R 031648Z FEB 09
FM AMEMBASSY BRASILIA
TO SECSTATE WASHDC 3450
INFO AMCONSUL RIO DE JANEIRO 
AMCONSUL SAO PAULO 
AMCONSUL RECIFE 
DEPT OF COMMERCE WASHDC

UNCLAS BRASILIA 000132 
 
 
STATE PASS USTR FOR DUCKWORTH AND KALLMER 
TREASURY FOR OASIA - HOEK AND MACLAUGHLIN 
USDOC FOR 4332/ITA/MAC/WH/OLAC/ADRISCOLL AND JKOZLOWICKI 
STATE FOR EB/IFD/OIA - HATCHER/HICKS 
STATE PASS OPIC FOR RO'SULLIVAN 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB OPIC USTR BR
SUBJECT: BRAZIL: INVESTMENT CLIMATE STATEMENT 2009 
 
REF: STATE 123907 
 
¶1.  This cable transmits the text of the Brazil Investment 
Climate Statement for 2007. 
 
BEGIN TEXT: 
 
A.1. Openness to Foreign Investment 
 
Brazil is open to and encourages foreign investment.  According to a 
recent United Nations report, Brazil is the largest foreign direct 
investment (FDI) recipient in Latin America, attracting an estimated 
USD 42 billion in 2008 (The Brazilian Central Bank reports a 
slightly higher figure of USD 45 billion).  The United States is the 
number one foreign investor in Brazil.  FDI is prevalent across 
Brazil's economy, although certain sectors, notably media and 
communications, aviation, transportation and mining, are subject to 
foreign ownership limitations.  While Brazil is generally considered 
a friendly environment for foreign investment, burdensome tax and 
regulatory requirements exist.  In most cases these impediments 
apply without discrimination to both foreign and domestic firms. 
The Government of Brazil makes no distinction between foreign and 
national capital. 
 
With respect to the current global financial crisis, a diversified 
economy, reliance on local rather than external debt, and investment 
grade status will help Brazil weather the storm.  However, Brazil is 
not immune to the crisis and the Central Bank's January 2009 market 
survey revealed a forecasted GDP growth of 2.0 percent, a decline 
from the July 2008 forecast of 4.0 percent growth.  The Brazilian 
government is pursuing monetary policy and industry support measures 
to address the impact of the crisis. 
 
Banking: An indication of the country's financial openness, Brazil's 
banking sector includes significant foreign investment and 
representation.  While the Constitution of 1988 technically forbids 
new or expanded foreign investment in the banking sector, the vast 
majority of requests for entry or expansion have been approved on a 
case-by-case basis.  Recent Brazilian Central Bank figures report 
that in 2008 foreign banks comprise 18 of the top 50 Brazilian banks 
in terms of total assets, representing 21.6 percent of total 
financial assets less brokerage. 
 
Insurance: Since 1996 the insurance sector has been open to foreign 
investors with most major U.S. firms represented via joint venture 
arrangements.  On January 15, 2007, Complementary Law 126 was 
published in Brazil eliminating the previous state monopoly on 
reinsurance through the government-owned Brazil Reinsurance 
Institute (IRB), which had been in place since 1939. 
 
Privatization: Foreign investment has played a significant role in 
Brazil's privatization programs.  From the early 1990s through 2007, 
Brazil's privatizations realized USD 87.9 billion in sales revenue 
and another USD 18.1 billion in debt transfer.  Foreign investment 
accounted for about USD 42.0 billion, or 48 percent of the total. 
Of this foreign investment participation, U.S. investors accounted 
for one third or USD 14.0 billion.  After a slowdown in 
privatization activity in the early 2000s, the Lula administration, 
which came to power in 2003, revived the program with three 
transactions: the 2004 privatization of the State Bank of Maranhao 
for USD 26.6 million, the 2005 privatization of the State Bank of 
Ceara for USD 302 million, and the 2006 privatization of Paulista 
Electric Energy Transmission Company for USD 230 million.  In 2007 
and 2008, large scale infrastructure projects were auctioned, 
including federal highways, high speed rail and airports. 
Additional infrastructure privatization activity is planned for 
¶2009. 
 
Ownership Restrictions: A 1995 constitutional amendment terminated 
the distinction between foreign and local capital in general, yet 
there are laws that restrict foreign ownership within some sectors, 
notably media and communications, and aviation. 
 
Foreign investment restrictions remain in a limited number of other 
sectors, including highway freight (20 percent) and mining of 
radioactive ore.  Foreign ownership of land within 150 km of 
national borders remains prohibited unless approved by Brazil's 
National Security Council. 
 
Media: Open broadcast (non-cable) television companies are subject 
to a regulation requiring that 80 percent of their programming 
content be domestic in origin.  Additionally, Law 10610 (2002) 
limits foreign ownership in other media, including open broadcast 
and print media outlets, to 30 percent.  In 2009, Brazil's 
legislature is considering extension of this restriction to cover 
Internet Service Providers, pay TV channels and operators, and 
content producers and distributors.  Foreign ownership of cable 
companies is limited to 49 percent, and the foreign owner must have 
a headquarters in Brazil and have had a presence in the country for 
the previous ten years.  National cable and satellite operators are 
subject to a fixed title levy on foreign content and foreign 
advertising on their channels. 
 
Aviation: The Government of Brazil currently restricts foreign 
investment in domestic airline companies to a maximum of 20 percent. 
The Government of Brazil is considering potential privatization of 
commercial airport operations.  The United States and Brazil 
liberalized cargo and passenger services in June 2008 and committed 
to further liberalization discussions by 2010. 
 
In May of 2008 Brazil published the Productive Development Policy 
which encourages technological innovations and new investment 
opportunities in the country.  It sets targets for investment 
spending to reach 21 percent of GDP and private investment in R&D to 
reach 0.64 percent of GDP by 2010.  It also sets goals to increase 
Brazil's share of exports to 1.25 percent of the global total and 
increase the number of small export businesses. 
 
A.2. Conversion and Transfer Policies 
 
There are few restrictions on converting or transferring funds 
associated with a foreign investment in Brazil.  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. 
 
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 also have a representative in 
Brazil.  Portfolio investors must have a Brazilian financial 
administrator and register with the Brazilian securities commission 
(CVM). 
 
All incoming foreign loans must be approved by the Central Bank.  In 
most instances, the loans are automatically approved.  Automatic 
approval is not issued when the costs of the loan are "not 
compatible with normal market conditions and practices."  In such 
instances, the Central Bank may request additional information 
regarding the transaction.  Foreign loans obtained abroad do not 
require advance approval by the Central Bank, provided the recipient 
is not a government entity.  Loans to government entities require 
prior approval from the Senate as well as from the Finance Ministry 
Treasury Secretariat and are subject to registration with the 
Central Bank. 
 
Interest and amortization payments specified in a loan contract can 
be made without additional approval from the Central Bank.  Early 
payments can also be made without additional approvals, if the 
contract includes a provision for them.  Otherwise, early payment 
requires notification to the Central Bank to ensure accurate records 
of Brazil's stock of debt. 
 
Central Bank regulations introduced in 2005 unified the foreign 
exchange market.  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. 
 
Capital gain remittances are subject to a 15 percent income 
withholding tax, with the exception of the capital gains and 
interest payments on tax exempt domestically issued Brazilian bonds. 
 Repatriation of an initial investment is also exempt from income 
tax.  Lease payments are 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 percent withholding tax and an extra 10 percent 
Contribution of Intervention in the Economic Domain (CIDE).  Loans 
with terms of 90 days or less must pay the IOF (5.38 percent), while 
those of longer maturity, profits and FDI remittances must pay 0.38 
percent. 
 
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. 
 
Exchange Rates 
 
With the onset of the 2008 global financial crisis the Brazilian 
Real currency ended its prior year appreciation trend against the 
U.S. Dollar as investors boosted their Dollar and Euro holdings. 
The Real ended 2008 near 2.34 Reais/USD representing close to a 35 
percent year over year depreciation versus the Dollar.  Current 
financial markets expect the Dollar-Real exchange rate to remain 
within the 2.10 to 2.40 Reais/USD range in 2009. 
 
A.3. Expropriation and Compensation 
 
There have been no expropriation actions in Brazil against foreign 
interests in the recent past nor have there been any signs that the 
current government is contemplating such actions.  In the past, some 
claims regarding land expropriations by state agencies have been 
judged by courts in U.S. citizens' favor.  However, compensation has 
not always been paid as states have filed appeals to these 
decisions. 
 
A.4. Dispute Settlement 
 
The Brazilian court system, in general, is overburdened and contract 
disputes can often take years to move through the system.  The 2009 
World Bank "Doing Business" survey found that on average it takes 45 
procedures and 616 days to litigate a contract breach at an average 
cost of 16.5 percent of the claim.  Judicial reform measures enacted 
in December 2004, however, have streamlined some administrative 
procedures, and the introduction of the concept of binding precedent 
should over time make judicial decisions more predictable. 
Article 34 of Brazilian Law 9.307, the 1996 Brazilian Arbitration 
Act, defines a foreign arbitration judgment as any judgment rendered 
outside the national territory.  The Law established that the 
Brazilian Federal Supreme Court must ratify foreign arbitration 
awards.  Law 9.307 also stipulates that the foreign arbitration 
award is to be recognized or executed in Brazil in conformity with 
the international agreements ratified by the country and, in their 
absence, with domestic law.  (Note:  A 2001 Federal Supreme Court 
ruling established that this 1996 Brazilian Arbitration Act, 
permitting international arbitration subject to Federal Supreme 
Court ratification of arbitration decisions, does not violate the 
Federal Constitution's provision that "the law shall not exclude any 
injury or threat to a right from the consideration of the Judicial 
Power.") 
 
Brazil has ratified the 1975 Inter-American Convention on 
International Commercial Arbitration (Panama Convention), the 1979 
Inter-American Convention on Extraterritorial Validity of Foreign 
Judgments and Arbitration Awards (Montevideo Convention) and the 
1958 UN Convention on the Recognition and Enforcement of Foreign 
Arbitration Awards (New York Convention).  Brazil, however, is not a 
member of the International Center for the Settlement of Investment 
Disputes (ICSID), also known as the Washington Convention. 
 
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 February 2005, bankruptcy legislation (Law 11101) went 
into effect creating a system, modeled on Chapter 11 of the U.S. 
bankruptcy code, which allows a company in financial trouble 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 improved ability to recover their debts. 
Brazil has both a federal and a state court system and jurisprudence 
is based on civil law.  Federal judges hear most disputes in which 
one of the parties is the State and rule on lawsuits between a 
foreign State or international organization and a municipality or a 
person residing in Brazil.  Five Regional Federal Courts hear the 
appeals of the federal judge decisions. 
A.5. Performance Requirements and Incentives 
 
The Brazilian government actively encourages both national and 
foreign investment in traditionally underserved regions of the 
country and other marginally profitable ventures.  A 2004 
Public-Private Partnership (PPP) investment law promotes joint 
ventures in otherwise marginally profitable infrastructure 
investments.  The federal government has not yet put out any PPP 
projects for public bids.  In 2007 the Brazilian government launched 
the Program to Accelerate Growth (PAC) with the goal of using 
government resources to attract private sector investment to improve 
Brazil's infrastructure.  To date, however, implementation of the 
PAC has been slow. 
 
The Government of Brazil extends tax benefits for investment in less 
developed parts of the country, for example the Northeast and the 
Amazon regions, with equal application to foreign and domestic 
investors.  These incentives have been successful in attracting 
major foreign plants to areas like 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.  These have proven controversial, with other states 
challenging them as harmful fiscal competition.  A tax reform 
proposal scheduled to be considered by the Brazilian Legislature in 
2009 attempts to limit states' ability to offer tax incentives for 
investment. 
 
Brazil restored tax breaks to exporters with the October 2007 
enactment of Law 11529 in an attempt to help industries hurt by the 
strengthening real.  This law allows certain Brazilian industrial 
sectors (textiles, furniture, ornamental stones, woodworking, 
leatherworking, shoes, leather goods, heavy and agricultural 
machinery manufacturers, apparel and automotive - including parts) 
to apply PIS-COFINS (social integration program) tax credits for the 
purchase of capital goods, both domestic and imported, that are used 
for manufacturing finished products.  The law also expands the 
government's program for exporting companies purchasing capital 
goods.  To be exempt from paying the 9.25 percent PIS-COFINS tax on 
these purchases, companies must prove they derive at least 70 
percent of their revenues from exports.  This benchmark was lowered 
to 60 percent for companies in the sectors covered by the 
legislation. 
 
To promote Brazilian industry, the Special Agency for Industrial 
Financing (FINAME) of the National Bank for Economic and Social 
Development (BNDES) provides financing for Brazilian firms to 
purchase Brazilian-made machinery and equipment and capital goods 
with a high level of domestic content. 
 
Government Procurement 
 
Brazil is not a signatory to the WTO Agreement on Government 
Procurement, and transparency in Brazil's procurement processes is 
at times lacking.  The U.S. Government has received complaints 
concerning lack of transparency and preferences for Brazilian 
products in government tenders.  Limitations on foreign capital 
participation in procurement bids reportedly impair access for 
potential service providers in the energy, construction, security, 
and defense sectors.  Brazilian federal, state, and municipal 
governments, as well as related agencies and companies, in general 
follow a "buy domestic" policy. 
 
Law 8666 (1993) which covers most government procurement other than 
information technology/telecommunications requires 
non-discriminatory treatment for all bidders regardless of 
nationality or origin of the product or service.  However, the law's 
implementing regulations allow for the consideration of non-price 
factors, giving preferences to certain goods produced in Brazil and 
stipulating local content requirements for fiscal benefits 
eligibility.  Additionally, nearly all bids require that a local 
representative be established for any foreign company bidding. 
 
Decree 1070 (1994), which regulates the procurement of information 
technology goods and services, requires federal agencies and 
parastatal entities to give preferential treatment to locally 
produced computer products based on a complicated and nontransparent 
price/technology matrix.  However, Brazil permits foreign companies 
with legal entities in the country to compete for 
procurement-related multilateral development bank loans and opens 
selected procurements to international tenders. 
 
A.6. Right to Private Ownership and Establishment 
 
Foreign and domestic private entities may establish, own, and 
dispose of business enterprises. 
 
A.7. Protection of Property Rights 
 
Mortgages 
 
Brazil has a system in place for mortgage registration, but 
implementation is uneven and there is no standardized contract. 
Foreign individuals or foreign-owned companies can purchase real 
property in Brazil.  Buyers frequently arrange alternative financing 
in their own countries, where rates may be more attractive.  Law 
9514 (1997) helped spur the mortgage industry by establishing a 
legal framework for a secondary market in mortgages and streamlining 
the foreclosure process, but the mortgage market in Brazil is still 
underdeveloped and foreigners may not be able to obtain mortgage 
financing.  Large U.S. real estate firms, however, are expanding 
their portfolios in Brazil. 
 
Intellectual and other Property Rights 
 
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 Patent Cooperation Treaty, 
and the Paris Convention on Protection of Intellectual Property. 
 
Brazil has not ratified the WIPO Copyright Treaty (WCT) or the WIPO 
Performances and Phonograms Treaty (WPPT).  In 2006, the country 
announced plans to join the Madrid Agreement Concerning the 
International Registration of Marks ("Madrid Protocol").  In 2007, 
Congress forwarded the issue to the Executive branch for 
consideration, where it is still pending. 
 
In most respects, Brazil's 1996 Industrial Property Law (Law 9.279) 
brings its patent and trademark regime up to the international 
standards specified in the TRIPS Agreement, although the law does 
permit the grant of a compulsory license if a patent owner has 
failed to locally manufacture the patented invention in Brazil 
within three years of patent issuance.  On May 4, 2007, invoking 
TRIPS provisions and public interest, Brazil issued a compulsory 
license for an anti-retroviral drug used in treating HIV/AIDS.  Data 
protection for pharmaceutical products for human use remains an 
ongoing concern. 
 
The United States has raised concerns regarding Brazil's Law 10196 
of 2001, which includes a requirement that National Health 
Surveillance Agency (ANVISA) approval be obtained prior to the 
issuance of a pharmaceutical patent.  On June 23, 2008, ANVISA 
issued Resolution RDC 45 standardizing, to some extent, the 
procedures for review of such patent applications.  Nonetheless, 
ANVISA's role in reviewing pharmaceutical patent applications 
remains non-transparent and has contributed to an increasing backlog 
in the issuance of patents.  The United States is also concerned 
that this requirement singles out one particular product category 
for a set of procedural requirements. 
 
A government-drafted bill to provide protection for the layout 
design of integrated circuits (computer mask works) was enacted into 
law on May 31, 2007 (Law 11.484). 
 
In August 2007, a bill (PL 1807/07) was introduced that, if 
approved, would amend Article 189 of Brazil's Industrial Property 
Law (9279/1996) by increasing the criminal penalties for trademark 
violations to two to six years, up from the current three to twelve 
months. 
 
Patent and trademark licensing agreements must be recorded with and 
approved by the National Institute of Industrial Property (INPI) and 
registered with the Central Bank of Brazil (Normative Act No. 135, 
of April 15, 1997).  Licensing contracts must contain detailed 
information about the terms of the agreement and royalties to be 
paid. In such arrangements, Brazilian law limits the amount of the 
royalty payment that can be taken as a tax deduction, which 
consequently acts as a de facto cap on licensing fees. 
 
Brazil's 1998 copyright laws generally conform to international 
standards, yet piracy of copyright material remains a problem.  The 
Brazilian Congress passed a law in July 2003 increasing minimum 
prison sentences for copyright violations and establishing 
procedures for making arrests and the destruction of 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. 
 
In recognition of its improved anti-piracy enforcement efforts, 
Brazil was upgraded from "Priority Watch List" to "Watch List" in 
the 2007 U.S. Trade Representative's Special 301 report. In 2008, 
the country maintained its "Watch List" status on the report. 
 
A.8. Transparency of the Regulatory System 
 
In the 2009 World Bank "Doing Business" survey, Brazil ranked 125th 
out of 181 countries in terms of regulatory environment conducive to 
business.  Brazilian sources respond that the survey attempts to 
account for requirements across all states and therefore offers an 
inflated view of what is actually required in any one state. 
According to the study, it takes an average of 18 procedures and 152 
days to start a new business.  The study noted that the 
administrative burden to a medium-size business of tax payments in 
Brazil is an average of 2,600 hours versus 187 hours in the United 
States.  According to this same study, it takes four years to close 
a business in Brazil and the recovery rate is 17.1 cents to the 
dollar. 
 
Tax regulations, while burdensome and numerous, do not differentiate 
between foreign and domestic firms.  However, there have been 
instances of complaints that the value-added tax collected by 
individual states (ICMS) favors local companies.  Although the tax 
is designed to be refunded upon export of goods outside of the 
country, exporters in many states have had difficulty receiving 
their ICMS rebates.  Taxes on commercial and financial transactions 
are particularly burdensome, and businesses complain that these 
taxes hinder international competitiveness of Brazilian products.  A 
government proposal to streamline the tax collection system is 
currently under consideration by the Brazilian Congress, but tax 
reform has been difficult because states fear losing revenue and 
control over fiscal policy. 
 
ANVISA, the Brazilian FDA equivalent, has regulatory authority over 
the production and marketing of food, drugs and medical devices. 
ANATEL, the country's telecommunication agency, handles licensing 
and assigns bandwidth.  ANP, the National Petroleum Agency, has been 
commended by the industry for its fair handling of auctions of oil 
exploration blocks and for its willingness to support the 
simplification of regulatory procedures such as environmental 
licensing.  However, following the discoveries of new oil reserves 
in late 2007, auctions have been discontinued for off-shore blocks 
as the government deliberates over a new regulatory structure for 
the oil and gas sector. 
 
The civil air transport industry regulator (ANAC) began functioning 
in 2006 with a mandate to increase competition within Brazil's civil 
aviation industry.  Taking over responsibilities that had previously 
resided with the Brazilian Air Force, ANAC has begun to take steps 
to liberalize the Brazilian market, although court challenges have 
slowed some proposed initiatives, such as price liberalization that 
is intended to be phased in over 2009. 
 
Foreign investors have encountered obstacles when interfacing with 
regulatory agencies.  Notable examples include companies in the 
electric power sector that have complained about the high level of 
regulatory risk, for example the tariff review process and the 
implementation of Brazil's new energy model.  Additionally, some 
industries have reported challenges in obtaining licenses from 
IBAMA, the environmental regulator, citing unpredictability in 
IBAMA's licensing requirements, though the process has reportedly 
become more streamlined over the course of 2008.  Brazilian private 
sector organizations which often include foreign companies are vocal 
and involved in industry standards setting. 
 
A bill (PL 3937/04) to modernize Brazil's antitrust review and to 
combine the antitrust functions of the Ministry of Justice and the 
Ministry of Finance (MoF) into those of the Administrative Council 
for Economic Defense (CADE) passed through the Chamber of Deputies 
in December of 2008.  The bill, which would also revise the 
country's licensing and anti-cartel system, is currently awaiting 
consideration by the Senate. 
 
 
Recent Concerns over Legislation Regulating Business Operations 
 
Foreign express delivery companies have recently become concerned 
about high taxes and a potential new Postal Law that if passed would 
monopolize the delivery of all letters and post cards under the 
Brazilian National Postal Service.  While the new law would exclude 
packages, it does include letters which constitute a large product 
segment within the express delivery industry.  The express delivery 
industry is encouraging the Brazilian government not to pass a law 
imposing regulations on the delivery of letters.  The law's draft 
remains with the Labor Commission in the House of Representatives 
and there is an executive branch petition to withdraw it, but as of 
January 2009 the Labor Commission has not yet voted on the issue. 
 
Brazil recently enacted a new Customer Care Support Law (Decree 
6523), effective as of December 2008, which implements numerous 
requirements for customer support and call centers operating in 
Brazil.  The provisions of the law are perceived as onerous and 
operationally intrusive to private business.  Among the laws many 
provisions are the requirements that a company operate its call 
center 24 hours a day and seven days a week, record and store call 
data, not leave a customer on hold for more than 60 seconds and to 
ensure that when customers are transferred to another attendant 
prior conversations are not repeated.  The enforcement of the decree 
and sanctions for noncompliance are covered under article 56 of Law 
8078, adopted in 1990. 
 
All proposed federal legislation is available to the general public 
via the internet. 
 
House of Deputies: 
http://www2.camara.gov.br/proposicoes 
 
Federal Senate: 
http://www.senado.gov.br/sf/atividade/default .asp 
 
A.9. Efficient Capital Markets and Portfolio Investment 
 
The Brazilian financial sector is large and sophisticated.  Banks 
lend at the Brazilian market rate which remains extremely high due 
to taxation, repayment risk, a lack of judicial enforcement of 
contracts, high mandatory reserve requirements, and administrative 
overhead. 
 
The financial sector is concentrated, with 2008 Central Bank data 
indicating that the 10 largest commercial banking institutions 
account for approximately 73.1 percent of financial sector assets 
less brokerage (approx. USD 1.2 trillion).  Two of the five largest 
banks (in assets) in the country are federally owned.  Lending by 
the large banking institutions is focused on the largest companies, 
while small and medium banks primarily serve small and medium-sized 
companies, but with a much smaller capital base. 
 
The Central Bank has strengthened bank audits, implemented more 
stringent internal control requirements, and tightened 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 Brazilian 
Securities Exchange Commission (CVM) independently regulates the 
stock exchanges, brokers, distributors, pension funds, mutual funds, 
and leasing companies with penalties against insider trading. 
 
Credit Market 
 
BNDES, the government national development bank, is the primary 
Brazilian source of longer-term credit, and also provides export 
credits.  FINAME (the 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), which finances capital good exports for 
both foreign and domestic companies, is a part of FINAME.  One of 
the goals of these financing options is to support the purchase of 
domestic over imported equipment and machinery. 
 
PROEX, an export credit program financed by the National Treasury 
offers assistance in the areas of interest rate equalization, 
capital and other goods exports, and service exports (See OPIC and 
Other Investment Insurance Programs section for more information on 
credit availability). 
 
Equity Market 
 
As of 2000 all stock trading is performed on the Sao Paulo Stock 
Exchange (BOVESPA), while trading of public securities is conducted 
on the Rio de Janeiro market.  In 2008, the Brazilian Mercantile & 
Futures Exchange (BM&F) merged with the BOVESPA to form the form the 
second largest exchange in the Western Hemisphere.  BOVESPA has 
launched a "New Market," in which the listed companies comply with 
stricter corporate governance requirements.  In June 2004, BOVESPA's 
new market had 18 listed companies; and by 2008 there were 100. 
(Note: A majority of the Initial Public Offerings are listed on the 
New Market).  In 2008, there were four new IPOs representing R$ 7.5 
billion in raised capital; 66 percent of this amount was foreign 
capital. 
 
The total number of companies listed on the BOVESPA has modestly 
grown over recent years; from 394 in 2006 to 424 by the end of 
December 2008.  Total daily trading volume rose from R$ 2.4 billion 
in 2006 to R$ 5.5 billion in 2008.  Trading is highly concentrated 
with the top ten stocks accounting for 53 percent of 2008's trading 
volume.  A total of 76 Brazilian firms are also listed on the NYSE 
via American Depository Receipts (ADR's).  Conversely, the Brazilian 
subsidiaries of some U.S. companies have issued shares on BOVESPA. 
 
Foreign investors, both institutions and individuals, can directly 
invest in equities, securities and derivatives.  Foreign investors 
are required to trade derivatives and stocks of publicly held 
companies on established markets.  At year-end 2008, foreign 
investors accounted for 36.2 percent of the total turnover on the 
BOVESPA.  Individual investors were the second most active category 
of market participants, accounting for 29.5 percent of BOVESPA 
transactions, while domestic institutional investors accounted for 
23.8 percent.  Financial and other institutions accounted for 10.5 
percent.  In 2001, law 10303 went into effect limiting preferred 
shares for new issuances to 50 percent and strengthened rights for 
minority shareholders. 
 
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.  Although the stock market is growing in popularity, 
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. 
 
Wholly owned subsidiaries of multinational accounting firms, 
including the major U.S. firms, are present in Brazil.  As of 1996, 
auditors are personally liable for the accuracy of accounting 
statements prepared for banks. 
 
A.10. Political Violence 
 
Political and labor strikes and demonstrations occur sporadically in 
urban areas and may cause temporary disruption to public 
transportation.  Since mid-2003 the Landless Workers' Movement (MST) 
has continued its aggressive invasions of a variety of agricultural 
interests, both domestic and foreign, and has occupied government 
buildings in its campaign to force redistribution of land.  MST 
protests have generally been more intense during the historically 
significant month of April. 
 
In 2006, criminal organizations staged several violent campaigns 
against public institutions in Sao Paulo State leading to a large 
number of deaths.  While it is unlikely that U.S. citizens would be 
targeted during such events, U.S. citizens traveling or residing in 
Brazil are advised to take common-sense precautions and avoid any 
large gatherings or any other event where crowds have congregated to 
demonstrate or protest.  Transnational crime is known to occur in 
Brazil involving individuals with ties to criminal entities that 
operate in major city areas and along the tri-border area of 
Argentina, Brazil, and Paraguay.  These organizations are involved 
in the trafficking of illicit goods.  In 2006, the U.S. Department 
of the Treasury designated nine individuals and two entities in the 
tri-border area as having provided financial and logistical support 
to a terrorist group. 
 
Colombian terrorist groups have been known to operate in the border 
areas of neighboring countries.  Although there have been reports of 
isolated small-scale armed incursions from Colombia into Brazil in 
the past, we know of no specific threat directed against U.S. 
citizens across the border in Brazil at this time.  Colombian groups 
have perpetrated kidnappings of residents and tourists in border 
areas of Colombia's neighbors.  Therefore, U.S. citizens traveling 
or residing in areas of Brazil near the Colombian border are urged 
to exercise caution.  U.S. citizens are urged to take care when 
visiting remote parts of the Amazon basin and respect local laws and 
customs. 
 
A.11. Corruption 
 
Corruption can be an obstacle to investment in Brazil.  In 2008, 
Brazil ranked 80th (among 180 countries) in Transparency 
International's Corruption Perception Index.  Brazil ranked below 
many other Latin American countries, including Chile, Uruguay, Costa 
Rica, El Salvador, Colombia, Mexico, and Peru.  In general terms, 
businesses find corruption an obstacle in government procurement and 
at some levels of the judiciary. 
 
Corruption scandals are a regular feature of Brazilian political 
life.  The GOB continued to investigate a series of corruption 
scandals, of unusual scope, that emerged in 2005.  Parallel 
Brazilian congressional and law enforcement authorities' 
investigations revealed illicit financing by some political parties 
of their 2002 presidential campaigns, as well as a related scheme 
involving vote-buying in Congress by some elements within the ruling 
party and the executive branch, possibly financed by illegal rebates 
on contracts.  In December 2007, the Brazilian Senate President 
resigned the presidency due to a separate ethics scandal.  Brazil's 
anti-money laundering mechanisms and relatively independent 
prosecutorial and oversight institutions have played useful roles in 
the investigation of such cases. 
 
Brazil is a signatory to the Organization for Economic Cooperation 
and Development (OECD) Anti-Bribery Convention.  Brazil has laws, 
regulations and penalties to combat corruption, but their 
effectiveness is inconsistent.  While federal government authorities 
generally investigate allegations of corruption, there are 
inconsistencies in the level of enforcement among individual states. 
 Corruption remains problematic in business dealings with some parts 
of the Brazilian government, particularly on the local level. 
 
Bribery is illegal and a bribe by a local company to a foreign 
official is a criminal act.  A company cannot deduct a bribe to a 
foreign official from its taxes. 
 
A.12. Bilateral Investment Agreements 
 
Brazil does not have a Bilateral Investment Treaty with the United 
States.  While Brazil had signed BITs with Belgium and Luxembourg, 
Chile, Cuba, Denmark, Finland, France, Germany, Italy, Republic of 
Korea, Netherlands, Portugal, Switzerland, United Kingdom and 
Venezuela, none of these were ratified by the Brazilian Congress. 
Brazil also has not ratified the Mercosul investment protocol. 
 
Brazil has no double taxation treaty with the United States, but 
does have such treaties with 24 other countries, including, among 
others, Japan, France, Italy, the Netherlands, Canada and Argentina. 
 Brazil signed a Tax Information Exchange Agreement with the United 
States in March 2007 that currently awaits ratification in the 
Brazilian Congress, where it has been challenged on its 
constitutionality. 
 
A.13. OPIC and Other Investment Insurance Programs 
 
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.  Brazil became a member of the 
Multilateral Investment Guarantee Agency (MIGA) in 1992. 
 
A.14. Labor 
 
The 86 million strong Brazilian labor force comprises a wide range 
of skills covering a broad array of occupations and industries.  Two 
thirds of the labor force is employed in the service sector, 19 
percent in the agriculture sector, and the retail and manufacturing 
sectors combined employ the remaining 15 percent. 
 
Brazil has signed on to a large number of International Labor 
Organization (ILO) conventions.  Brazil is party to the U.N. 
Convention on the Rights of the Child and major ILO conventions 
concerning the prohibition of child labor, forced labor and 
discrimination. 
 
The labor code is highly detailed and relatively generous to 
workers.  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 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.  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. 
 
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. 
 
The Brazilian Institute of Geography and Statistic's (IBGE) 
estimated unemployment as of December 2008 at 6.8 percent (versus 
7.4 percent in December 2007).  Unemployment statistics range 
significantly across regions and the December IBGE numbers may not 
reflect the latest negative employment impacts of the current global 
financial crisis. 
 
IBGE reports that real wages have trended higher in recent years. 
The average monthly wage in Brazil's six largest cities was around 
1,284 Reais in December 2008 (approximately USD 536 based on average 
exchange rates for that month), and the minimum monthly wage was 
raised from 380 Reais in 2007 to 415 Reais in March 2008.  Earnings 
also vary significantly by region and industry and there is 
significant wage inequality between Brazil's poor and wealthy. 
 
The Ministry of Labor estimates that there are over 16,000 labor 
unions in Brazil, but Ministry officials note that these figures are 
inexact.  Labor unions, especially in sectors such as metalworking 
and banking, tend to be well-organized and aggressive in defending 
wages and working conditions and account for approximately 19.04 
percent of the official workforce according to the last IBGE release 
(2005).  Strikes are frequent, particularly among public sector 
unions.  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. 
 
Employer federations, supported by mandatory fees based on payroll, 
play a significant role in both public policy and labor relations. 
Each state has its own federation, which reports to CNI (National 
Confederation of Industries), headquartered in Brasilia. 
 
A.15. Foreign Trade Zones 
 
The federal government has granted tax benefits for certain free 
trade zones.  The most prominent of these is the Manaus Free Trade 
Zone, in Amazonas State, which has attracted significant foreign 
investment, including from U.S. companies.  Most of these free trade 
zones aim to attract investment to the North and Northeast of 
Brazil. 
 
A.16. Foreign Direct Investment 
 
According to the Central Bank's most recent foreign-capital census 
(2000), the stock of foreign direct investment in Brazil stood at 
USD 103 billion as of December 2000.  Of this total amount, the 
United States had the largest share at about USD 24.5 billion (24 
percent).  Spain had 11.9 percent (USD 12.2 billion) and The 
Netherlands 10.7 percent (USD 11.0 billion).  Investment inflows 
from 2000 to 2006 have amounted to about USD 117 billion, exclusive 
of depreciation and capital repatriation.  The Central Bank has not 
yet published updated investment stock figures which were originally 
expected in early 2007. 
 
Central Bank data estimate total FDI inflows were USD 34.6 billion 
in 2007, and USD 45.0 billion in 2008.  According to the U.S. Bureau 
of Economic Analysis, FDI inflows from the United States to Brazil 
were USD 4.1 billion in 2007 and United State's FDI stock was USD 
41.6 billion as of 2007. 
 
Brazil's Top 20 multinationals have USD 56 billion assets abroad, 
equivalent to over half of the country's outward FDI stock.  A 
survey released December 3, 2007 by the Columbia Program on 
International Investment (CPII) and the Brazil-based Fundacao Dom 
Cabral (FDC) in New York indicated that Brazil's top multinational 
enterprises (MNEs) made the country the second largest outward 
investor among developing countries in terms of foreign direct 
investment (FDI) outflows in 2006. 
FDI as a Percentage of GDP:  2003 - 2008 
 
Year    FDI (USD Billions) Percentage of GDP 
2008  45.060   2.84 
2007  34.585   2.63 
2006  18.782   1.76 
2005  15.066   1.71 
2004  18.146   2.73 
2003    10.144   1.83 
Source:   Central Bank of Brazil 
For more information on investing in Brazil, contact the National 
Investment Information Network, Brazilian Ministry of Development, 
Industry and Foreign Trade (MDIC): 
http://investimentos.desenvolvimento.gov.br/ 
renai_en/index.asp 
 
END TEXT. 
 
SOBEL