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08 September 2010

How can Brazil answer the challenge of its government’s desire to raise more capital without holding back the current level of economic growth and increasing tax rates, which could halt consumer spending and domestic growth? Fresh from his latest trip to Brazil, Michael Konstantinov, CIO of emerging markets for RCM, a company of Allianz Global Investors, discusses the increasing formalisation of the Brazilian economy and why this is a major theme for growth: “Brazil has recently implemented one of the most sophisticated tax collection systems in the world with a programme called SPED. This is a key part of President Lula’s plan to formalise the Brazilian economy and support its growth with government financing. “SPED is essentially a technology based accounting system which is overseen by the Brazilian tax authorities. In short, when a company wants to invoice a customer they need to issue an invoice via their trading platform which must work and be licensed by the Brazilian Tax office. The invoice is then sent electronically to the central tax office where it is electronically stamped. It is the tax office who then sends the invoice to the debtor. This therefore ensures that tax revenues increase and the informal economy reduces significantly over time. If transactions on the company tax return don't match exactly with the government records then the company either pay a big fine or investigators move in. This system has not yet been fully integrated across Brazil but it must be implemented by all local government offices in the near future. “This is a major theme for growth which has been mentioned in every single company meeting that I attended during my recent trip to Brazil, irrespective of the sector that the company is in. It is seen as another growth driver for formalised companies to grow market share from the ‘informal’ economy. “This theme creates opportunities for enterprise resource planning (ERP) companies such as Totus which has secured 65% of the market share in Brazil’s mid and small cap ERP market. Totus is already the 7th largest ERP platform in the world. They see themselves as the SAP or Oracle of the mid and small cap sector. SPED means that all legitimate retailers are being 'forced' to improve their trading platforms to ensure that they can comply and operate with this new system. “Other companies that should benefit from this process of formalisation include well established retailers such as Renner. This is a fast growing fashion retailer that stands to benefit from the squeeze on the informal retail clothing sector, such as small shops and markets that currently have a 50% market share. Formalisation is Brazil’s latest theme to offer up new investment ideas – in the wake of the growing middle class, infrastructure opportunities and Brazil’s continued rise to superpower status in energy and agriculture.” - Ends -

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