The authority to enforce controls that will secure its borders is one of the main features of a sovereign territory. Customs procedures impact national security and economic development – two of the core values for every nation – and must reflect the challenges of our time. Brazil has been working on its customs modernisation system for the past few years and has achieved progress in many areas. However, in order to accomplish these changes and become a business-friendly environment for traders, a new culture must be forged.
Culture does not change because we desire to change it. Culture changes when the organisation is transformed – the culture reflects the realities of people working together everyday.
– Frances Hesselbein
Knowing how to handle Brazilian customs law is essential for corporations doing business in the country, if they wish to earn the benefits of the new surges in trade capability while also navigating old problems. Using legal knowledge to guide international trade operations in Brazil – one of the largest economies in the world and one of the more difficult places to import and export goods – improves business competitiveness and predictability.
Brazil is the world’s ninth biggest economy, with US$1.869 trillion earned in 2018 and population of 211 million. However, it is not a world leader when it comes to international trade, owning only a small fraction of global exchanges. In 2017, according to the World Trade Organization (WTO) rankings, Brazil was responsible for only 1.2 per cent of global exports (making it the 26th biggest exporter) and 0.9 per cent of imports (29th biggest importer).
There are many explanations for Brazil’s modest participation in the global trade arena. One is its historical culture as a country focused on the local market, with protectionist policies favouring local manufacturing and cracking down on imports. One consequence of this strategy is its out-of-date customs administration – widely viewed as one of the worst in the world.
Fortunately, change is coming.The economy collapsed in 2013 and the downturn is proving slow to shift. Antiquated behaviours need to be reviewed, such as international trade policies tailored to protect national industry, which have been cited as a cause of the financial depression. Crisis is opportunity, and Brazil is leveraging the chance to review its international trade patterns in order to grow stronger.
A good example of the shift in mindset, at a governmental level, is the swing from having trade surplus as a leading ambition (having more exports than imports has been a target for Brazil ever since its colonial days) to working on widening the trade flows, with the aim of integrating the global value chains. To achieve this goal, Brazil has to modernise its customs system.
Brazil has finally woken up from the regulatory stasis that, for many decades, saw the country behave as if it did not depend on the private sector to generate revenue, punishing entrepreneurs with a heavy
red-tape burden in one of world’s less business-friendly environments.
For the past few years, the new approach has been felt in the customs system, which has seen such developments as the end of the continuous customs-official strikes; reviewing of regulations; accession to the Revised Kyoto Convention; the development of new customs management software; and the maturation of the authorised economic operator (AEO) programme. These and other developments are reflected in global perceptions of the ease of doing business in Brazil, as measured by the World Bank. In the “trading across borders” category, Brazil was ranked 145th in 2016 and 106th in 2019.
Many of these developments derive from the implementation of the WTO Trade Facilitation Agreement (TFA), which entered into force in 2017 and since then has informed the work of Brazilian policymakers. One highlight of Brazil’s customs reforms is the success of the AEO programme, which is legally grounded in the TFA. Fabiano Coelho, customs stakeholders coordinator at the Brazilian customs headquarters, published an article in WCO News, the official journal of the World Customs Organization, titled “From ‘red tape’ to ‘red carpet’: how the Brazilian AEO Programme has brought customs procedures to an entire new level”. In the article, Coelho states:
More than 220 companies have been certified thus far, and an equivalent number is in the process of certification. Managing the increase in the number of applications, by the way, is the biggest challenge that Brazilian Customs faces at the moment. Today, AEOs account for more than 20 per cent of import declarations and almost 15 per cent of export declarations. With the current growing number of certified companies, Customs expects that 50 per cent of Brazilian foreign trade transactions will be covered by the AEO Programme by 2019.
With regard to the benefits, Coelho states:
Benefits and results are even more palpable for AEOs. At export, release time for AEOs is 65 per cent below that of regular operators on average, or, put differently, release times for AEO transactions are two-thirds less than those of other operators. At import, the difference is even higher: the average release time for an AEO is 81 per cent below that of regular operators, in other words five times faster. The rate of documentary and physical inspections has also dropped, bringing more predictability to transactions, a very important factor for traders. The number of inspections is 77.5 per cent lower at export and 74.5 per cent lower at import for AEOs compared to regular operators. On average, an AEO is inspected four times less, both at import and at export.
Corporations that have global trade within their core business seek predictability in the jurisdication where their business is handled, in order to fulfil its policies of competitiveness and compliance. When it comes to carrying out cross-border business in Brazil, both of these values face some threats.
For many years we have been analysing trade compliance from four different perspectives: customs compliance; supply chain security; export controls; and integrity. Below, we present our outlook on the risks faced by companies doing business in Brazil, from each of these four perspectives.
Although change is coming, for the most part the Brazilian customs system is still guided by the duties and taxes collected on imports, a behaviour that shapes the national mindset. International trade obligations arising from international treaties – such as customs classification, customs valuation and rules of origin – may have stronger national enforcement than usual, with those requirements reflected in the duty to be levied.
Companies need strong procedures to prevent any ambiguity, and thus to avoid fines and delays in obtaining clearance.
The exaggerated focus on collection means customs controls in Brazil are unbalanced, and security risks on the operations may be overlooked. The public and private sectors alike tend to fall into this trap, making imports and exports vulnerable to organised crime systems that use legitimate trade flows to smuggle prohibited goods, such as weapons and drugs, into shipments belonging to corporations. For a corporation, having its operations used by cartels can be both a reputational menace and a very dangerous threat to employee security.
Although Brazil is party to certain international agreements on export controls – such as those relating to nuclear, missile, biological and chemical weapons – the country does not have a strong culture of export restrictions and sanctions. In this way the local customs administration may not enforce or even be aware of export controls, since, as stated, the country tends to concentrate its energies on collection of monies.
The violation of export controls may pose a risk for businesses in Brazil, since few professionals are trained to comply with these regulations.
Corruption in customs operations is a global hazard, for both governments and companies, as stated by Sofia Wickberg in the article “Literature review on corruption in cross-border business”, published by the U4 Anti-corruption Resource Centre. As Brazil is considered a high-risk country for corruption, the chances of it occurring are increased.
Brazil needs to make changes before it can sustain a long cycle of uninterrupted growth. It is necessary to rescue the national economy from the current downturn, and create much-needed opportunities for its people. In order to reach these goals, the country is willing to transform itself. In terms of customs regulations, Brazil needs to change from a jurisdiction of red tape and enforcement to one promoting trade facilitation.
That does not mean that the customs administration will stop doing its work in order to set controls and ensure the country’s sovereignty. As explained in Lars Karlsson’s article, “Back to the future of customs: A new AEO paradigm will transform the global supply chain for the better” (published in World Customs Journal):
Previously, there had been a general opinion that enforcement and trade facilitation were two sides of a scale—more enforcement generated less trade facilitation and vice versa. This is fundamentally wrong. There is no contradiction between facilitation and security, since a simplified process is easier to secure and a safe process is easier to facilitate. It is when processes are complicated that it becomes difficult to determine risks and evaluate early warning signals.
Brazil shall review its priorities, leaving the protectionism of a closed economy behind, and promoting measures to facilitate trade while apprising its customs enforcement team of the real threat to national trade: as mentioned, drug-trafficking is currently the main hazard for cross-border operations. However, these fundamental changes do not happen because we want to. Echoing the words of Frances Hesselbein, which opened this article, in order to effect a cultural change that will make the country competitive, Brazil’s customs system will need to be transformed.
A new customs system in Brazil will be the driver to lead the country’s true integration to the global value chains.
While cultural changes take place, corporations must adopt measures to minimise harm to their steadiness, compliance and results; this will enable any business to navigate sea storms. This essentially entails two elements: a trade compliance programme, and legal advisory system for customs activity.
The trade compliance programme involves the creation of standards based on knowledge, procedures and IT systems, in order to meet the company’s key requirements (which can be divided across the four key elements described above: customs compliance; supply chain security; export controls; and integrity). As Fabiano Coelho says in the article quoted above, the Brazilian AEO programme is very effective and may provide a constructive framework in guiding the internal controls that must be crafted. Corporations must keep in mind that the AEO programme covers customs compliance and supply chain security, but does not deal with export controls or integrity; these need to be covered separately.
Having a trade compliance program in place will help a business to comply with customs regulations, prevent ambiguity, reduce or avoid costs, and safeguard the company’s reputation.
A legal advisory system is necessary to both ensure trade compliance and control operational costs. The Brazilian customs system has a reputation for challenging and fining corporations for their import and export processes, which are often undertaken quite correctly. Avoiding litigation in Brazil, so as to “maintain a good relationship with local authorities”, will not prevent loss; but, on the other hand, it can bring dire consequences for corporation in the long term.
The Courts of Justice in Brazil have in fact ruled against some duties and taxes levied on imports that were created and developed during the country’s protectionist era, since these duties and taxes sometimes violate international trade treaties, the Brazilian Constitution or federal laws.
Brazil is a huge market, with major potential for growth. Most of the world’s leading corporations are already doing business in Brazil – this is inevitable for a company that is part of the global value chain. Things are changing for the better in terms of cross-border operations in Brazil; but special due diligence is still required to sail our beautiful coasts.