Country has one of the worst business environments, and tax transition could increase chaos

Doing business in Brazil is like putting together a jigsaw puzzle with pieces of different sizes and shapes – and some of them changing shape mid-game. The country, which has a series of obstacles to entrepreneurship summed up in the expression "Brazil cost", ranks sixth among the most complex environments in the world for entrepreneurship, according to the study of 79 countries.

The survey was conducted by the Dutch group TMF, which specializes in providing support solutions for companies and financial institutions. Only five countries are considered more challenging: Greece, France, Mexico, Turkey and Colombia.

What is already chaotic could get worse: the consumption tax reform, approved last year and currently being implemented until 2032, will add new layers of complexity. This is because companies will have to operate under two tax systems at the same time during the transition period.

“This will require companies to adapt significantly,” warns Mauricio Catâneo, country head for Brazil at TMF Group. “The coexistence of the two systems will require complete restructuring of accounting, tax and tax payment processes.”

Regardless of the tax reform, the challenges related to taxation have already been increasing. Until last week, the government of President Luiz Inácio Lula da Silva (PT) had already made 24 announcements of the creation or increase of taxes – one every 37 days, on average . Last Sunday (8), the Minister of Finance, Fernando Haddad, stated that he would back down on part of the recent increase in the IOF, but in exchange announced a series of other taxes .

Tax reform: simplification in the future, but an obstacle in the present

Despite the promise of long-term simplification, the short and medium term will bring more uncertainty, more risk and more cost. And it is not just the tax transition that is complicating matters: Brazil already has a fragmented and costly system, marked by the overlapping of federal, state and municipal taxes, frequent regulatory changes and difficulties in accounting integration.

The group also highlights the concern that many organizations are unprepared for this scenario and the consequent increase in the risk of non-compliance, which could result in "significant tax impacts". The scenario is aggravated by the need for greater digitalization. Although promising, the requirement for real-time transactions imposes additional challenges, especially for smaller and less technologically structured companies.

Brazil Cost beyond taxes: structural obstacles to the business environment

The labor market adds another layer to the problem. Inflationary pressures, a lack of skilled labor, and high turnover make it difficult to manage teams and force investments in retention and training.

According to a Hays survey, 56% of companies today have difficulty finding qualified professionals — ten percentage points more than last year. The bottleneck is most serious in mid-level positions, where the talent shortage is eight times greater than in executive positions.

The country's infrastructure and logistics are also not helping. Years of underinvestment have left deep scars on the operating environment of companies, especially outside of major cities.

Responsibility for improving this environment lies with both the public and private sectors. However, the country's fiscal situation does not inspire confidence. Public debt reached 76.2% of GDP in April, the highest level for the month since 2022, and the accounts have been in the red for almost two years.

“There is, in fact, a risk of delay due to the fragility of the fiscal situation,” says Catâneo. “Brazil, historically, has lived with a degree of uncertainty that increases complexity.”

Despite this scenario, he recalls that the private sector has a great capacity to influence the public sector to direct public investments in order to support economic growth.

The Brazilian paradox: why does the country still attract foreign investment?

Despite the difficulties, Brazil still manages to attract investment — an intriguing contradiction. According to data from the Central Bank, Direct Investment in the Country (IDP) reached US$ 69.8 billion in the 12 months to April, the best performance for the month in two years.

According to Mauricio Catâneo, country head for Brazil at TMF Group, there is a significant volume of inquiries from international investors, channeled through trade corridors, with a special focus on the agribusiness and infrastructure sectors.

Robust investments are on the horizon : almost R$100 billion in pulp projects in the Central-West and South; around R$70 billion announced by vehicle manufacturers in several regions; even larger investments planned by the mining sector; and large-scale projects in the energy sector.

But this attractiveness, although real, does not reduce the burden of bureaucracy, nor does it resolve structural obstacles. Doing business in Brazil continues to be a test of endurance — and strategic intelligence. Opportunities exist, but reaching them requires navigating a turbulent sea of ​​regulations, parallel systems and political uncertainty.

In the dispute for investments, Brazil ends up benefiting from the more complex situation in two other countries that are experiencing a deteriorating political and economic situation and that are direct competitors in the dispute for investments: Mexico and Turkey.

The first is expected to be affected by tariffs imposed by US President Donald Trump. The International Monetary Fund (IMF) projects that Mexico will face its first economic downturn since the COVID-19 pandemic. Turkey is expected to see its growth rate decline for the fifth time in a row.

The political environment in both countries has been deteriorating in recent years. A report by the Economist Intelligence Unit (EIU) highlights the effects of corruption and organized crime, classifying Mexico as a “hybrid” regime – that is, although it is not totalitarian, it is not entirely a democracy either. The country fell from 50th place in 2010 to 84th in 2024 in the democracy rankings, especially after Andrés Manuel López Obrador, a left-wing populist, took power in 2018.

In Turkey, the deterioration gained momentum in 2010 under the leadership of populist leader Recep Erdogan. Also considered a hybrid regime and ranked 89th at the time, Turkey fell to 103rd place by 2024.