Tax & Accounting Blog

The Free Trade Zones in Brazil

Blog, Global Trade, ONESOURCE February 18, 2016

The use of free zones finds its origins as far back as Gibraltar (1704), Singapore (1819), Hong Kong (1848), Hamburg (1888) and Copenhagen (1891). Until 1970, free zones were mainly located in industrialized countries. In 1975, there were around 79 free zones spread across 25 countries with the largest first industrial free zone created in Ireland in 1959, installed at Shannon International Airport.  Developing countries, particularly Latin American and Asia, have begun to build-up their free zone programs with greater attention to a logistics platform[1].

In the 1980s, we saw the first free zones developed and operated by private sector entities emerge in the Caribbean and Central America. It is estimated that today there are about 3,000 Special Economic Zones (SEZ) (a generic term for a number of different types of free zones) in 135 countries, with about 20% of them in developed countries and the rest in 119 developing countries and economies in transition. In its totality, they account for over 68 million direct jobs and over 40% of all world exports (2008 data), adding value to various commodities in an amount of approximately US $500 billion annually.[2]

The concept of free zones has changed significantly since the creation of the FTZ in Shannon (Ireland).  Free zones have basically been classified, according to its concepts and features in the FTZ General Purpose Zones and are usually situated in an industrial park or port complex whose facilities are available for use by the general public.

Among the BRICS countries[3], Brazil appears on the list as having hybrid (industrial and commercial) zones; Russia, with the only free port, India, with a traditional and free port, China with a hybrid, commercial and free port; South Africa, with a traditional zone.

In its origin, the FTZ aimed to promote exports, create jobs and support technology transfer, but with globalization, this vision turned to including integration with the rest of the economy, mainly aiming at disseminating the modernization and liberalization of production and trade of goods and services throughout a country’s territory.

Along the years, many organizations dedicated efforts to advance this issue on the world stage; UNIDO (United Nations Industrial Development Organization) stimulated the creation of the World Export Processing Zones Association (WEPZA) in Flagstaff, Arizona, bringing together the free zones around the world. The organization came to finance the preparation of a major study of the Brazilian EPZ. UNCTAD (United Nations Conference on Trade and Development), in turn, supported the creation of the Fédération Mondiale des Zones Franches (FEMOZA) in Geneva, Switzerland. UNCTAD and the World Bank have promoted numerous studies on costs, benefits and advantages of these zones.[4]

Adding to the concept of supporting trade activities and boost economies, in the United States, President Obama a few years ago made it a key initiative to increase exports from the United States.  Part of this initiative promised to make the application and approval process of FTZ’s and sub-zones more streamlined.  Of recent, the 76th Annual report of the Foreign-Trade Zones Board to the congress of the United States, mentions that there were 179 FTZs active during the year, with a total of 311 active production operations. Approximately 420,000 persons were employed at some 2,700 firms that used FTZs during the year, an increase from 390,000 employees in 2013. The value of shipments into zones totaled over $798 billion, compared with $835 billion the previous year.[5]

History in Brazil

Facing this global trend of the use of Special Zones, the Brazilian State launched the Export Processing Zones (EPZ’s) in 1988 with the idea that this initiative would help promote the less developed regions of the country, reduce imbalances, and promote the country’s technology and economic and social development.

The EPZ is characterized as free trade areas for companies focused on the production of goods to be sold abroad.  These are the primary zones for customs control. The companies installed in these EPZ’s have access to specific treatment in the areas of tax and administrative advantages. For Brazil, beyond the expected positive impact over the balance of payments from exporting goods, the hope is that this will attract foreign direct investment, job creation and economic and social development.

However, since the Special Zones were introduced in Brazil, the project has lost focus with the government. During the roll-out of the Special Zones in Brazil, in the same period Brazil underwent a strong economic restructuring, which led to the postponement of several projects, among them the EPZ’s.

The project has since been revitalized with the enactment of Law No. 11,508 creating conditions for the emergence of new Export Processing Zones in Brazil.

Brazil’s EPZ’s

In Brazil, the first EPZ (Export Processing Zones) in operation is located at the Port of Pecém in Ceará.  A steel company will be the first to operate in the port´s free trade zone.  22 industrial units are expected to come on line by the first quarter of 2016 with investments of US $5.4 billion, meant to impact the states GDP (gross domestic product) an additional 6% during construction, 12% in operations and generating  2800 direct jobs, 1200 outsourced jobs and 12,000 indirect jobs.  Source: http://www.zpeceara.ce.gov.br/

The current EPZ’s program establishes benefits of three natures for participating companies: administrative, foreign exchange and tax.

  1. Administrative – Custom authorities with offices inside the EPZ speeding up the administrative process.
  2. Foreign exchange treatment supported by the law that created the EPZ.
  3. Tax – Federal and State Tax Suspension of the purchase / import goods.

Dr. Helson Braga, president of the Brazilian Association of Export Processing Zones. (ABRAZPE), a Doctor (PHD) in Economics stated that “Few convictions are so well established in Brazil today than the need to vigorously increase our exports. The President of the Republic came to put the questions in the terms of ‘export or die’. The promotion of exports is listed as a priority in the programs of all candidates for the next presidential elections”.[6] Dr. Braga’s statement embodies the goal of the National Export Plan (PNE), which is to encourage, facilitate and increase Brazilian exports.

The vision of the Free Zones is critical as one of the main pillars of the PNE:

“Improvement of mechanisms and tax regimes for export support: the government seeks to simplify the various special schemes offered to exporters, for example, the ZPE´s, Drawback and RECOF.”[7]

This pillar focuses on the concept of adding value to exports, logistics efficiencies and cost reduction, all factors very much at the top of concerns in Brazilian foreign trade.  EPZ’s are viewed as an alternative program in increasing competitiveness of Brazilian exporters.

Current State

Currently, 22 EPZ’s projects are authorized and in different pre-operational phases, spread over eighteen Brazilian states. By implementing the EPZ model in Brazil, it is apparent the intended result will increase the volume and value of Brazilian exports.[8] With the establishment of EPZ’s, domestic and foreign companies will be provided with another mechanism in their strategy to foster competitiveness of its products in foreign markets.

See graphic on locations of EPZs in Brazil at http://www.mdic.gov.br/arquivos/dwnl_1412792231.pdf

Conclusion

An effective export policy should certainly contain elements capable of not only stimulating domestic companies to export, but also, and above all, attracting foreign companies.  With the publication of Brazil’s National Export Plan this signals a new strategy to effectively move towards establishing a policy for exports and to help companies establish themselves in Brazil, using export platforms with greater benefits to Brazil’s tax system.

The recent evolution of the EPZ’s legislation, signals with the prospect of the final implementation of EPZ’s in Brazil, which may result in a major qualitative and quantitative leap in Brazil’s exports.

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Sources

[1]  http://www.aeb.gov.br/ (Informativo de Comércio Exterior, Associação de Comércio Exterior do Brasil – AEB, julho/agosto 2013)

[2] http://www.mdic.gov.br/sitio/interna/interna.php?area=1&menu=3050

[3] Brazil, Russia, India, China and South Africa

[4] http://www.wepza.org/history/

[5] http://enforcement.trade.gov/ftzpage/annualreport/ar-2014.pdf

[6] http://www.abrazpe.org.br/index.php/download

[7]  http://g1.globo.com/economia/noticia/2015/06/governo-anuncia-plano-nacional-de-exportacoes.html

[8] http://www.mdic.gov.br/arquivos/dwnl_1412792231.pdf

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