This week Brazilian Federal Police and Brazilian IRS shut down Cisco Brazilian offices in Rio de Janeiro and São Paulo and arrested the Brazilian branch president and directors and brought in several employees for interrogation. You can read the full story, in English, here.

Since I am originally from Brazil, I ought to give my opinion on this matter.

The whole problem with Brazil is what we call there “Brazil Cost”. Brazil is a highly taxed country and its taxation is only surpassed by Sweden’s. But compare what the Swedish people get in social return to what Brazilians get.

Among other things, the cost of importing things, especially electronic equipment, is around 100%. This includes importation duties, VAT (which, insanely enough, is calculated on top of all other expenses, including other taxes – have you ever heard of a place where you pay tax on tax?), freight, insurance, storage, customs broker fees, etc.

So any product that costs USD 100 in the USA will cost at least USD 200 in Brazil, if imported thru the legal channels. We say at least because we were only talking about costs, and obviously both the importer and the distributor will want a piece of profit.

Then we have another thing that a lot of people don’t think about. Brazilians make far less money than people living in the US. The minimum wage in Brazil is of R$ 380 or USD 190 PER MONTH. This translates into USD 1.08 per hour, if we do the math using a 40-hour week (Brazilian law allows 44-hour week). In the US the Federal minimum wage is of USD 5.85 per hour, with the majority of states setting a far higher minimum wage (California’s minimum wage is of USD 7.50 per hour, for example).

So on top of things costing at least twice, Brazilians have a lower buying power, meaning that a thing that costs USD 50 in the US is like if it costed USD 100 for a Brazilian, as Brazilians have far less money to spend.

If you put buying power into the equation, then things in Brazil are at least four times more expensive than in the US.

The crazy thing is why there is such high taxation. The idea behind it is to protect the local industry. The government is afraid of lowering taxes and having Brazilian companies running out of business. So instead of changing things in Brazil to make Brazilian companies more competitive, the solution used in Brazil is to set high importation duties, creating a false sensation that Brazilian companies can survive. In fact, they can’t, due to several reasons like bureaucracy, archaic labor laws and high market control by the government, ideas set back when the military was in the government between 1964 and 1984. Just for the record, things were even worse in the past: until 1993 Brazilians couldn’t legally import any computer equipment.

Brazilian government also says that taxes are high because the high rates of smugglering. But of course smugglering is high! Who can afford 100% importation duties? It is just a matter of basic math: a lower tax applied to a higher volume leads to a higher tax revenue. If the importation costs are lowered for something like 20% I think everybody could import legally, the smugglering problem is gone and the government would make more money, as more people would start importing things legally instead of smugglering them. Anyone can see this but the government.

The sad truth is that is not the real motive the taxes are high. The real reason is (1) Brazilian government don’t want to give up the taxes they are already collecting and is not willing to try a radical change in mentality and (2) there are a lot of hidden agendas around: there are some people that don’t want things to change so they can still profit from the current situation one way or another – like bribery.

The biggest question – the one nobody seems to be asking in Brazil, and if they are, nobody is doing anything about it – is simple: where does all this money go? I can tell for sure it is not to education, health care, infrastructure or creating ways to enhance Brazil’s potential to compete in a globalized world. Oh yeah, the current government likes to help Brazilians companies to export soy beans, steel and other raw material. When will they learn that real money is made on finished goods? Do Brazilians really want to be known in the global market as mere raw materials supplier? I don’t think so.

In recent years there was a lot of buzz about the so-called BRIC countries – Brazil, Russia, India and China –, the countries with the highest growth potential. But with this scenario it is hard for Brazil to enter the international game.

It is always good to remember that democracy is something that exists in Brazil for only the past 22 years – before that the country alternated between dictatorship and short-term democracy. The country and especially their people have a lot to learn, like free market, voting for a change, getting together and protesting in an effective way (unfortunately most Brazilians get upset with the current situation, complains with their friends but do nothing to really change) and, most importantly, getting on the phone or sending e-mails to the senators and congressmen they voted for.

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