Brazil: An Opportunity for Argentines?

Brazil's ratification as the venue for the World Cup by FIFA in 2014, on October 30, 2007, and the choice of Rio de Janeiro as the host city of 2016 Olympic Games by the IOC, on October 2, 2009, resulted in acts that will impact on Brazil in an unimaginable way. 

The two events are and will be responsible for the largest number of direct investments in the country in a six-year period in history. The construction and repairs of the railways, airports, roads, ports, subways and highways, hotels, stadiums, sports facilities, and sanitation to be held in all its aspects (water, sewer, storm drainage and solid waste) qualify urban infrastructure and logistics of cities. There are many ideas and there are already several public and private projects which together will exceed the fantastic figure of USD 500 billion. 

The federal, state and municipal governments have also been working to stimulate private investment, creating several tax incentives for companies which have approved the project for the implementation of infrastructure works in transportation, ports, energy, sanitation and irrigation. 

The five regions of the country will be benefited by the improvements to be performed in large cities as well as in small towns. It is estimated that the 65 destinations of regional tourism in Brazil will be able to create dynamic poles with offers of products and services. 

The private sector allocated USD 11 billion in investments in new hotel developments in Brazil (266 new hotels will be built) in the coming years. The government will also invest heavily in the promotion of cities and the training of service providers. 

The Brazilian Development Bank (BNDES in Portuguese) has launched a credit line for financing the construction and refurbishment of hotels for R$ 1 billion, with interest rates ranging from 6.9% to 7.8% plus rate risk, to comply with the requirement of FIFA 55 thousand beds available in the host cities of the tournament. 

Besides these events, it is also important to mention other three events linked to the World Cup and Olympic Games, which will give strong impulse to the hotel industry at the time these events take place: FIFA Confederations Cup (2013), the Para-Olympic Games (2016) and the Peace Games . 

These Public-Private Partnerships (PPP) come as an option to the achievements of the Brazilian objectives. Created as a mechanism of association between the state and individuals to develop major projects, the risks are properly distributed between the partners on projects where exploitation by the entrepreneur would not be enough to pay up (PPP sponsored) or even when there is no payment by proper users (PPP administration). 

In the same way, project finance and securitization of future revenue also materializes as negotiating structures are able to develop and finance the entire new infrastructure. 

Project finance is a process of financial engineering, which represents a way to raise funds, primarily from the financial market to finance infrastructure projects, with little or no right of return to entrepreneurs (non-recourse), supported by cash flow from the project (primary source), secured by the assets to be acquired and profits from the operation. The project is based on the analysis and quantification of the risks involved in the variation of the cash flow, by mitigating them through contractual obligations. The application of the project permits the financial self-development of the business, the increase of security to the parties, with an appropriate division of risks among the participants and, thus, the creation of greater chances of success of the business objectives.

Also, the securitization of future revenue is also characterized as a form of structured finance. It means the "securitization" of assets of a company. The cash flow generated by the underlying assets is used for the payment of interest, capital securities and the cost of transaction. The notes are secured by the assets (asset backed securities "- ABS - or" asset-backed securities with "), and the flow is controlled by a trustee, and may be handled, which makes them more attractive ("enhancements"). They allow assets to gain liquidity and falling financing costs. Moreover, the generator of the receivables, the structure removes the balance sheet, not only these assets, but also the issue of the plea. 

Besides the projects aimed at these sporting events, the Brazilian government has also been working to leverage investments, beginning with the works of the Growth Acceleration Program (PAC in Portuguese), the exploration of the pre-salt layer and housing program My House, My Life. 

At the beginning of his second term, Lula launched the PAC, which represents a set of measures to accelerate the pace of economic growth, with estimated investments of more than R$ 500 billion, for the last four years of his term. 

It is estimated that the pre-salt layer contains the equivalent of about 1.6 trillion cubic meters of gas and oil, which is five times the current reserves of the country and, if confirmed, Brazil will be the sixth largest oil reserve in the world. There is still no estimate of actual costs, but a study conducted by USB Pactual bank said it would take USD 600 billion just for the exploration blocks of Tupi, Jupiter and Sugar Loaf (13% of the pre-salt layer). Petrobras, however, estimates that the cost will be USD 600 billion, for the six areas (Tupi and Iara, Bem-Te-Vi, Guara and Carioca, Parati, Carambá and Jupiter) already being explored where Petrobras is the operator itself. 

Finally, the housing program “My House, My Life” was created to reduce the housing deficit in Brazil. It is intended for families earning up to 10 minimum wages and this program aims to build 1 million houses, with an investment of R$ 34 billion. 

This growth will impact not only on Brazil, but also on all countries that have dealt with it to facilitate the running of business; Argentina will certainly be the most benefited country, by the proximity of both countries, by being the second largest economy in South America and by having long and positive trade history with Brazil, which resulted in a series of bilateral treaties and agreements of economic complementation.

Brazil and Argentina have a treaty to avoid double taxation on income tax, which guarantees that (i) a company's earnings are only taxed in the country of domicile (with some exceptions), (ii) income from real property is taxed in the country where the property is located, (iii) the income of air, land and sea transport companies, by way of international traffic are taxable only in the country where the headquarters of these companies are located, (iv) the employees' salary is taxed in their country of residence, (v) the fees of the manager are taxed in the country where the company is set up, which pays said salaries, among other guarantees.

To guarantee social security rights provided for the existing laws of the member countries of MERCOSUR to their employees and legal dependent people, the Reciprocity Convention establishes uniform guidelines for the exemption application and the extension of the exemption to the contributions of Social Security for foreign workers coming from the other MERCOSUR countries, whether permanently or temporarily. 

As regards visas, Argentine citizens do not need to travel to Brazil holding any visa if they travel as tourists, visit relatives or friends or go on business trips (so long as these activities do not generate any income in Brazil). The maximum time allowed for Argentine citizens who have no intention of establishing residence in the country is a period of 90 days, which may be extended for more than 90 days, with a total of 180 days a year. Anyone who intends to work in Brazil does not need a visa, but it is mandatory to obtain a residence in the country, which is a relatively simple procedure. The consular representation may grant an initial temporary residence of 2 (two) years, which may become permanent at the request of the immigrant, before the immigration authorities of the host country within ninety (90) days prior to expiration. 

Also, the Central Bank of Brazil and the Central Bank of Argentina signed a Convention on Payment Systems in Local Currency (SML), which is intended to trade operations that allow importers and exporters in Brazil and Argentina to make payments and issue receipts in their own currencies, without requiring prior conversion to the U.S. Dollar. This procedure eliminates one exchange which makes the products cheaper, since the seller receives the payment in their own currency.

 

As well as all these agreements, both countries are joining forces to create a more productive integration. There are already integration projects in the metallurgical, spare parts, wood and furniture sectors.

 

In addition, the Vice President of the Brazilian Development Bank (BNDES), Armando Mariante has announced that entity will provide financial assistance to Argentine companies that decide to settle in Brazil. 

Marval, O'Farrell & Mairal has represented the majority of the largest Argentine companies in Brazil, through the partnership held with the law firm Demarest e Almeida for 12 years now.

Furthermore, the partnership allows Marval, O’Farrell & Mairal to have an Argentine lawyer in Brazil and hosts a Brazilian lawyer in their offices in Buenos Aires.

Due to this, Marval, O’Farrell & Mairal is fully capable of provide professional advice to any company wanting to be part of this period of strong growth in Brazil.