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DE RUEHBR #0324/01 0451746
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FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 4520
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDO/USDOC WASHDC
RUCPCIM/CIMS NTDB WASHDC
INFO RUEHSO/AMCONSUL SAO PAULO 6358
RUEHRI/AMCONSUL RIO DE JANEIRO 1523
RUEHRG/AMCONSUL RECIFE 4318
RUEHBU/AMEMBASSY BUENOS AIRES 3775
RUEHSG/AMEMBASSY SANTIAGO 5321
RUEHAC/AMEMBASSY ASUNCION 5212
RUEHMN/AMEMBASSY MONTEVIDEO 6038

UNCLAS SECTION 01 OF 11 BRASILIA 000324 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA 
TREASURY FOR DO/BRESNICK 
USDOC FOR ITA/SMATHEWS 
STATE PASS TO USTR FOR EDUNLOP 
STATE PASS TO OPIC FOR CCOUGHLIN 
 
E.O. 12958: N/A 
TAGS: EINV OPIC KTDB USTR BR
SUBJECT:  BRAZIL INVESTMENT CLIMATE 2006 
 
REF: 05 STATE 202943 
 
¶1. This cable transmits Mission Brazil's submission of the 2006 
Investment Climate Statement.  This document has already been 
forwarded to USDOC by e-mail. 
 
Openness to Foreign Investment 
------------------------------ 
 
¶2. Brazil is open to and encourages foreign investment.  The 
Brazilian Congress approved constitutional amendments in 1995 to 
eliminate the distinction between foreign and national capital. 
Foreign investors have been permitted to invest in the Brazilian 
stock market since 1991; new rules, which liberalized considerably 
foreign investment in equities and put foreign investors essentially 
on an equal footing with Brazilians, took effect in 2000.  The 1962 
Foreign Capital law and subsequent amendments govern most foreign 
investment.  During the high point of the privatization program, 
Brazil was the second largest destination for foreign investment 
among emerging markets, with a peak inflow of $32.8 billion in 2000; 
the country remains a leading investment destination. 
 
¶3. Constitutional amendments passed in 1995 opened formerly closed 
sectors, such as petroleum, telecommunications, mining, power 
generation, and internal transport to foreign investors.  In 2002, 
Congress approved a constitutional amendment permitting foreign 
investors to own up to 30% of media companies.  Restrictions remain 
on foreign investment in a limited number of sectors:  nuclear 
energy, health services, media, rural property, fishing, mail and 
telegraph, aviation and aerospace.  Law 10,610 (2002) limits foreign 
ownership in media outlets to 30 percent, including the print and 
"open broadcast" (non-cable) television sectors. Brazil's 
legislature is considering extension of this restriction to cover 
Internet Service Providers, pay TV channels and operators, and 
content producers and distributors; such a change would pose a 
serious threat to a number of U.S. companies operating in Brazil as 
content producers/distributors. 
 
¶4. New or expanded foreign investment in the banking sector is 
technically forbidden by the Constitution of 1988.  However, since 
1995 entry or expansion has been approved on a case-by-case basis; 
the vast majority of requests for entry or expansion have been 
granted.  Foreign banks currently account for 27% of the net worth 
of the banking system and 23.4% of total banking system assets. 
Since 1996, the insurance sector has been open to foreign investors, 
and most major US firms are already represented, mainly via joint 
venture arrangements.  Brazil maintains a government-owned 
reinsurance monopoly, the Brazil Reinsurance Institute (IRB).  The 
Lula administration has not pursued privatization of the IRB but it 
has proposed legislation, sent to Congress in May 2005, which would 
dismantle the IRB's monopoly and permit new entrants in the 
reinsurance sector.  The Congress has not acted on the bill. 
 
¶5. In 1991, Brazil embarked on the world's largest privatization 
drive, selling off more than US$ 100 billion worth of assets.  Since 
2002, however, privatization has virtually stopped.  Through 2005, 
Brazil realized $87.8 billion in sales revenue and another $18.1 
billion in debt transfer as a result of the national privatization 
program.  Foreign investment accounted for $42 billion, or 48% of 
the total.  One third of the foreign investment was from the US ($14 
billion).  With the exception of power-generation sector, in which 
the majority of power generation capacity remains in government 
hands, most of the largest state enterprises have been sold in whole 
or in part.  Privatization activity has slowed substantially since 
2001; in 2002, it totaled only US$ 2 billion; in 2003 there were no 
privatizations.  The Lula administration has carried out two 
privatizations, the 2004 sale of the State Bank of Maranhao for US$ 
26.6 million and the December 2005 privatization of the State Bank 
of Ceara for US$ 302 million.   In December 2004, the Congress 
approved and the President signed a Public-Private Partnership (PPP) 
investment law that promotes joint ventures in otherwise marginally 
profitable infrastructure investments; the first such projects may 
be bid in 2006.  The law creates a federal guarantee fund to protect 
investors in federal PPPs. 
 
¶6. In December 2004 and April 2005, Brazil conducted its first 
auctions of long term energy supply contracts under a new energy 
 
BRASILIA 00000324  002 OF 011 
 
 
regulatory framework advanced by the Lula administration.  Under the 
new model the federal government now plays a more central role in 
establishing energy demand forecasts and energy prices.  Although a 
central goal of the new model is to attract private investment in 
power generation, several investors that bought energy assets during 
the now-halted energy sector privatization were disadvantaged by the 
transition to the new regulatory system.  Analysts, companies and 
investors also have expressed concern that the more centralized 
government role and low auction prices will inhibit private 
investments.  A majority of power generation capacity remains in 
public hands. 
 
¶7. During the early 1990s, foreign direct investment (FDI) was a 
crucial source of financing for Brazil's balance of payments. 
Dramatic growth in Brazil's exports has produced trade surpluses 
since 2001 and current account surpluses since 2003 have 
dramatically reduced the importance of FDI as a source of external 
financing.  Moreover, the winding down of the privatization program 
has seen FDI fall from a 2000 peak of $30 billion to a low of $10.1 
billion in 2003.  FDI inflows have since picked up, increasing to 
$18.2 billion in 2004 and an estimated $15 billion in 2005. 
 
¶8. Brazil has undertaken a significant reduction in trade barriers 
in recent years. In 2005, Brazil's average Normal Trade Relations 
(NTR) tariff was 10.7%, versus 32% percent in 1990, according to the 
Foreign Trade Secretariat of the Ministry of Development, Industry 
and Foreign Trade. 
 
¶9. Foreign investors may own real estate, but purchase of land along 
the borders by foreigners requires specific authorization. 
 
Conversion and Transfer Policies 
-------------------------------- 
 
¶10. There are few restrictions on converting or transferring funds 
associated with an investment.  Foreign investors may freely convert 
Brazilian currency in the unified foreign exchange market wherein 
buy-sell rates are determined by market forces.  All foreign 
exchange transactions, including identifying data, must be reported 
to the Central Bank.  Foreign-exchange transactions on the current 
account have been fully liberalized in practice. 
 
¶11. Foreigners investing in Brazil must register their investment 
with the Central Bank within 30 days of the inflow of resources to 
Brazil.  Registration is done electronically.  Investments involving 
royalties and technology transfer must be registered with the patent 
office (INPI) as well.  Investors must have a representative in 
Brazil and register with the Brazilian securities commission (CVM). 
Subsequent transactions, such as reinvestment of profits, may also 
have to be registered with the Central Bank. 
 
¶12. Foreign investors, upon registering their investment with the 
Central Bank, are able to remit dividends, capital (including 
capital gains), and, if applicable, royalties.  Remittances must 
also be registered with the Central Bank.  Dividends cannot exceed 
corporate profits.  The remittance transaction may be carried out at 
any bank by documenting the source of the transaction (evidence of 
profit or sale of assets) and showing that applicable taxes have 
been paid. 
 
¶13. Foreign loans obtained abroad no longer require advance approval 
by the Central Bank, provided the recipient is not a government 
entity (loans to government entities still require prior approval). 
Upon concluding the transaction, the loan must be registered 
electronically with the Central Bank.  In most instances, the 
registration is completed automatically.  Automatic registration is 
not issued when the costs of the operation are "not compatible with 
normal market conditions and practices."  In such instances, the 
loan is reviewed by the Central Bank; if the Central Bank does not 
respond within five working days, the registration is considered 
complete. 
 
¶14. Interest and amortization payments specified in the loan 
contract can be made without additional approval from the Central 
Bank.  That also applies to early payments, if there is a provision 
in the contract for early payment.  If the contract does not have 
such a provision, early payment requires prior approval by the 
 
BRASILIA 00000324  003 OF 011 
 
 
Central Bank.  According to Central Bank officials, this requirement 
is to ensure accurate records of Brazil's stock of debt, and all 
requests have been approved since the new guidelines were issued in 
¶2000. 
 
¶15. In addition to payments associated with registered loans and 
investments, there are other approved procedures for transferring 
funds abroad that in practice can be used for a wide range of 
purposes. 
 
¶16. Capital-gain remittances are subject to a 15 percent income 
withholding tax.  Repatriation of an initial investment is exempt 
from income tax.  Beginning in 2000, lease payments were assessed a 
15 percent withholding tax.  Remittances related to technology 
transfers are not subject to the tax on credit, foreign exchange, 
and insurance (IOF), although they are subject to a 15% withholding 
tax and an extra 10% Contribution of Intervention in the Economic 
Domain (CIDE).  Loans with terms of 90 days or less must pay the IOF 
(5%), while those of longer maturity do not.  In 2002, Brazil 
eliminated the application of the financial transaction tax (CPMF), 
which is currently 0.38%, to stock market transactions.  Foreign 
cable and satellite television programmers are subject to an 11 
percent remittance tax; however, the tax can be avoided if the 
programmer invests 3 percent of its remittances in co-production of 
Brazilian audio-visual services. 
 
¶17. Brazil has no double taxation treaty with the US, but does have 
such treaties with a number of other countries, including, among 
others, Japan, France, Italy, the Netherlands, Canada and 
Argentina. 
 
Expropriation and Compensation 
------------------------------ 
 
¶18. There have been no expropriatory actions in Brazil in the recent 
past nor any signs that the current Government is contemplating such 
actions.  In 1999, a state government sought and obtained a court 
ruling canceling contractual obligations, signed by the prior state 
government, associated with the partial privatization of a state 
electricity company.  The U.S. investors are appealing the court 
ruling.  In 2003, a newly inaugurated government in another state 
refused to honor a number of contracts the previous state government 
had signed with a range of Brazilian and foreign investors; the 
parties involved continue to negotiate these contract disputes and 
have had recourse to local courts.  Some claims regarding land 
expropriations by state agencies many years ago have been judged by 
courts in US citizens' favor.  There remain individuals who have not 
yet been compensated because the states have appealed these 
decisions. 
 
Dispute Settlement 
------------------ 
 
¶19. Brazil is not a member of the International Center for the 
Settlement of Investment Disputes (ICSID - also known as the 
Washington Convention), but it is a party to the New York Convention 
of 1958 on the recognition and enforcement of foreign arbitration 
awards.  In August 1995, Brazil ratified the 1975 Interamerican 
Convention on International Commercial Arbitration, as well as the 
1979 Interamerican Convention on Extraterritorial Validity of 
Foreign Judgments and Arbitral Awards. 
 
¶20. Arbitration clauses in contracts are not automatically 
enforceable.  Foreign arbitral awards require confirmation by a 
court of the country in which the award was rendered and by the 
Brazilian Supreme Court.  This confirmation is procedural in nature, 
and not meant to consider the merits of the case.  Confirmation by 
the Supreme Court allows the claimant to enforce the arbitral award 
through Brazilian courts.  The Supreme Court has confirmed foreign 
arbitral awards between two private parties in multiple cases.  Some 
companies opt for domestic arbitration as an alternative. 
 
¶21. There is some legal controversy in Brazil over binding foreign 
arbitration between foreign investors and state entities.  Some 
Brazilian legal interpretations claim this is prohibited under 
Brazilian law on the grounds that it infringes the sovereign rights 
of the state.  The Federal Government nevertheless maintains, in the 
 
BRASILIA 00000324  004 OF 011 
 
 
absence of a definitive judicial ruling on the issue, that it can 
agree to binding foreign arbitration and routinely enters into 
contracts that allow for such arbitration. 
 
¶22. This legal uncertainty, as well as congressional politics, has 
held up ratification of Bilateral Investment Agreements that Brazil 
has signed with fourteen countries (not including the US), which 
call for arbitration by either ICSID or a panel set up under the 
United Nations Rules for International Commercial Law.  Given the 
doubts about the applicability under Brazilian law of these 
international arbitration provisions to Brazilian government 
entities, the government in December 2003 withdrew the agreements 
from consideration for Senate ratification. 
 
¶23. Brazil has a functional commercial code that governs most 
aspects of commercial association, except for corporations formed 
for the provision of professional services, which are governed by 
the civil code.  In December 2004, Congress approved an overhaul of 
the bankruptcy code.  The reforms create a system, modeled on 
Chapter 11 of the U.S. bankruptcy code, which allows a company in 
financial straits to negotiate a restructuring with its creditors 
outside of the courts.  In the event a company does fail despite 
restructuring efforts, the reforms give creditors a better chance at 
recovering their debts.  An overburdened court system is available 
for enforcing property rights but decisions can take years. 
Judicial reform measures enacted in December 2004 streamline 
administrative procedures, and, by introducing the concept of 
binding precedent, should, over time, make judicial decisions more 
predictable. 
 
Political Violence (As it May Affect Investments) 
--------------------------------------------- ---- 
 
¶24. Brazil's major urban centers suffer from significant drug 
trafficking-related and organized crime-related violence.  Poverty, 
gangs, drugs and a lack of government resources have combined to 
erode state authority in some urban slums (favelas).  There have 
been episodes of drug-related violence prompting major police 
crackdowns, particularly in Rio de Janeiro.  Police have been 
implicated in significant human rights violations, including 
extra-judicial killings, abuse of prisoners, and other criminal 
activity.  Since mid-2003 the Landless Workers' Movement (MST) has 
continued its aggressive invasions of a variety of agricultural 
interests, both domestic and foreign, in its campaign to force 
redistribution of land.  In rural areas, powerful landowners, 
sometimes aided by police or private security agents, have used 
violence to settle land disputes, including but not limited to those 
with the MST or indigenous peoples, and to influence the local 
judiciary. 
 
Corruption 
---------- 
 
¶25. Corruption can be an obstacle to investment in Brazil.  In 
general terms, businesses find corruption an obstacle in government 
procurement and at some levels of the judiciary.  2005 saw a range 
of corrupt activities of spectacular scope come to light as 
Brazilian Congressional and law enforcement authorities began 
multiple investigations into illicit financing by several political 
parties of their 2002 presidential campaigns.  The campaign 
financing investigations uncovered a multi-layered corruption 
scandal involving alleged vote-buying in the Congress by elements 
within the President's PT party and executive branch, financed by 
kickbacks on government procurement contracts and influence 
peddling.  Brazil is a signatory to the Organization for Economic 
Cooperation and Development (OECD) Anti-Bribery Convention.  While 
Federal government authorities generally investigate allegations of 
corruption, there are inconsistencies in the level of enforcement 
among individual states. 
 
Performance Requirements and Incentives 
--------------------------------------- 
 
¶26. Geographic preferences consist of tax benefits for investment in 
less developed parts of the country, such as the Northeast and the 
Amazon, with equal application to foreign and domestic investors. 
These benefits have succeeded in attracting some major foreign 
 
BRASILIA 00000324  005 OF 011 
 
 
plants to, for example, the Manaus Free Trade Zone, but most foreign 
investment remains concentrated in the more industrialized southern 
part of Brazil.  Individual states have sought to attract investment 
by offering ad hoc tax benefits and infrastructure support to 
specific companies, negotiated on a case by case basis.  Some 
municipalities provide land on favorable terms for industrial 
development. 
 
¶27. In firms employing three or more persons, Brazilian nationals 
must constitute at least two-thirds of all employees and receive at 
least two-thirds of total payroll.   Foreign specialists in fields 
where Brazilians are unavailable are not counted in calculating the 
one-third permitted for non-Brazilians. 
 
¶28. On November 21, 2005, Brazil's President signed law 11,196 which 
provides tax benefits to qualifying exporters.  The law's Special 
Regime for the Information Technology Exportation Platform (REPES) 
suspends PIS/PASEP and COFINS taxes on goods and services imported 
by companies which commit to export software and IT services to the 
extent that those exports account for over 80 percent of annual 
gross income.  The MP's Special Regime for the Acquisition of 
Capital Goods by Exporting Enterprises (RECAP) suspends these same 
taxes on new machines, instruments and equipment imported by 
companies which commit for a period of at least three years to 
exports goods and services such that they account for at least 80 
percent of overall gross income.  The government also has a series 
of smaller programs designed to assist small and medium sized 
businesses to export. 
 
¶29. The Special Agency for Industrial Financing (FINAME) of the 
National Bank for Economic and Social Development (BNDES) provides 
financing for purchases by Brazilian firms of Brazilian-made 
machinery and equipment -- capital goods with a high level of 
domestic content. 
 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
¶30. Foreign and domestic private entities may establish, own, and 
dispose of business enterprises. 
 
Protection of Intellectual Property Rights (IPR) 
--------------------------------------------- --- 
 
¶31. Brazil is a signatory to the GATT Uruguay Round Accords, 
including the Trade Related Aspects of Intellectual Property (TRIPS) 
Agreement, signed in April 1994.  Brazil is a member of the World 
Intellectual Property Organization (WIPO) and a signatory of the 
Bern Convention on artistic property, the Washington Patent 
Cooperation Treaty, and the Paris Convention on Protection of 
Intellectual Property.  In August 1992, Brazil removed its 
reservations and fully accepted the Stockholm revision of the Paris 
Convention.  Brazil has not yet ratified the WIPO Treaties on 
Copyright and Performances and Phonograms.  As a result of problems 
regarding protection of intellectual property rights, principally in 
enforcement, Brazil was retained on the Special 301 priority watch 
list in the 2005 review. 
 
¶32. Patents.  In most respects, Brazil's 1996 Industrial Property 
law brings its patent and trademark regime up to the international 
standards specified in the TRIPS Agreement.  However, the law 
includes local working requirements which may be TRIPS-inconsistent. 
 The law would theoretically permit the grant of a compulsory 
license if a patent owner has failed to "work" (i.e. locally 
manufacture) the patented invention in Brazil within three years of 
issuance.  Invoking TRIPS provisions, Brazil has at times threatened 
to issue compulsory licenses for anti-retroviral drugs used in 
treating HIV/AIDS if satisfactory supply agreements, including a 
reduction in prices, could not be reached with patent-holders; to 
date Brazil has not issued such a license.   Negotiations were 
successfully completed with one U.S. pharmaceutical company in 2005 
and are on on-going with two others. 
 
¶33. Trademarks.  The fraudulent use of internationally "famous" 
marks has been a problem in Brazil.  However, the Industrial 
Property Law has provided improvements in Brazil's trademark regime, 
including better protection for internationally known trademarks. 
 
BRASILIA 00000324  006 OF 011 
 
 
Some foreign firms have been successful in court actions against 
trademark infringement.  Trademark licensing agreements must be 
registered with the National Institute of Industrial Property (INPI) 
to be enforceable; however, the failure to register licensing 
agreements will no longer result in cancellation of trademark 
registration for non-use. 
 
¶34. Copyrights.  Brazil's copyright law generally conforms to 
world-class standards.  Likewise, its software copyright protection 
law contains provisions that introduce a rental right and an 
increase in the term of protection to 50 years.  Despite passage of 
these copyright laws in 1998, widespread piracy of copyright and 
trademark material remains a problem.  The US private sector 
estimates that trade losses from copyright infringements (including 
from piracy of videocassettes sound recordings and musical 
compositions, books and computer software) were $960 million in 
¶2004.  Nonetheless, given progress on enforcement in 2005, the U.S. 
Government in January 2006 announced that it would maintain Brazil's 
trade benefits under the Generalized System of Preferences after a 
review prompted by a 2000 petition from the International 
Intellectual Property Rights Association. 
 
¶35. The Brazilian Congress passed a law in July 2003 that increased 
minimum prison sentences for copyright violations and established 
procedures for making arrests and destroying confiscated products. 
However, the heftier sentences have not acted as effective 
deterrents due to the continued ability of judges to commute many of 
the prison terms to fines.  A much-publicized Special Congressional 
Inquiry into IPR piracy completed its report in June 2004, amidst 
considerable sensation after a reputed piracy kingpin was arrested 
on charges of trying to bribe the chairman of the inquiry 
commission.  In November 2004, the government created a high-level, 
inter-ministerial, National Council to Combat Piracy and 
Intellectual Property Crimes.  In 2005, the Council developed and 
has begun implementing a national plan for combating piracy and 
smuggling. 
 
¶36. Integrated Circuit Layout Designs.  A government-drafted bill to 
provide protection for the layout design of integrated circuits 
(computer mask works) was introduced in the Brazilian Congress in 
April 1996.  In 2004 the administration asked that the Congress give 
the bill greater priority as part of a package of measures to 
stimulate innovation and local production of electronics.  The draft 
law has made it through several Congressional committees but was 
still under discussion in 2005. 
 
Regulatory System (as it pertains to investments) 
--------------------------------------------- ---- 
 
¶37. Although some improvements have been made, the Brazilian legal 
and procedural system is complex and overburdened.  State courts in 
particular can be subject to political influence.  The central 
government has historically exercised considerable control over 
private business through extensive and frequently changing 
regulations.  The bureaucracy has broad discretionary authority. 
 
¶38. Taxes are numerous and burdensome, but do not discriminate 
between foreign and domestic firms, although in a few instances 
there have been complaints that the value-added tax collected by 
individual states (ICMS) is set to favor local companies.  Taxes on 
commercial and financial transactions are particularly burdensome, 
and businesses complain that these taxes hinder international 
competitiveness of Brazilian products.  Brazil has separate 
value-added tax systems run by the federal government and individual 
state governments.  The administration has made some recent efforts 
at tax reform, including the conversion of invoice taxes to VATs at 
the federal level in 2003 and 2004.  A 2004 measure reduces taxes 
paid on long term investments.  A measure to simplify and harmonize 
the state-level VATs (which vary from state to state and product by 
product) was proposed but did not pass in 2003. 
 
¶39. Regulatory agencies for sectors such as telecommunications, 
energy and transportation are a relatively young phenomenon in 
Brazil.  ANATEL, the country's telecommunication agency, handles 
licensing and assigns bandwidth.  The National Petroleum Agency 
(ANP) has been commended by the industry for its fair handling of 
auctions of oil exploration blocks and its willingness to assist 
 
BRASILIA 00000324  007 OF 011 
 
 
industry in seeking to simplify regulatory procedures such as 
environmental licensing.  Conversely, in the electric power sector, 
some companies have complained about the high level of regulatory 
risk, for example the tariff review process and the implementation 
of the Brazil's new energy model.  The federal government in 2003 
passed legislation setting fixed three-year terms for directors of 
the regulatory agencies.  Congress passed legislation in 2005 to 
create a civilian air transport industry regulator (ANAC).  The new 
agency, expected to begin functioning in 2006, will exercise 
regulatory functions previously the responsibility of a directorate 
overseen by the Brazilian Air Force.  Separate legislation to 
further clarify the roles and responsibilities of the regulatory 
agencies and consolidate the multiple laws currently governing each 
separate regulator was still under consideration by the Congress at 
end-2005.  Separate legislation will refine the personnel systems of 
these agencies. 
 
Bilateral Investment Agreements (BITs) 
-------------------------------------- 
 
¶40. Brazil has signed Bilateral Investment Agreements (BITs) with 
fourteen countries.  There are two Mercosul investment-related 
agreements:  the Buenos Aires Protocol ("extra-bloc") and the 
Colonia Protocol ("intra-bloc"); the latter has not been signed by 
Brazil.  Seven of the bilateral investment treaties have been sent 
to the Brazilian Congress, but have not been ratified.  All of these 
treaties pending ratification were withdrawn from Senate 
consideration by the Executive in late 2003.  The Executive cited 
the need for further review of the treaties so as to avoid potential 
juridical conflicts.  At issue are the international arbitration 
clauses of these treaties, which may not be binding on Brazilian 
government agencies under Brazilian law. The US signed an Investment 
Warranty Treaty with Brazil in 1965 (OPIC).  The US and Brazil 
currently have no plans to discuss a BIT. 
 
OPIC and Other Investment Insurance Programs 
-------------------------------------------- 
 
¶41. Programs of the Overseas Private Investment Corporation (OPIC) 
are fully available, and activity has increased in recent years. 
The size of OPIC's exposure in Brazil may occasionally limit its 
capacity for new coverage.  For more information on OPIC, please go 
to http://www.opic.gov/. 
 
¶42. Brazil became a member of the Multilateral Investment Guarantee 
Agency in 1992. 
 
Capital Outflow Policy 
---------------------- 
 
¶43. In 2005 the Central Bank introduced a new administrative regime 
for foreign currency transactions.  The new regulations unified the 
foreign exchange market and removed many restrictions associated 
with remittances overseas, for example, removing a requirement for 
prior Central Bank approval for contracting loans in another 
country.  The Central Bank maintained reporting requirements on all 
foreign exchange transactions.  In a related effort, the Central 
Bank is working to streamline the regulatory regime for foreign 
investment transactions in Brazil. 
 
¶44. There has been a relaxation since 1991 of the restrictions on 
the remittances of royalty payments for patent and trademark use 
between subsidiaries established in Brazil and the parent office 
headquartered overseas and on remittances of franchise contract 
royalties.  A 1992 INPI resolution simplified procedures and, in 
particular, eliminated a number of requirements (but not all) 
concerning technology transfer agreements.  No royalties or other 
fees may be transferred between related companies for the use of 
software. 
 
Employer Federations Play a Significant Role 
-------------------------------------------- 
 
¶45. Investors should be aware that employer federations, supported 
by mandatory fees based on payroll size, play a significant role in 
both public policy and labor relations.  Each state has its own 
federation, which reports to CNI (National Confederation of 
 
BRASILIA 00000324  008 OF 011 
 
 
Industries), headquartered in Brasilia. 
 
¶46. The Brazilian labor force comprises nearly 84 million workers in 
a wide range of occupations and industries.  Nearly half of the 
labor force is employed in the service sector, roughly a quarter in 
agriculture, and the retail and manufacturing sectors combine to 
employ another quarter.  The participation of women, who now account 
for over 40 percent of the labor force, continues to grow.  The 
labor market has a high rate of informal sector employment; sources 
estimate that approximately 40 percent of all workers are not 
formally registered, pay no income taxes, and do not enjoy full 
protection under the law.  About a quarter of all workers are 
self-employed. 
 
¶47. Unemployment - significant.  The Brazilian Institute of 
Geography and Statistics (IBGE) calculates an average unemployment 
rate for the country based on data collected monthly in Brazil's six 
largest metropolitan areas.  According to this survey, the 
unemployment rate in November 2005 was 9.6%.   This average masks 
some significant variation, from a high of 15.9% in Salvador to a 
low of 7.8% in Porto Alegre. 
 
¶48. Real wages halt decline, disparities significant.  Real wages in 
2004 halted an almost decade-long slide and continued on an upward 
trend in 2005.  Real wages were up 2.1% in November 2005 over 
November 2004.  The average monthly wage in Brazil's six largest 
cities was approximately 974 Reals (approximately $423) in November 
2005, and the minimum monthly wage was raised from 260 Reals in 
April 2004 to 300 Reals (approximately $130) in 2005.  These 
averages gloss over some stark wage inequalities, as the wealthiest 
50% of the Brazilian population earn nearly 90 percent of total 
income.  Earnings also vary significantly by region and industry. 
The typical industrial worker in Sao Paulo, for example, earns about 
three times as much as the average retail worker in the northeastern 
state of Bahia. 
 
¶49. Differences in earnings are caused in part by the regional 
disparity in educational attainment and in the availability of 
skilled workers.  According to a 2002 survey by IBGE, 60 percent of 
the population has fewer than 8 years of schooling, with this number 
reaching 45 percent in the Southeast (including Rio and Sao Paulo) 
and 70 percent in the Northeast (including Recife and Salvador). 
Illiteracy rates also exhibit regional disparities.  The IBGE 
reports that about 11 percent of the population is illiterate, with 
7 percent illiteracy in the Southeast and 21 percent in the 
Northeast. 
 
¶50. Unions play a significant role.  Labor unions, especially in 
sectors such as metalworking and banking, tend to be well-organized 
and aggressive in defending wages and working conditions.  In more 
remote areas with smaller local unions, however, unions tend to be 
less effective.  Union members account for approximately 12 percent 
of the workforce, but unions represent more than twice this number 
in collective bargaining.  Unions, which are funded largely by a 
mandatory tax equivalent to one day's wages per year, are obliged to 
represent all formal sector workers in a professional category and 
geographical area, regardless of membership status. 
 
¶51. The Ministry of Labor estimates that there are over 16,000 labor 
unions in Brazil, but Ministry officials note that these figures are 
inexact.  Local unions often associate with state federations and 
national confederations in their professional category.  In 
addition, four major labor federations, known as "centrals," have 
emerged: the Workers' Unitary Central (CUT), the Union Force (Forca 
Sindical - FS), the Workers' General Confederation (CGT), and the 
Social Democratic Union (SDS).  Labor unions channel much of the 
political activity of the labor movement.  They also organize 
strikes and salary campaigns involving multiple professional 
categories and represent workers in many governmental and tripartite 
councils.  While some labor organizations and their leadership 
operate independently of the government and of political parties, 
others are viewed as closely associated with political parties. 
 
¶52. Extensive regulation, slow legal system.  The labor code is 
highly detailed and relatively generous; formal sector workers are 
guaranteed 30 days of annual leave, an annual bonus equal to one 
month's salary, and severance pay in the case of dismissal without 
 
BRASILIA 00000324  009 OF 011 
 
 
cause.  Brazil also has a system of labor courts that are charged 
with resolving routine cases involving unfair dismissal, working 
conditions, salary disputes, and other grievances.  Currently, over 
2.5 million cases languish in the labor court system, where they may 
remain unresolved for four or five years.  The Brazilian government 
is attempting to reduce this backlog and increase the efficiency of 
the labor courts through recent initiatives to expedite legal 
procedures and increase the number of claims that are resolved 
before reaching the courts. 
 
¶53. Labor courts have the power to impose an agreement on employers 
and unions if negotiations break down and either side appeals to the 
court system.  As a result, labor courts routinely are called upon 
to determine wages and working conditions in industries across the 
country.  The system is tantamount to compulsory arbitration and 
does not encourage collective bargaining.  In recent years, however, 
both labor and management have become more flexible and collective 
bargaining has assumed greater relevance.  The Inter-Union 
Department of Socioeconomic Studies and Statistics (DIEESE) no 
longer collects data on the number of strikes each month.  Strikes 
have been a frequent occurrence, however, particularly among public 
sector unions. 
 
Major Foreign Investors 
----------------------- 
 
¶54. According to the Central Bank's most recent foreign-capital 
census (December 2000), the US was the largest single foreign 
investor in Brazil followed by Netherlands, Spain, France, Germany 
and Portugal.  Investment from the Cayman Islands began growing 
rapidly in 1995 and is thought to represent mainly repatriation of 
Brazilian capital entering the country as foreign investment and, to 
a lesser extent, investment activity by other national groups. 
Investment from Spain and Portugal surged beginning in 1998 due to 
involvement in telecom privatizations and greatly increased 
investment in the banking sector by Spain. 
 
¶55. The stock of direct foreign investment in Brazil stood at $103 
billion as of December 2000, the most recent year for which detailed 
data is available.  Of this, the US had the largest share at about 
$24.5 billion (24%).  Spain had 11.9% of the total ($12.2 billion) 
and The Netherlands 10.7% ($11.0 billion).  Investment inflows since 
2000 have amounted to about $87 billion, exclusive of depreciation 
and capital repatriation.  (The Central Bank is expected to publish 
updated investment stock figures in 2006.) 
 
¶56. Despite its leading position among foreign investors, as of 2005 
the local operations of only two US companies - Cargill and AES - 
were among the top thirty domestic firms in terms of revenues.  Four 
of the top ten importing firms in 2004 were foreign: Nokia, 
Motorola, Bunge, and Ford Motor Co.  Six of the top ten exporters -- 
Bunge, Volkswagen, Cargill, General Motors, Ford and Halliburton -- 
represented foreign investment. 
 
Efficient Capital Markets & Portfolio Investment 
--------------------------------------------- --- 
 
¶57. Banking shakeout results in improved system.  The Brazilian 
financial sector is large and sophisticated, in part a legacy of the 
high inflation period when good financial management was critical to 
survival.  Despite current moderate inflation rates, bank-lending 
spreads remain extremely high due to taxation, repayment risk, lack 
of judicial enforcement of contracts, high mandatory reserve 
requirements and administrative overhead.  Brazilian banks have 
weathered a difficult period of consolidation and streamlining over 
the last decade.  The elimination of high inflation in the 
mid-1990s, and with it the disappearance of so-called "float 
income," led to liquidity problems among many banks.  A series of 
failures, mergers, and acquisitions took place in the late 1990's. 
The surviving banks have returned to profitability.  Today, the 
financial sector is fairly concentrated, with the 10 largest 
institutions accounting for over 65% of financial sector assets. 
Acquisitions have contributed to this trend as banks seek economies 
of scales, including through partnerships with retail chains. 
Lending by the large banking institutions is focused on the largest 
companies, leaving small and medium-sized companies underserved. 
 
 
BRASILIA 00000324  010.2 OF 011 
 
 
¶58. Most government-owned banks, in particular those that were owned 
by state governments, have been privatized.  These insolvent 
institutions were taken over by the federal government, liquidated, 
privatized, or transformed into development agencies.  Three 
federally owned banks, the largest in the country, still play a 
prominent role in the financial system.  These federal banks, while 
in better shape than their state-level counterparts, were also 
undercapitalized and carrying poorly performing loans, many the 
result of the loss-making "social" lending.  These banks have, to an 
extent, recapitalized by selling back government bonds. 
Extraordinary bank profits in 2002 - 2004 also have improved the 
health of their balance sheets.   As part of an effort to prevent 
the need for future recapitalizations of these federal banks, the 
government now requires that loss-making social lending programs by 
any government-owned bank be supported with an explicit government 
subsidy. 
 
¶59. Dealing with the bank failures and consolidations of the last 
several years has led the Central Bank to strengthen bank audits, 
implement more stringent internal control requirements, and tighten 
capital adequacy rules to better reflect risk.  It also established 
loan classification and provisioning requirements.  These measures 
are applied to private and publicly owned banks alike.  The Central 
Bank intervened in medium-sized Banco Santos in late 2004 after 
embezzlement left the institution insolvent.  Banco Santos was 
liquidated in 2005. 
 
¶60. Stock markets not an option for most companies.  Brazilian stock 
exchanges serve to raise financing primarily for domestic companies, 
although the Sao Paulo Stock Exchange (BOVESPA) aspires to a 
regional role.  There were 9 Initial Public Offerings (IPOs) on the 
Sao Paulo Stock Exchange (BOVESPA) in 2005.  In June 2004, Brazilian 
airline Gol executed an initial public share offering simultaneously 
on the Sao Paulo and New York stock exchanges.  The total number of 
companies listed on the BOVESPA increased to 382 as of year-end 2005 
from 361 in June 2004, compared to 399 in 2002 and 428 in 2001. 
Total turnover was about $430 billion in 2005, while total market 
capitalization was $482 million at end-2005.  Trading is highly 
concentrated, with the top 10 stocks accounting for over 50 percent 
of turnover.  Some 71 Brazilian firms, including Petrobras, Embraer, 
Banco Itau, CVRD, Brasil Telecom and Ambev, are also listed on the 
NYSE via American Depository Receipts (ADR's). 
 
¶61. In 2000, with the intent of promoting the stock market and 
improving liquidity, the numerous regional stock markets agreed to 
consolidate.  All stock trading is now done on the Sao Paulo stock 
market, while trading of public securities is conducted on the Rio 
de Janeiro market.  The Sao Paulo stock market also launched a "New 
Market," in which the listed companies would comply with strict 
corporate governance requirements.  As of 2005, the new market had 
18 listed companies, down from 31 in June 2004. 
 
¶62. Until recently, up to two-thirds of a corporation's capital 
could be preferred (non-voting) shares, so that it was possible to 
achieve majority control of voting shares, in some cases, by holding 
only 17 percent of total capital.  In 2001, the Congress approved a 
law that limits preferred shares for new issuances to 50 percent. 
The same proposal strengthens rights for minority shareholders. 
 
¶63. The Brazilian Securities Exchange Commission (CVM) directly 
regulates the stock exchanges, brokers, distributors, pension funds, 
mutual funds, and leasing companies.  In 2001, new legislation 
granted the CVM independence and established stronger penalties 
against insider trading. 
 
¶64. In January 2000, Brazilian regulators removed a number of 
remaining restrictions on foreign portfolio investment.  As a 
result, foreign investors - both institutions and individuals - can 
directly invest in equities, securities and derivatives.  The 
foreign investors are required to trade derivatives and stocks of 
publicly held companies on established markets.  As of 2005, foreign 
investors accounted for 31.9% of the total turnover on the BOVESPA. 
Domestic institutional investors were the second most active 
category of market participants, accounting for 27.8% of BOVESPA 
transactions. 
 
¶65. Export credit availability.  BNDES, the government national 
 
BRASILIA 00000324  011 OF 011 
 
 
development bank, is the primary Brazilian source of longer-term 
credit, and also provides export credits.  FINAME (Special Agency 
for Industrial Financing) provides foreign and domestic companies 
operating in Brazil financing for the manufacturing and marketing of 
capital goods.  FINAMEX (Export Financing) is a part of FINAME, 
which finances capital good exports for both foreign and domestic 
companies.  An export credit program for capital and some consumer 
durable goods, known as PROEX, was established in 1991.  PROEX 
receives funds from the National Treasury to offer assistance in the 
areas of interest rate equalization, capital and other goods 
exports, and service exports. 
 
¶66. Other issues:  accounting and mergers.  Wholly owned 
subsidiaries of multinational accounting firms, including the major 
US firms, are present in Brazil.  The failure of major banks and 
large businesses during 1995, notwithstanding positive financial 
statements prepared by the major accounting firms, raised doubts 
about the credibility of these financial statements.  Beginning in 
1996, auditors have been personally liable for the accuracy of 
accounting statements prepared for banks. 
 
¶67. Brazilian law recognizes mergers, in which one company loses its 
separate identity by being merged into another, and consolidations, 
in which the pre-existing companies are extinguished and a new 
entity emerges.  The procedures for both are essentially the same. 
Sales of Brazilian companies usually result from private 
negotiations, rather than stock exchange activities.  Acquisitions 
resulting in market concentration in excess of 20 percent are 
subject to review by the Administrative Council for Economic Defense 
(CADE) under Brazil's 1994 Anti-trust Law. 
 
CHICOLA