Praxity Regional Review – Latin America

In a business world that is increasingly multi-pole and decentralised, regions outside the usual financial centres are seeing strong growth and greater resilience to shocks. The growth of Latin America over the last three decades is likely to continue over coming years, with projections from the World Bank suggesting growth of 2.3% for 2024 and 2.6% for 2025.1

As with everywhere else, the region suffered hardship during the COVID-19 global pandemic. However, leveraging growth in the region and in response to seismic changes elsewhere in the world, firms are finding their feet again, with business rediscovering what Latin America can offer.

Across the region, Praxity members work together to increase their potential and to overcome inherent challenges. Working in a capital-rich environment, with competing priorities in different jurisdictions and distinct legislative challenges, member firms are often at the forefront of action.

Global currents in the marketplace interact with rapid change on the ground, with elections often meaning huge swings in government policy and legislation. Whatever situation presents itself, there is always an opportunity to find. We asked the new chair of Praxity Membership Committee, Bernardo Del Rio of JA Del Rio in Mexico, and Wesley Figueira, Partner at VBR, Brazil, to give us an overview of what the future holds for the region, and for its two largest economies.

Bernardo Del Rio

Managing Partner, JA Del Rio, Mexico

One of the interesting trends over the past years is the growing focus on Regionalisation vs Globalisation, where markets are attended to much closer to where the end consumer is located. As part of this, for example, LATAM is on the mend from the pandemic slump, with foreign direct investment growing by 132%, reaching $208 billion in 2022.

Alejandro Delgado, JA Del Río Partner, Direct Investment Advisory –

“According to a Procurious survey of more than 600 procurement and supply chain leaders, 97% experienced a supply chain disruption related to COVID-19. In response, the majority (73%) of organizations are now planning major shifts in supply chain and procurement strategy, including supply base expansion (38%) and reductions in supply chain globalization (34%).

Despite high FDI records, Nearshoring potential should be reflected in new investment figures and that’s not yet the case. So, the question is: Are FDI flows conclusive proof that nearshoring processes are bearing fruit? For Mexico, the nearshoring phenomenon is a golden opportunity that hasn’t yet been taken advantage of at its fullest.”

There are many projects that have been announced and plants that are being built, and we see this with our clients where the lapse between the announcement to a factory to full-fledged operation can be 1-3 years, so this could explain the big mystery of why FDI flows into Mexico are not higher yet.

Industrial Real estate in Mexico is at a 98% occupancy rate, and many new funds are being launched to build out industrial real estate at a frenetic pace. Mexico will likely be one of the main beneficiaries, but talent, water, and other issues will make the rest of Latin America, especially Colombia and the rest of Central America, destinations for investment.

Wesley Figueira

VBR, Brazil

Brazil started 2023 under the fear of a government change that brought with it a different economic model, under a party that is constantly under the suspicion of a budget spendthrift policy. After 2022 ended with a primary public surplus (0.5% of GDP), we ended 2023 with a primary deficit of 2.1%. Fortunately, the Central Bank administration under Campos Neto kept inflation within the target of 4.62% and with a relatively healthy growth rate of 3.1%, within Federal Government pressure to keep interest rates low.

To counter the possibility of a deficit, the Bolsonaro and Lula da Silva administrations, respectively (see items below) passed two pieces of legislation in Congress that will be the focus of the economy and accounting profession in the next 3 years:

New Transfer Pricing model – The former Brazilian administration passed an OECD based TP legislation, that promoted major changes in the calculations for multinational companies in Brazil and Brazilian companies with branches and manufacturing abroad, from January 1st 2024. All basic concepts of the new TP Model will be similar to what is in place in each OECD member country. The question mark here is the interpretation that Brazilian Revenue Services will give to the concept of “market average prices”. Directors of BR IRS, when questioned by us, informed us that they will “determine the ranges to be used”, which is not an official opinion, of course, but one that infers that the freedom of research of such market equivalents may be subject to closer scrutiny.
Tax reform – A tax reform that may result in the largest VAT in the world has passed in Brazil and is still being regulated by BR IRS. The new rate is expected to be at least 27.5%, most probably 30% or slightly more and is known as the IBS-CBS VAT2. This is a long reform that will start showing its effects in 2025 and should be in full force by 2031. The best news here is the apparent guarantee of full credit of IBS-CBS on all invoices received by companies, which is not a reality under the present system. This somewhat balances the effect of the high rates but will certainly affect the end consumer directly, which means that the lower income individuals will suffer more.

The challenges for Brazil are several and serious:

Inflation – with the present budget deficit, holding inflation within the variation range, centered on a 3.5% target (1.5% to 5.5%) will be a challenge for the new president of the Central Bank, who will be inaugurated in July 2024 for a mandate of 4 years. Depending on the quality of the professional, and his/her abilities to fulfill the mandate of keeping the Brazilian Real stable and inflation at the proposed ranges, we may see a relatively stable economy, as it has been now, even with the cloudy horizon of our deficit, or a relatively loose control of interest and currency, with inflationary repercussions.

Growth – The present administration (Lula 3) has repeated the plan put in place in earlier administrations (Lula 1 and 2 and Rousseff 1) of fostering the “National Champions”. In the past, this has resulted in the creation of some large companies, such as JBS (Protein) and other smaller names, with an international presence. On the other hand, it has generated concentration and “oligopolisation” of sectors. New “champion sectors” and companies are now being selected by the federal government. Along with this, it is considered that the tax reform will take its toll on the economy only from 2026 on, but with immediate reactions from some affected sectors.

The above changes and challenges represent huge opportunities for Praxity firms to work together. Our clients in the region must be informed and encouraged to prepare and prevent problems in the near future.

Some ideas on how we can work together towards this goal:

Serious tax studies on the present and future effects of Tax Reform – A few companies, with the possible exception of the largest ones, are duly preparing for the impacts to be seen in the future.
Supply chain studies – Companies that import and resell manufactured items in Brazil normally lack specific studies to take advantage of potential COO – Country of Origin Custom Duties rates, and its cascade effect in all other taxes on imported goods. The application of SKD and CDK3 importations with parts being sourced and assembled in Brazil sometimes has a huge impact on the final costs. The impact of Mercosur sales and incentivized loans (provided by Brazil Development Bank) for the acquisition of machinery of COO are large and largely used in the country.
Corporate finance consulting – In the complex Brazilian market, we have expertise in working capital management, optimal capital structure (in a country with high interest rates), equity and debt fundraising, in addition to the feasibility of new business analysis.
Regionwide and worldwide BPO contracts – We, as the Praxity Alliance, have traditionally worked with some common clientele, without going as far as pooling together to provide regional, seamless services. The Americas, particularly, show a great opportunity for such a “go-to-market” approach to Business Process Outsourcing accounts for larger organisations. Coordinating that approach, rather than seeking providers country-by-country, can be done extremely well in Praxity’s alliance model.
Risk advisory contracts – The same kind of services mentioned above, in BPO, can be done for larger corporations with the need of SOX, IT SOX, FCPA, or other concerns. We believe there is room here for cooperation and obtaining larger, regional or worldwide contracts.

Megaprocesos,

Central America & Caribbean

Central America has seen a huge share of the changes in the region, with the area becoming a key signpost for global events to come. From their transnational base, Megaprocesos of Guatemala assess what has changed and give us an idea of where developments might appear this year.

Nearshoring and reshoring

We have seen growing use of nearshoring in Central America as a market strategy to expand economic activities in free trade zones. Guatemala, El Salvador and Honduras are considered the Northern Triangle of Central America, with joint aims in facilitating business specifically for the manufacturing, pharmaceutical, logistics, renewable energy and aeronautics sectors. Territories are expected to expand the tax and legal benefits of nearshoring to the service for North American businesses, including data and digital information transmission and retransmission, food and beverages, vehicle parts manufacturing, distribution centres and business services.

A point in favour of nearshoring business in this Northern Triangle is that the constituent countries represent a customs union, which provides tax benefits and eliminates tariff barriers between these countries.

Tax benefits and news

Nicaragua, Costa Rica and Panama have made several tax reforms to join new market strategies that will take effect this year. Nicaragua will start implementing digital forms for taxpayers to facilitate the filing and payment of taxes. Costa Rica will continue to make progress in exports of pharmaceutical and technological supplies. Panama has completed the migration process to electronic invoicing, except for small taxpayers with invoicing of less than USD $36,000.

In addition, a code will be added for invoices for internal operations, external operations, imports, exports, credit notes, debit notes, free zones and refunds in the electronic invoicing system, making tax filing simpler and less susceptible to fraud.

Most relevent areas of opporunity

Concerns in the Central America and Caribbean region include:

Fiscal and financial education of the population, due to diversification of economic sectors.
The lack of command of a second foreign language across the region, with the notable exception of Costa Rica, which has a higher rate of multi-lingual inhabitants.
Changes in government and other challenging political situations.
The easing of border areas between countries, strengthening the regional market by reducing tariff barriers.
Adaptation to digital platforms and process innovation.

Changes of note by territory

Guatemala: The country has implemented tax benefits in the agricultural sector, leaving a 0% rate of customs duty on agricultural products. There has also been implementation of digital processes for users and taxpayers in government entities.

El Salvador: There was a 40.6% increase in family remittances, generating economic growth across the territory.

Honduras: There was an increase in basic food basket prices due to the slow post-pandemic recovery, resulting in a drop in foreign investment nationwide.

Nicaragua: There was a significant economic growth in exports, especially in seafood products. In addition, Nicaragua signed of a free trade agreement with China, as a strategic part of attracting foreign investment and innovation in new markets.

Costa Rica: There were several tax reforms, of which the most important are:

Debt forgiveness benefit for specific taxpayers
Expansion of the catalogue of economic activities in free trade zones

Panama: There has been a law reform in the Colon Free Zone (Reform Law 412 dated 21/11/23), affecting tax benefits and expanding economic activity in the Free Trade Zone. We have also seen the implementation of new requirements for specific sectors, including logistics and data processing.

Dominican Republic: The territory has implemented labour benefits provided by the Social Security Treasury for Disability and Survivorship. There are also new laws governing the validity of master reports and country-by-country transfer pricing reports (Decree 256-21).

The region faces present and historical challenges, with different jurisdictions in flux alongside each other. The dynamic nature of the area, however, leads to a dynamic approach from Praxity members, working together to anticipate trends and to make the most of opportunities. The balance of risk and reward can be in the balance, but having the experience and knowledge to work within shifting parameters sets Praxity member firms apart. Strengthening connections is a key part of what the Alliance offers its members.

Across the Latin American region, the Praxity has outstanding firms featuring as part of the Alliance. Please check the links below for more information about Praxity member firms in Latin America.