However, the CBI did not raise such problems specifically in connection with Brazil.[162] Though tariff and customs barriers cause annoyance to potential importers and may provide opportunities for corruption, the situation is no worse—and in some cases less serious—in Brazil than in other developing countries. It is important, though, that this issue is addressed in the JETCO process.

62. 'Trading across borders' was Brazil's highest and therefore best ranking category (53rd out of 175) in the World Bank's Doing Business report, which looked at a typical goods shipment from contractual agreement to receipt. The World Bank put Brazil above the Latin America & Caribbean region average on every indicator in this category, but although it compared reasonably well with the developed Organisation for Economic Co-operation and Development (OECD) country average on exporting, it performed somewhat worse on importing, for example taking double the average number of days for import in the OECD countries (see Fig. 7, overleaf).

63. The WTO trade facilitation negotiations which cover, among other things, these kinds of customs issues have made comparatively good progress. However, success in this area is dependent on progress in some of the more difficult areas of negotiations within the overall Doha Round, of which trade facilitation is just one element.[163]
Figure 7: World Bank Doing Business rankings: 'Trading across borders'

Latin America & Caribbean (region average)
OECD (average)
Documents for export (number) 7.07.3 4.8
Time for export (days) 18.022.2 10.5
Cost to export (US$ per container) 8951,068 811
Documents for import (number) 6.09.5 5.9
Time for import (days) 24.027.9 12.2
Cost to import (US$ per container) 1,145 1,226883

Source: World Bank, Doing Business 2006


64. UKTI considered Brazil to be a relatively open market for financial services, though there were some restrictions in areas such as legal services and insurance.[164] These comprised restrictions on cross-border supply of services, on the ability of UK service providers to establish a commercial presence in Brazil, and on UK service professionals seeking temporary access to Brazil.[165] There have also been difficulties clearing WTO financial and telecommunications services agreements through the Brazilian Congress; UKTI acknowledged that this was a difficult issue for Brazil, and that it can only be expected to move very cautiously.[166]

65. We were told about issues in legal services, where the regulator, the Brazilian Bar Association (OAB), restricts foreign practitioners. Barriers included limits on foreign firms entering into multi-jurisdictional partnerships with Brazilian qualified lawyers.[167] The CBI called for restrictions on legal partnership to be lifted;[168] while Clifford Chance noted the loss of important investment opportunities due to such barriers,[169] the sector's "crucial significance" to the economy,[170] and the inequity that Brazilians can practise in England.[171] While Brazil maintains considerable limitations on trade in services we consider it unlikely that Brazil will move forward on services liberalisation issues without progress—either multilaterally through the WTO Doha Round or bilaterally through EU­Mercosur negotiations—in areas in which it has key interests, particularly agriculture.


66. UKTI said that UK companies find regulation in Brazil "quite stifling",[172] and told us that municipal, state and federal regulation and bureaucracy added up to "a bewildering array of rules, regulations and paperwork that can quickly swamp the unwary or ill­prepared exporter or investor."[173] Complex regulation in areas such as employment law was seen as a particular barrier for SMEs.[174]

67. Other areas of difficulty were restrictions on work permits, onerous certification requirements, lengthy product registration procedures, and measures to encourage local production.[175] We were also told of regulatory agency backlogs which "can delay the introduction of novel goods and services for months or even years."[176] One company alleged that the Brazilian authorities lacked interest in approving their chemical products for use—not that they had turned them down, but that they had not even considered them—with the suggestion that rather than being the exception this was the norm.

68. Regulatory issues are reflected in the World Bank's Doing Business study, which ranked Brazil poorly on dealing with licences, closing a business, enforcing contracts, registering a property, starting a business and employing workers.[177] The CBI argued that there was a need for clearer and more consistent application of regulation, and for greater transparency and timeliness in formulation and enforcement of regulations. The CBI said that it would also welcome an "exchange of best practice and a push towards more mutual recognition of standards".[178]

69. In the meantime, the CBI told us that there are "well established methods (indeed whole industries dedicated to identifying and facilitating these methods) of navigating the bureaucracy without drowning in it. These work-arounds do not generally rely on corrupt or illegal practices; instead they are established ways through the tangle of bureaucracy that the better local companies have mapped out. Knowledge of how to operate these 'little ways' is one of the reasons that exporters must have the right local representation if they are to operate effectively in Brazil."[179] UKTI said that while local partners were not a requirement, "if you have got a local partner it is a lot easier to get through the mass of regulation. […] it is imperative for British companies that want to really establish themselves in the market to have some local knowledge."[180] We note the strong positioning of UKTI to help UK businesses identify such partners.


70. Possibly partly due to the regulatory issues outlined above, some 60% of the Brazilian workforce is thought to be in the informal sector,[181] with the CBI suggesting that the informal sector could account for around 40% of Brazil's GNP, compared with 23% of India's, 13% of China's and 46% of Russia's.[182] The informal sector has an unfair advantage over legitimate businesses, and results in tax and social security evasion, reduced government revenue and so higher taxation on the formal sector and poorer public services.[183] In the formal sector employees have "strong protections" in terms of conditions and social provision, with employers paying an average 100% of an employee's salary in social costs and taxes—an incentive for informal employment to reduce these costs. While these difficulties in theory affect all companies operating in Brazil, UKTI noted that the competitiveness of foreign companies was constrained as they were either unable to use the grey economy in this way or unwilling to do so as this would be likely to breach corporate social responsibility standards.[184] Moreover, there are additional regulations that bear more heavily on foreign companies. For example, in common with other developing countries, Brazil has rules limiting the number of expatriates who may be employed in companies: for those employing three or more people, Brazilian nationals must make up a minimum of two-thirds of total employees and must receive at least two-thirds of the total payroll, although foreign specialists in areas lacking sufficient Brazilians are not included where calculating the one-third allowed for non-Brazilians.[185]


71. Brazil has taxes at federal, state and municipal level, including value-added taxes at both the federal and state level. Its tax system has been described as "bewildering",[186] "complex and burdensome",[187] and "one of the most complex taxation systems in the world"[188] with estimates of the number of taxes facing companies ranging from 62 or 65, up to 75.[189] According to The Economist, Brazil has a "poorly structured revenue system marked by heavy tax burdens, a narrow taxable base, complicated levies and widespread tax evasion. Companies, both foreign and domestic, employ tax professionals and devote considerable resources to managing their tax affairs. The corporate and indirect taxation systems are particularly complex, porous and unwieldy; the income tax system is considered to be relatively efficient, with a top rate of 27.5%." However, the US State Department says that Brazil's taxes "do not discriminate between foreign and domestic firms, although in a few instances there have been complaints that the value-added tax collected by individual states (ICMS) is set to favour local companies."[190] The University of Birmingham's study of SMEs and Brazil concluded that simplification of Brazil's tax structure would be helpful.[191]

72. Moreover, BT pointed out that some services were subject to "cumulative taxation", with taxes payable twice for the same service, giving the example that when a service is bought and resold both suppliers and providers pay taxes that cannot be credited like VAT, which "combined can amount to an additional 15% cost."[192] Anglo American also told us that Brazil's transfer pricing laws were at odds with OECD guidelines, with consequent effects on corporate income tax and social contribution taxes.[193]

73. Reflecting these problems, the World Bank's Doing Business study ranked Brazil lowest on 'paying taxes'—151st out of 175, much lower than its overall rank of 119th. The basis for this is the tax paid by a typical medium-sized company and associated administrative burdens. The table shows that Brazil compares unfavourably with not only the OECD, but also the Latin America and Caribbean region on the time taken to deal with taxes, which at 2,600 hours is the longest among the 175 countries surveyed (the second longest, Ukraine, was 2,185 hours). The figure for Brazil was more than twelve times the average time taken to deal with taxes in OECD countries, and six times the average in the Latin America and Caribbean region and, as the British Chamber of Commerce in Brazil noted, compares with a world average of 332 hours.[194]
Figure 8: World Bank Doing Business rankings: 'Paying taxes'

Latin America & Caribbean (region average)
OECD (average)
Payments (number) 23.041.3 15.3
Time (hours) 2,600.0 430.5202.9
Total tax rate (% profit) 71.749.1 47.8

Source: World Bank, Doing Business 2006

74. UKTI told us that attempting to comply with this system meant large inputs of managerial time and investment in tax consultancy. Moreover, it opened the way for a range of inappropriate activities contrary to good business practice. UKTI also noted that foreign companies established in Brazil were taxed on their world-wide income (as are Brazilian firms), and that the lack of a double taxation agreement seriously damages the viability of such investments.[195]

75. There have been some tax reforms: a law simplifying corporate tax payments for small and medium-sized companies—SIMPLES for small business[196] and Presumed Income for medium-sized businesses—for example, and there is talk of amalgamating Brazil's indirect taxes into one national value-added tax, a move which would require the support of Brazil's state governors.[197] However, the US State Department states that Brazil failed to pass measures to simplify and harmonize state-level VAT in 2003.[198]


76. The International Chamber of Commerce's Business Action to Stop Counterfeiting and Piracy survey of multinationals found Brazil to be the fourth worst country on protecting Intellectual Property Rights (IPR) after China, Russia and India.[199] We heard that piracy of copyrighted material was a serious problem:[200] a perception shared by the US Government[201] and the European Commission, which has listed Brazil alongside other Mercosur countries (Argentina and Paraguay) as a country where future trade relations would need a greater focus on IPR enforcement.[202]

77. Both the CBI and the Trade Minister noted the importance to companies of being able to enforce their intellectual property rights.[203] UKTI said that, in principle, Brazil had a sound IPR and patent system, but noted that its effectiveness and impartiality in enforcement was variable, and that legal processes were protracted and expensive.[204] The Trade Minister pointed out that IPR problems were common among emerging economies, and therefore not only a problem for Brazil, and that this was "a fundamental issue which always arises in building up business confidence and being prepared to do business."[205]

78. The Brazilian Embassy told us that Brazil was doing more than ever to combat piracy.[206] In November 2004, an inter-ministerial National Council to Combat Piracy and Intellectual Property Crimes (CNCP) was created. A National Plan for Combating Piracy was adopted in 2005. The Embassy also noted that Brazil implemented its WTO Trade­related aspects of Intellectual Property Rights (TRIPS) agreement obligations ahead of the final deadline for developing countries, with 'TRIPS-plus' provisions in some areas. The US's recent annual review of IPR enforcement in other countries recognised progress on IPR, the action plan, stating that the National Anti-Piracy Council "is increasingly recognized as a model of public-private collaboration in the area of IP enforcement."[207] This saw Brazil demoted from the highest level 'priority watch list' to the lower level 'watch list', although an 'out-of-cycle' review of progress will take place, with similar reviews covering Russia, the Czech Republic and Pakistan, and with China subject to a year-long review. Both Argentina and Venezuela among Mercosur countries remain on the priority watch list, as do all three other BRIC countries (China, India and Russia).[208]

79. The UK-Brazil Joint Economic and Trade Committee (JETCO) included IPR in its recommendations for action.[209]


80. We were also informed of problems in relation to obtaining business visas, opening offices in Brazil, employing local staff, opening bank accounts, and repatriating funds.[210] We saw no specific evidence of corruption, although it was raised obliquely in reference to facilitating clearance of imports, and the US State Department states that while "Federal government authorities generally investigate allegations of corruption, there are inconsistencies in the level of enforcement among individual states."[211] Brazil is a signatory to the OECD Anti­Bribery Convention and the UN Convention against Corruption. Transparency International ranked Brazil 62nd out of 159 countries on the perception of corruption in 2005, where 1st is the least corrupt (the UK was ranked 11th).[212] By comparison with the other Mercosur countries, Uruguay ranked above Brazil at 32nd, while the other Mercosur countries ranked below it: Argentina at 97th, Venezuela at 130th and Paraguay at 144th.

81. We also considered whether the fact that Brazil does not currently enjoy investment grade status—that is, it is not regarded as a lower risk, high quality investment—or at least the factors behind this, could partly explain the relative lack of UK investment. India was recently returned to investment grade by Standard & Poor's after 15 years of 'junk' status.[213] The CBI said that generically investment grade status was an "important factor" among a range of others for corporate risk, but other than noting that "Brazil is looking forward to obtaining investment grade status from international rating agencies"[214] it did not highlight this as a specific problem for Brazil.[215] In any case, there are indications that Brazil's status may be upgraded, perhaps within the next two years if its public finances remain stable.[216]

82. We recognise that a number of real, if surmountable, barriers exist to trade with and investment in Brazil, but given that these generally face our competitors as well, we find these insufficient to explain the relatively poor performance of the UK. Other than the problems we have outlined, witnesses did not pinpoint any other factors that would explain this situation. We are therefore led to conclude that awareness and perception issues are the greatest barriers to trading with Brazil. We hope that this Report will help to make British business more aware of the opportunities afforded by, and give indications of how companies can tackle some of the difficulties involved in doing business with, Brazil.

The Joint Economic and Trade Committee (JETCO): Tackling barriers bilaterally

83. The UK and Brazil agreed to establish a Joint Economic and Trade Committee (JETCO) during President Lula da Silva's state visit to the UK in March 2006. As the Trade Minister noted, similar committees have already been established with China and India (as well as an Intergovernmental Steering Committee in the case of Russia).[217] The Trade Minister said that JETCOs were "a way forward" in the case of Brazil, China and India where there are "massive opportunities but also clearly areas where they cannot be realised because of significant impairments to trade".[218] Its aims are to improve economic relations, "systematically examine why UK companies appear to under perform in terms of trade and investment with Brazil", and to agree joint strategies to tackle bilateral trade and investment impediments.[219]

84. The UK Government intends JETCO to give businesses a "platform" to share their concerns with ministers in the UK and Brazilian governments.[220] The success of the JETCO is likely to depend crucially on the amount of business interest in developing UK­Brazil relations, raising issues and providing solutions to problems. The JETCO with India has been backed by business organisations like the Indo-British Partnership Network, a body created by UK businesses to encourage bilateral trade between the two countries.[221] In the case of Brazil, JETCO has the support and involvement of the CBI, the British Chamber of Commerce in Brazil, its Brazilian equivalent (the CNI) and FIESP, the business body for São Paulo state.[222] The CBI was closely involved in the business side of the inaugural meeting and pushed for an "action­oriented agenda",[223] with the recommendations being "broadly similar to the sorts of concerns that Brazilian business itself has about the changes and reforms that it wants to see in Brazil."[224]

85. There will be annual ministerial-level JETCO meetings alternating between the two countries, interspersed with at least one meeting of officials. The first ministerial-level meeting took place in Brasilia in September 2006. Fifteen recommendations were made, including a general call for increased UKTI resources in Brazil and the UK and awareness­building events, as well as highlighting the importance of reaching bilateral investment and taxation agreements, tackling intellectual property rights issues, co­operating in three 'strategic sectors' (aerospace, financial services and healthcare) and in science.[225] Key recommendations and progress are explored in more detail below. Science aspects are considered in Chapter 5.

86. The first six-monthly meeting of officials took place in São Paulo on 13 March 2007, with around six officials from each country plus business representatives. UKTI said that while "there were many ideas, there was little consensus from business", and the focus was on possible sectoral and/or issue working groups, and a planned seminar on 'Doing Business in Brazil'.[226] UKTI explained that the elections and government changes in Brazil had limited progress in some areas: for example the Brazilian Trade and Industry Minister was only appointed on 23 March 2007.[227] Perhaps the most progress has been made on the Doing Business in Brazil seminar, which was originally scheduled for 16 May 2007 but will now take place on 25 June 2007 at the DTI Conference Centre in London. A UK visit by the Brazilian Ministry of Trade was planned, focusing on technical aspects of the services sector. Also planned are joint events on professional services alongside the Lord Mayor's Brazil visit in August, and a possible mission to the UK at the same time as the London JETCO Ministerial meeting in September 2007. However, it seems that there has been less progress in other areas, notably on the bilateral investment and taxation agreements.[228]

87. We support the creation and work of the UK-Brazil JETCO, but note that its success will depend on maintaining both political and business interest and involvement in both countries. We are pleased to see that events are being planned which will serve to raise awareness of the available opportunities, but while we recognise it is still early in the life of the JETCO with Brazil, progress over the six months since the Ministerial meeting has been limited. Certainly the planning work so far needs to be converted into genuine action: we believe that it is essential that momentum is maintained to ensure the continued support of business and to maximise JETCO's awareness-raising potential.


88. The CBI told us that IPR was "an incredibly important" issue for British businesses, and it highlighted IPR as one of the three most important JETCO recommendations.[229] The two sides "agreed to examine IPR issues under government leadership, with a view to increasing co-operation, including promoting innovation and transfer of technology initiatives, in order to reach the adequate level of protection of intellectual property rights in both countries."[230] The Trade Minister said that he believed the Brazilians "are seized with the need to work" on the IPR area.[231] A two-week training programme in Brazil on IPR provided by the UK Patent Office has also been proposed.[232]

89. As we have noted earlier, Brazil's failures in intellectual property rights protection lie in the area of enforcement, not legislation. The UK has a good record in enforcement and could provide useful training and advice. Without advances in enforcement, Brazil may well not receive the investment it needs to develop high-tech and science R&D, from either the UK or elsewhere.


90. Although an Investment Protection & Promotion Agreement (IPPA)—a bilateral investment treaty that provides for equal treatment for investors, compensation in the event of expropriation, and independent settlement of any disputes—was signed with Brazil in 1994, it has yet to be approved by the Brazilian Congress. In fact Brazil has no such agreement with any country, and similar agreements with other countries were withdrawn from consideration by the Brazilian Congress in 2003.[233] The CBI saw an IPPA with Brazil as one of its top priorities, UKTI emphasized the issue, and the Trade Minister concurred.[234] The CBI told us that ratification "would mark a major step forward in the framework for investment relations between the two countries."[235] They said it was "important in terms of providing confidence and stability and a sort of comfort that if they invest certain things will happen if things go wrong."[236] The JETCO recommendation highlighted "the importance to business of the adoption of a comprehensive" IPPA. [237]

91. However, progress in these areas appears to have been minimal and the portents are not good. UKTI suggested that the IPPA's presence among the JETCO recommendations represented a step forward, although the officials were unable to promise that Brazil would "change its attitude overnight".[238] The Trade Minister said that the British Government were attempting to expedite the IPPA issue, but that this was "a difficult area for us to resolve".[239] He said that while the Brazilian Government had suggested a mechanism for attracting investors, this fell "far short of" what the UK Government sees as an IPPA.[240] However, a working group had been set up in Brazil to examine all of its IPPAs.[241]

92. However, it appears that there are difficult, possibly insurmountable, constitutional obstacles to ratification by Brazil.[242] When we pressed the Trade Minister on the prospects of significant progress in the immediate future, he said: "No. To give you any other impression would be misleading in the extreme."[243] Because of the constitutional and political issues that lie behind the non-ratification of Brazil's bilateral investment agreements' an IPPA between the UK and Brazil is unlikely in the near future. It was perhaps over-ambitious to include such a difficult issue in the JETCO priorities, but it nevertheless remains an important goal for UK business, and we urge the Government to do all it can to ensure that progress is made.


93. Double taxation agreements ensure that income received or gains made in one country by residents of another country are taxed only once. Brazil has double taxation agreements with a number of countries including Argentina, Canada, Chile, China, France, Germany, Italy, Japan, Luxembourg, the Netherlands, and Spain, but neither the UK nor the US. [244] A double taxation agreement with Brazil was one of the CBI's top priorities.[245] The issue was also raised by both Anglo American[246] and in the University of Birmingham SMEs and Brazil study, which concluded that it would be "an important step forward."[247] The JETCO recommendations reflect this.[248]

94. Brazil is reluctant to conclude a double taxation agreement. The UK insists that such agreements must be based on the OECD Model Convention, which offers a template for bilateral tax agreements, and this appears to have hindered progress on this issue. As the Trade Minister explained, "Our double taxation policy is close to the OECD model treaty and we should like that to be the starting point for our discussions with Brazil. […] Brazil's policy varies significantly from the OECD model and Brazil is unwilling to give up its taxing rights […] but we think that the best way forward is the OECD model." He said he believed the CBI agreed with the Government's stance, and went on to say that Brazil's double taxation arrangements with other countries "have limited benefits and I do not think they fully cover the OECD model. The problem is that they have settled for second best, but we are not yet prepared to do that."[249]

95. UKTI has subsequently suggested that it was "not true to say that any treaty would be better than none", and that this "would prejudice the terms of other treaties that are being negotiated within the region e.g. with Chile." Officials noted that OECD members that did have agreements with Brazil have frequently reported problems in their application, and in 2005 Germany had decided to terminate its agreement unilaterally after "differences of interpretation."[250] UKTI told us of plans for a senior HM Revenue and Customs policy adviser to visit Brazil in Spring 2007 "to take forward technical level exchanges on the Double Taxation Agreement".[251]

96. In the case of a prospective double taxation agreement it seems there is a certain amount of intransigence on both sides. While UKTI said that an agreement was unlikely, it remains possible that the UK's investment statistics with Brazil are being distorted by the double taxation agreements between Brazil and other EU countries in particular: during our visit we were told of one case where a company routed business via Italy to take advantage of its tax agreement with Brazil. We therefore urge the Government to re­examine this matter which seems likely to be putting us at a disadvantage vis à vis our competitors, and remains a key priority of UK businesses. If the re-examination demonstrates the significance we anticipate, then such a treaty must become a key objective of the JETCO process.

Opportunities by sector

97. While it may not be easy to trade with Brazil our evidence suggests that there are a number of sectors in the Brazilian market with opportunities for UK businesses. UK companies are currently involved only in a limited way in some sectors, which may have the effect of discouraging risk-taking by other, particularly smaller, companies. To some extent this limited involvement reflects the fact that in some important sectors, such as mobile telecommunications[252] and water services, decisions on global strategy are no longer taken from a purely UK perspective due to ownership structures that mean that many such companies are UK subsidiaries of companies based in other countries.

98. In our terms of reference we highlighted aerospace, financial services, information technology, life sciences, and oil and gas as offering particularly good opportunities for UK companies. UKTI provided us with useful detailed briefings on each of these, as well as on its other priority sectors, environmental technology and healthcare. The evidence accompanying this Report contains the full sector briefings,[253] and key elements are summarised below, first for the three JETCO strategic sectors, and then for the remaining sectors (life sciences is covered in Chapter 5).

99. There appears to be a discrepancy between UKTI's sectoral priority markets for Brazil and the three sectors identified by the JETCO as 'strategic'. Two of the JETCOs 'strategic sectors', aerospace and financial services, are seen by UKTI as merely 'opportunity sectors' in Brazil, with only healthcare being a priority sector. We are not clear how these two sectors were singled out as strategic by JETCO, yet merely opportunity sectors by UKTI. It is imperative that there is consistency between the priorities of JETCO and UKTI.


100. After a seminar attended by 50 UK companies saw just four companies following up leads, the UKTI Aerospace Sector Advisory Group demoted Brazil from priority status to a second tier in November 2005.[254] UKTI told us that Brazil's aircraft manufacturer Embraer is "key to the Brazilian market for UK companies"; hardly surprising if the claim made by the company during our visit, which we have no reason to doubt, that they have overtaken Bombardier and are now the third largest civil aircraft manufacturer in the world is substantiated. However, UK content in its aircraft is less than 2% and "current relationships with existing partners make it very difficult to displace the existing supply chain for existing programmes. New programmes will demand a higher level of local content".[255] These local content rules were seen as the main reason for low interest among UK firms.[256] However, we were also told during our visit to Embraer about their entrepreneurial approach to risk-sharing with their suppliers and the resultant nature of their contractual arrangements with those suppliers. Such arrangements certainly add to the challenge of doing business with the firm.

101. Following the inclusion of aerospace as a strategic sector within the JETCO recommendations, UKTI's aerospace sector group commissioned a report to reassess the sector. This found that, despite the presence of Rolls­Royce and three UK SMEs, the market was still dominated by Embraer and its well-established supply chain that "costs more to break into" compared with getting involved in new chains in India, for example. The report also noted that Embraer preferred its trading partners to make inward investment as opposed to dealing with companies interested in supplying products or services.[257] The report identified the kinds of barriers we have discussed above, including tax and local representation (a particular barrier for new entrants), and the advantage for European competitors of having an established presence, as well as a lack of incentives such as the tax breaks offered by, for example, the US and Mexico. All of this undermines companies' efforts to the point that they have "moved on to try other, easier markets."[258]

102. The aerospace industry called for "focus on addressing barriers and highlighting the difficulties of getting into Embraer's supply chain," and for a bilateral JETCO Aerospace Working Group to tackle the barriers and promote "trade, interchange and cooperation."[259] UKTI told us that this group, including the UK and Brazilian public and private sectors, was being set up and was expected to meet during 2007.

103. We note the unfortunate limitations for UK businesses caused by the Brazilian Government's local content rules for present and future Embraer models, and that the UK remains disadvantaged against competitors with an established local presence. We welcome the selection of Aerospace as a JETCO strategic sector, and hope that the proposed JETCO working group on aerospace will be successful in reducing the barriers.


104. We were told by UKTI that while the UK already has a strong presence in financial services, there is increasing demand for "specialised service providers" that could present further opportunities for UK companies.[260] There is interest in public-private partnerships (PPPs, also noted by the CBI), legal services, reinsurance and carbon trading.[261]

105. As the Remembrancer of the City of London explained, "much of the Latin American financial world overlooks the City of London and turns instead to New York for expertise".[262] The Lord Mayor made a three-day visit to Brazil—Rio, São Paulo and Brasilia —as part of a broader visit to Latin America in September 2005, which focused on carbon trading and PPPs.[263] We were pleased to hear that the Lord Mayor and the City of London will be making a longer return visit to Brazil from 23 August—1 September 2007. However, we note that while the Lord Mayor envisages visits to China, India and the Gulf every year, visits to 'emerging markets', including in South America, are planned only every 2-3 years.[264]

106. On his 2005 visit to São Paulo the Lord Mayor promoted the benefits to Brazilian companies of listing in London rather than in New York and said that he would advise the London Stock Exchange (LSE) of the opportunities to attract Brazilian listings, which to date have predominantly been on the New York Stock Exchange (NYSE).[265] During our visit to Brazil we were struck by the perception that, unlike the NYSE, the LSE was not actively engaged in Brazil. There was a feeling that the LSE's presence was ceremonial, rather than the businesslike approach of the NYSE in Brazil. During his visit the Lord Mayor noted a "strong appetite" for a visit by the LSE to São Paulo.[266] UKTI told us that promoting the LSE and the AIM in particular "could encourage local businesses to view London as a viable alternative to New York".[267] The CBI also called for more work on promoting London to Brazil.[268] The LSE told us that it saw increasing opportunities in and enquiries from Brazil, partly due to the attraction of its being based in Europe and general dissatisfaction with US regulatory approaches, but that this was offset by the strength of cultural links with the US and the compatibility of time-zones.[269] However, this latter point is unconvincing, given that São Paulo's time zone is between the time zones of London and New York. We welcome the comments from the LSE, after visiting the region, that it recognised the "general lack of awareness regarding the London offering" and had now "begun to actively market to attract issuers".[270] UKTI later told us that the LSE's International Business Development team had experienced an increase in enquiries from investment banks, law firms and Brazilian corporations regarding listing on the Alternative Investment Market (AIM).[271]

107. The Trade Minister acknowledged that the UK's financial services and banking sectors had been performing poorly in South America in comparison with competitor countries due to "20 years of under­resourcing."[272] UKTI accepts that its new financial services strategy focuses on China, India, Russia and the Gulf rather than Brazil. However, the Trade Minister told us that Brazil was a priority,[273] while UKTI said that the sector team was looking at markets other than those in the strategy in the long term.[274] The UKTI Financial Services Sector Advisory Board (FSSAB), the driving force for that services strategy, recently considered a paper on South America.[275] UKTI told us that the FSSAB had agreed that the UK had fallen behind and saw this as a good time to "re-engage the continent", with Brazil serving as a pilot for the region.[276]

108. UKTI's Financial Services team has provisionally allocated one of the largest budget allocations for its 'opportunity markets' to Brazil.[277] This is expected to fund activities associated with the Lord Mayor's visit as well as potential support for the LSE's follow up to their 2006 visit.[278] JETCO is also encouraging links between the UK's Financial Services Authority and its equivalent in Brazil. Recent initiatives include work on public private partnerships (with Brazilian officials the largest group attending 'master classes' provided by Partnerships UK over the last three years) and carbon credits (with the Climate Change Projects Office visiting Brazil last year and planning to visit again this year).

109. While we welcome the setting up by UKTI of the Financial Services Sector Advisory Board (FSSAB) because of the importance of financial services to the UK economy, we note that the UKTI financial sector strategy mentions Brazil only in passing, and that country strategies are planned for China, India, Russia and the Gulf, but not Brazil. We believe the scale of opportunities for financial services available in Brazil should be recognised by placing the market on a par with China, India and the Gulf, or at least above other emerging markets. We therefore hope that the designation of financial services as a JETCO strategic sector will help redress the balance. As UKTI is developing dedicated China and India financial strategies, with Russia to follow this year, a dedicated strategy for Brazil should be seriously considered.

110. We also hope that these developments and the Lord Mayor's planned visit to Brazil later this year will help encourage the London Stock Exchange to establish a permanent presence in Brazil, as ThinkLondon, London's inward investment agency have in partnership with UKTI. This would have the potential to serve as a base for the whole of South America and increase competition with the New York Stock Exchange. ThinkLondon also recently reached the first bilateral investment promotion agreement between a Chinese and a European city,[279] and we believe there is scope for a similar initiative with São Paulo, for example.


111. UKTI told us that Brazil's healthcare market was the largest in Latin America with more than 7,000 hospitals, 280,000 doctors and annual expenditure of US$20 billion, and that it was also the largest market for medical devices in Latin America, with imports valued at over US$980 million in a market valued at almost US$2.8 billion. UKTI also identified opportunities for joint ventures with a local industry of over 500 companies, and noted that modernisation of the communications network is "encouraging IT projects in Healthcare, varying from software development to telemedicine and e-health training/services."[280]

112. The UK and Brazil have a Memorandum of Understanding for the healthcare sector, signed during President Lula's March 2006 State Visit to the UK, with the main aim of increasing co­operation in the area of blood plasma products.[281] UKTI told us that a full programme of events for the sector had been approved for 2007/08, and that it was looking into how barriers such as new rules for registration of medical devices and diagnostic products could be tackled via the JETCO.


113. Brazil has taken a lead among developing countries in expressing concerns about climate change and initiating activity. The potential for selling the UK's environmental technology to Brazil is therefore good. However, UKTI considered that due to the sophistication of the Brazilian market "overseas companies must offer something new to the market. Opportunities exist for UK companies offering innovative technologies, services, and equipment."[282] The regulatory environment and lack of investment in the sanitation sector resulted in UK companies leaving the Brazilian market in recent years. But some smaller companies have been successful in supplying Brazil.[283]


114. Brazil's IT, telecoms and electronic industries had revenue of US$23 billion in 2005, with manufacturing accounting for 25% of this, including PCs, printers, telephones and other hardware, mostly in the São Paulo and Manaus free trade zones.[284] There have been trade missions in both directions,[285] and the National Grid, BT and LogicaCMG are all present in the Brazilian market.


115. UKTI officials told us that if asked to rank its priority sectors the "one that specifically stands out is oil and gas".[286] UKTI's International Oil & Gas Business Advisory Board has designated Brazil a "priority A Market", as part of a Latin American "golden triangle" of deep water Exploration and Production, and "a significant area of the UK's industry capability."[287] UKTI also noted that Petrobras, the former state monopoly, was planning to invest heavily up to 2011 "creating important opportunities for providers of services and supplies",[288] and that new offshore gas fields were a top priority for the Brazilian government to increase domestic production and reduce dependency on Bolivia. A new gas regulatory framework is also planned.[289]

116. As with healthcare, there is a bilateral Memorandum of Understanding, signed in February 2006, for the energy sector.[290] UKTI told us that, subject to resources available from UKTI's oil and gas sector team and in Brazil, a similar, or enhanced, programme of activity is envisaged for 2007.[291] We welcome the fact that UKTI has made Brazil a global priority market for the oil and gas sector in recognition of the opportunities that exist in the market.

138   Appendix 23 (UKTI), annex A Back

139   Appendix 6 (British Chamber of Commerce in Brazil) Back

140   The evidence given to our parallel inquiry is to be published as The Future of UK Manufacturing, HC 161 of Session 2006-07. The evidence from British Expertise may be found at Q 381. Back

141   Appendix 29 (University of Birmingham), summary and para 6 Back

142   Appendix 7 (British Expertise) Back

143   Ibid.  Back

144   Q 2 Back

145   Q 109 Back

146   Appendix 29 (University of Birmingham), para 7 Back

147   Appendix 7 (British Expertise) Back

148   Ibid. Back

149   Appendix 19 (Paul Eadie MBE) Back

150   Ibid. Back

151   Appendix 23 (UKTI), para 5.1 Back

152   Appendix 10 (CBI), para A8 Back

153   Ibid. Back

154   WTO statistical database, April 2007 Back

155   Ibid., September 2006 Back

156   ISS and ICMS. See Appendix 8 (British Telecom), para 14, and also Appendix 23 (UKTI), annex E. Back

157   PIS and COFINS (Appendix 23, annex E) Back

158   Appendix 23 (UKTI), annex E Back

159   Appendix 29 (University of Birmingham), para 25 Back

160   Appendix 19 (Paul Eadie MBE) Back

161   Appendix 29 (University of Birmingham), para 7 Back

162   Q 119 Back

163  - See Chapter 6 Back

164   Appendix 23 (UKTI), annex F Back

165   Ibid., para E8 Back

166   Ibid. Back

167   Ibid., annex F2 Back

168   Appendix 10 (CBI) Back

169   Appendix 9 (Clifford Chance), paras 6 and 8 Back

170   Appendix 9 (Clifford Chance), para 22  Back

171   Ibid., para 8 Back

172   Q 35 Back

173   Appendix 23 (UKTI), annex E Back

174   Appendix 29 (University of Birmingham) Back

175   Appendices 19 (Paul Eadie MBE) & 7 (British Expertise) Back

176   Appendix 23 (UKTI), annex E Back

177   Appendix 10 (CBI), para 28 Back

178   Appendix 10 (CBI), para 32 and Q 115 Back

179   Appendix 23 (UKTI), annex E Back

180   Q 51 Back

181   'Left turn ahead? How flaws in Lula's plan could condemn Brazil to lag behind its peers', Financial Times, 22 February 2007, although the US State Department estimates around 40% of all workers not being formally registered (2006 Investment Climate Statement - Brazil; Back

182   Appendix 10 (CBI), para 10 Back

183   Elstrodt, H-P. 'What executives are asking about Latin America', McKinsey Quarterly, 2007 Special Edition, p27 Back

184   Appendix 23 (UKTI), annex E  Back

185   US State Department, 2006 Investment Climate Statement - Brazil; and also Appendix 10 (CBI), para 31 Back

186   'Left turn ahead? How flaws in Lula's plan could condemn Brazil to lag behind its peers', Financial Times, 22 February 2007 Back

187   Appendix 10 (CBI), para 30 Back

188   Appendix 23 (UKTI), annex E Back

189   The lower estimate was provided by the CBI (Q 106) and the higher by UKTI (Appendix 23, annex E). Back

190   US State Department, 2006 Investment Climate Statement - Brazil; In 2004 a WTO trade policy review stated that Brazil's ICMS tax could discriminate against imports in some cases (WTO, Trade Policy Review - Brazil, Secretariat report, WT/TPR/S/140, 1 November 2004). Back

191   Appendix 29 (University of Birmingham), para 25 Back

192   Appendix 8 (British Telecom) Back

193   Appendix 1 (Anglo American plc) Back

194   Appendix 6 (British Chamber of Commerce in Brazil) Back

195   Appendix 23 (UKTI), annex E; this issue is further explored in paragraphs 92-95. Back

196   The British Chamber of Commerce in Brazil noted that the Simples system allows "single monthly tax payment for companies with revenue under $1.1 million a year, covering 8 taxes, 12 labour taxes and one municipal tax (90% business approval)". (Appendix 6) Back

197   'Left turn ahead? How flaws in Lula's plan could condemn Brazil to lag behind its peers', Financial Times, 22 February 2007 Back

198   US State Department, 2006 Investment Climate Statement - Brazil: Back

199   'Industry chiefs press for action to enforce counterfeiting laws': Financial Times, 29 January 2007  Back

200   Appendix 10 (CBI), para 39 Back

201   US Trade Representative, 2007 Special 301 Report: Back

202   As part of the European Commission's Global Europe strategy framework, it recently placed Brazil on its 'priority list': and Brazil summary: Back

203   Qq 115 and 182 Back

204   Appendix 23 (UKTI), annex E Back

205   Q 183 Back

206   Appendix 4 (Brazilian Embassy) Back

207   US Trade Representative, 2007 Special 301 Report, p 30: Back

208   US Trade Representative, 2007 Special 301 Report, pp 1-2, 25 and 28 Back

209   See paragraph 88 below. Back

210   Appendix 29 (University of Birmingham), para 25 Back

211   US State Department, 2006 Investment Climate Statement - Brazil: Back

212   Transparency International, Global Corruption Report 2006, table 11.1 Back

213   The Financial Times notes that this is despite India's public finances being much weaker than other comparable countries: 85% debt to GDP, over 3 times that of China ('India returns to full investment grade after status 15 years', Financial Times, 31 January 2007, p6) Back

214   Appendix 10 (CBI), para 9 Back

215   Q 109 Back

216   'Premiums on emerging debt approach lows', Financial Times, 7 February 2007 Back

217   Reportedly the UK Government is looking to "revive" this ('British cabinet minister makes case for greater UK-Russian trade', British Embassy in Russia press release, 6 February 2007: Back

218   Q 189 Back

219   Appendix 23 (UKTI), para 6.29 Back

220   'Darling paves way for stronger trade relations with Brazil', UKTI press release, 7 September 2006 Back

221   See Back

222   Appendix 27 (UKTI), annexes C and G (point 12) Back

223   Q 110 Back

224   Q 106 Back

225   Other recommendations include ratifying the Brazil-UK Agreement on the Taxation of Air Transport and Shipping (priority x), and joint ventures between UK and Brazilian professional services firms (priority xiv). Back

226   Appendix 27 (UKTI), annex C Back

227   Ibid.; We were also told that the ratification of the UK-Brazil Air Services Agreement had been delayed because of the Brazilian elections. Back

228   See paragraphs 89-95 Back

229   Q 114 Back

230   JETCO priority xi Back

231   Q 183 (Trade Minister) Back

232   Appendix 27 (UKTI), annex A (point 11) Back

233   Appendix 27 (UKTI), annex L Back

234   Qq 114 (CBI), 36 (UKYI) and 183 (Trade Minister) Back

235   Appendix 10 (CBI), para 35 Back

236   Q 109 Back

237   JETCO statement, priority xiii Back

238   Q 36 Back

239   Q 183 Back

240   Ibid. Back

241   Appendix 27 (UKTI), annex L Back

242   Q126 (CBI). The US State Department notes the "legal controversy in Brazil over binding foreign arbitration between foreign investors and state entities. Some Brazilian legal interpretations claim this is prohibited under Brazilian law on the grounds that it infringes the sovereign rights of the state […] legal uncertainty, as well as congressional politics, has held up ratification of Bilateral Investment Agreements that Brazil has signed" (US State Department 2006 Investment Climate Statement - Brazil; which also states that "The US and Brazil currently have no plans to discuss a BIT") Back

243   Q 188 Back

244   Q 186 (DTI); Appendix 27 (UKTI), annex L; US State Department, 2006 Investment Climate Statement - Brazil: Back

245   Qq 114 and 125 and Appendix 10 (CBI), para 30 Back

246   Appendix 1 (Anglo American plc) Back

247   Appendix 29 (University of Birmingham), para 25 Back

248   JETCO statement, priority xiii Back

249   Q 186 Back

250   Appendix 27 (UKTI), annex L Back

251   Appendix 27 (UKTI) annex A (point 13) and annex B Back

252   The market is dominated by Portuguese, Spanish and Italian operators. UK companies are not involved in the market, but while Vodafone has pursued Hutchinson­Essar of India it only operates in Brazil in a partnership with America Movil Group. British Telecom has a "growing presence" in the region, with Brazil as its key market and one of its six global network centres based there. See Appendix 8 (British Telecom) . Back

253   Appendix 23 (UKTI), annex F, passim Back

254   Appendix 23 (UKTI), para 6.10 and Q 46 Back

255   Ibid., para 6.9 Back

256   Q 47 Back

257   Appendix 27 (UKTI), annex D Back

258   Ibid. Back

259   Ibid. annexes A (point 9) and H Back

260   Appendix 22 (UKTI), annex F Back

261   The Brazil Reinsurance Institute (IRB) was a state monopoly until new legislation in January 2007, and now new opportunities are available to UK companies. See, Appendix 27 (UKTI), annex D. Back

262   Appendix 1 (Anglo American plc) Back

263   Appendix 12 (Corporation of London), para 31 Back

264   Appendix 13 (Corporation of London) Back

265   Appendix 12 (Corporation of London), para 31 Back

266   Appendix 1 (Anglo American plc), para 31 Back

267   Appendix 23 (UKTI), annex F Back

268   Appendix 10 (CBI), para 22 Back

269   Appendix 16 (London Stock Exchange) Back

270   Ibid. Back

271   Appendix 27 (UKTI), annex D, also notes that Infinity Bio Energy is in the process of becoming the first AIM-listed Brazilian company. Back

272   Q 192 Back

273   Q 194 Back

274   Appendix 27 (UKTI), annex D. UKTI also noted that while Brazil was in its financial services strategy, "it is perhaps the weakest of the candidates in the group" because growth was "strongly dependent on the political willpower to maintain a framework within which business can flourish." (Appendix 23, para 6.11) Back

275   Appendix 27 (UKTI), annex N Back

276   Ibid., annex D Back

277   Ibid., annex N Back

278   Ibid. and Q 192. UKTI said it would not cover PPP, which the sector has told it should be self-funding, or insurance, which it felt should be coordinated by the private sector. Back

279   'Deal boosts London as investment hub', Financial Times, 7 March 2007, p4 Back

280   Appendix 23 (UKTI), para 6.20 and annex F Back

281   Appendix 24 (UKTI), annex A Back

282   Appendix 23 (UKTI), para 6.17 Back

283   Appendix 24 (UKTI), annex A Back

284   Appendix 27 (UKTI), annex J Back

285   Appendix 23 (UKTI), annex F Back

286   Q 43 Back

287   Appendix 23 (UKTI), para 6.16 Back

288   Ibid., annex F Back

289   Ibid., para F5.3 Back

290   'Consultative Mechanism for Co-Operation in the Field of Energy', Appendix 27 (UKTI), annex E Back

291   Appendix 23 (UKTI), annex F: a summary of UKTI sectoral activity in 2006 is in Appendix 27 (UKTI), annex J, pp43-48 Back

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