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Accounting for foreign companies in Brazil: 10 points to consider!
While accounting procedures can sometimes be confusing and challenging for Brazilian investors, imagine the complexities involved for foreign companies.
We often encounter questions about everything from opening a foreign company in Brazil to routine procedures, which is completely understandable given that it involves a different country, new legislation, and new processes.
With that said, the goal of this text is to clarify and understand the specific requirements of Brazilian accounting standards for international companies.
Specificities of Brazilian accounting for foreign companies
It is common for companies to have operations in different countries. Understanding the specificities of each country is crucial for ensuring that the new unit complies with local legislation. In Brazil, accounting standards are based on the International Financial Reporting Standards (IFRS), but there are some specificities.
It is important to understand that the goal of international accounting standards is not to fully standardize accounting practices across the globe, but rather to harmonize and make them more accessible.
This makes it easier for any business owner to access financial statements and understand their meaning, not only for each item analyzed by their company, but also when reading reports from other companies.
This process, known as accounting convergence, allows for easier comparison of financial statements from different companies and facilitates cross-border investment and business transactions.
In Brazil, the process of convergence involves adapting international standards to the local reality, resulting in some specificities that differ from the requirements in other countries.
10 Key considerations for foreign companies accounting in Brazil
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Exchange rate risk
Exchange rate variation is not just about converting foreign operations into the company’s local currency, there are accounting accounts that are adjusted by the exchange rate on the closing date (a single date) and other accounts that are adjusted by the average exchange rate (period of dates)
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Transfer Price
The value of goods/services transferred between countries must be calculated correctly to avoid abusive tax practices, considering that the negotiated values can vary significantly depending on the country. The Brazilian tax authorities closely monitor these values, as they view related companies as a single business entity, and they monitor whether the generated profits are directed to avoid paying taxes in regions with attractive tax rates, losing its share of taxation in Brazil.
If the transfer price does not reflect the market price, tax authorities may consider that the company is transferring profits abroad and impose tax penalties. There is no direct formula for calculating transfer prices, and the following aspects must be considered: cost-plus method, comparable uncontrolled price (CUP) method, resale price method and future sale price method.
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Invoice
Foreign transactions use the invoice document to detail the commercial transaction. It is necessary to verify that the transfer price indicated in the invoice is correct, as well as the taxes involved that will be described in this document.
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Intercompany loans
Loans entered into between foreign companies must comply with the legal aspects of the countries involved. The points of inspection in Brazil are mainly present in the taxes on the interest of the operation and the transfer price practiced of the loan.
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Balance sheet consolidation
In cases where a partner has interests in two or more foreign companies, they can verify the total result of these companies through the consolidation of balance sheets. This statement will provide a more realistic view of the result that was actually generated outside the economic group.
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POC (Percentage of Compliance)
Accounting for POC allows revenue to be recognized in the accounting records according to the progress of what was agreed upon in the contract with the customer, and not just the recognition of revenue at the time of the invoice issuance. This use allows a product/service sold to be recognized in the company’s results over time.
In Brazil, POC is widely used in the real estate sector, providing an accounting view for recording according to the progress of the work. However, from a tax perspective, the accounting of taxes due must follow the issuance of the Nota Fiscal (invoice). Therefore, care must be taken in the accessory declarations to correctly evidence the POC adjustments for calculation based on the billing, in order to find the correct bases for the taxes due.
Over the years, we have seen the growth of the use of POC in other business sectors, such as the IT sector.
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Leasing
The lease contract has undergone considerable changes in its accounting treatment, considering that for many years it was considered a rental expense. However, with recent changes, it has come to be seen as the right to use, and therefore recorded as an asset in companies that are enjoying the benefits of use.
This change has impacted the results of companies and needs to be controlled in the tax assessment in order to avoid the risk of erroneous taxation.
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Inventory/Cost
Inventory accounts that will be taken to the result at a later date as a cost need to be controlled and reviewed by the accounting department to ensure that the inventory control method is following the practices used in Brazil (PEPS/Weighted Average) different from abroad where some countries allow the practice (LIFO).
In addition to this control, it is important to emphasize the correct measurement of the values at which the inventory is recognized, being at its cost value or at its net realizable value (the lower of the two).
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Fixed assets
Fixed asset control is necessary not only for asset monitoring and heritage control, but it has also been a major risk factor for companies in the tax aspect related to depreciation. Companies that have a high volume of fixed assets and use depreciation to reduce taxes on profit need to have detailed control of fixed assets, including by item (item class) identified.
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Intangible assets
Accounting standards require detailed information about intangible assets, including the monitoring of research and development phases by the accounting department in order to obtain assertive control over what should be recognized in the company’s results/assets.
The definitions of definite/indefinite useful life also have implications for the accounting treatment of intangible asset amortization, which will also impact the company’s results. Aspects such as technological obsolescence are mentioned in the accounting standard for technology companies, bringing with them a constant monitoring of market trends in order to avoid overvalued intangible assets in the accounting records.
That said, it is essential to have secure and documented records of accounting transactions, thus bringing assertiveness and security to the results generated and distributed to shareholders, as well as in case of tax audits.
Therefore, it is important for a foreign company to have well-informed and prepared accounting to face these risks and ensure compliance with Brazilian tax and accounting laws. In the tax area, the risks become high considering that the Federal Revenue Service does not adopt international standards and has its own aspects for calculating taxes.
We can help you!
Here at Bernhoeft, you will find a team of specialists in foreign companies, from opening to accounting routines. One of our differentials is that, in this cell, everyone speaks English. A great shortcut for everything to go well.
If you understand that you need to count on a safe, assertive and experienced company, contact us!
