About Goats, Jabuticabas and Hope

“There is no legal risk in the country”
Dilma Rousseff, September 2013

According to Warren Buffett, “you will never know who is swimming naked until the tide goes out.” And for the recent years, the tide has definitely gone out. After the economic recovery experienced up to 2010 – primarily thanks to the fact that the world has not ended – all countries have been fighting against significant factors that have been limiting their growth. And in Brazil things are not different… but magnified. We achieved an outstanding growth in 2010 and, in the following years, disappointments and more disappointments.

The shortage of capital has been obliging governments to fight for it – an actual “beauty contest” in which different countries exhibit their opportunities and protection practices to call the attention of capital suppliers. It is, therefore, an auspicious moment for an association such as Amec, which major mission is to advocate for investors’ rights.

For Brazil, the highest point of this beauty contest was the speech delivered by the president, Ms. Dilma Rousseff, in New York, fired with important testimonials such as the one that opens this article. A Martian arriving in our Planet at that moment would be excused if he considered Brazil as one of the most active countries when it comes to attracting foreign capital. Maybe he would be curious why the president repeatedly stated that agreements are met and investors are welcomed; but no doubt that the overall impression was positive.

That Martian would be very surprised if he had the chance of checking the cover of The Economist magazine on the following day. After all, which Brazil is the real one?

The answer is found in acts, not in words.

If the Brazilian government has actually noticed the impact – yet involuntary – of some recent measures aimed on the attraction of foreign investments, for the next months we will be watching a real inversion in the way the public sector operates. Some signs are positive, such as the reduction in the market share of the public sector in the economy’s credit operations, the emphasis on bids and concessions for the private sector and the declarations made by Petrobras’ president about the price realism.

However, more than the details in the auctions for concession projects or the attractiveness of this or that bid, our Martian friend must pay attention to the issues that do bring impacts in the long term – whether for their constant presence in decision-making processes, whether by the indication they provide for one to understand the public sector – including policy makers and the bureaucracy – regarding their role as the drivers of the country’s development.

And now we have reached an important opportunity. Last month, the Internal Revenue Service (IRS) issued the Normative Instruction No. 1,397 that, in brief: (1) establishes the double bookkeeping of our companies, in IFRS and Brazil GAAP and (2) indicates the need of paying retroactive taxes on some specific operations of distribution of profits. In one single stroke, the IRS managed to give two death blows on the back of president Dilma’s speech: the increase in our companies’ costs, reducing their productivity, and an additional uncertainty among those who believe in the country. It seems a tailored work of art for the diagnosis of the late Minister Mario Henrique Simonsen, according to whom “in Brazil, even the past is uncertain.”

Even though one can say that the country has solid institutions to protect taxpayers from the federal tax collection rage, if judges, in last instances, agree that a retroactive interpretation is completely against the fundamental principles of the law, if though one concludes that, in fact, it’s almost impossible to determine how much must be paid and who must pay, at best, the mentioned instruction would overflow our already inundated courts with more and more tax lawsuits. From the practical point of view, the IRS will be burdening our companies in terms of costs and time, and adding to their balance sheets another item to the already multibillionaire tax contingencies, which use up working capital and affect the assessment of the real return of investments in our country. All this only to collect a few more dimes.

Consequences, however, go far beyond that. If we had to choose one objective to allow a change to our country’s growing pattern, we would hardly choose other parameter rather than the increase of our depressed savings rate. By imposing a new tax – a retroactive tax – on the distribution of results to shareholders, those who believe in the future of our country are once again punished. The capital market, which social function is to channel private savings to the production sector, stunts, and takes us back to a confiscatory past that has made us lose so many opportunities.

Curiously, all this takes place in a moment that major entities of the capital market managed to gather around a new positive agenda. In August, a caravan of entities, among which Amec, went to Brasília to interact with leaderships of the Executive, Legislative and Judicial branches. With the possible exception of one meeting, the entities’ presidents returned to São Paulo certain that the authorities had understood the message: the capital market is important for the country’s development and the recent public policies may have failed because they did not consider the segment in decision-making processes. Everybody wants more investments, more transparency, more credibility and, after a hard day’s work, higher growth and employment levels.

That caravan – and the authorities’ testimonials – is what makes this apparently sad article, in fact, a story of hope. The feeling is that the direction of the transatlantic has already started to change. Public agents have been able to understand that the investors’ message is not necessarily a self-interested one. It is common to the national interest. If public policies take the protection of investors into consideration, everybody profits. And the government would be the first one to reap the benefits.

It is in this context that the Normative Instruction No. 1,397 must be considered the swan song of a regulatory approach alienated from real life. The discussions arisen from its issuing, with a strong reaction from usually reticent entities, such as CFC (the accounting body) and Abrasca (the issuers association), tends to accelerate the turn of the transatlantic into the correct direction, what can start to change Brazil’s image as an investment destination.

The first result of this process has already taken place. In an interview to Valor Econômico newspaper on October 3rd, the Secretary of the Internal Revenue Service ruled out the retroactive taxation. One of the three problems of the instruction – the retroactive aspect –seems to be solved. Our hope now is that the other two problems – double bookkeeping and tax on dividends – are also reverted.

It seems we can understand that goats started to be taken away from the living room. Our Martian adds a tick to his optimistic view, as well as that of the entities that joined forces to sensitize the public sector. But the challenge now is not to content ourselves with the fact that the goat was taken away.

Let’s kill the goat.