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     Brazilian Information Technology Market and Related Legal Incentives                                                                  

The Brazilian Information Technology market is by far the largest in Latin America and projections account for a compound annual growth rate of 11% over the 2007-2012 period. According to BMI (Business Monitor International), the values of spending on IT products and related services are expected to go beyond US$ 21 BN in 2008 and US$ 32 BN by 2012. With current PC penetration rates of less than 25%, there is still plenty of room for growth.

The overall economic outlook is also constructive for growth in IT spending, with BMI projecting that the Brazilian economy should expand by approximately 4-5% on an annual basis throughout the forecast period. This growth rate is already lifting millions into a middle class for whom computers and related products are no longer beyond reach. Domestic demand, rather than external variables, is playing an increasingly prominent role in such economic expansion. The retail PC segment is expected to keep registering strong growth by virtue of a greater range of financing options for consumers and more flexible terms from retailers.

Brazil has been legislating on information technology since 1984, when Law no. 7232/84 was enacted. Aiming at the improvement of the country’s incipient development in this economy sector, this law authorized the Executive Branch to place restrictions on imports, production, operation and trade of IT goods and services, and provided for the creation of special financial and tax regimes to favor Brazilian companies operating solely with local funding.

This scenario changed in 1991, with the enactment of Laws nos. 8191/91 and 8248/91, further amended in 2001 and 2004. These laws modified the rules granting privileges to Brazilian companies operating strictly with national capital. Consequently, market reserves and privileges once given exclusively to local IT companies were extinguished and the basis for the current Brazilian IT policy was established.

The national IT policy began to focus on the attainment of international competitiveness, so the incentives to the sector were thereby extended to any companies engaged in the manufacturing of information technology and automation goods, regardless of the origin of their capital. Nowadays, responsibility for the conduct of the Brazilian IT Policy mainly befalls the Ministry of Science and Technology along with the Ministries of Finance, Development, Industry and Foreign Trade. The applicable incentives are set forth in Laws nos. 10176/01 and 11077/04, with most of the respective regulations laid down in Decrees nos. 5906/06 and 6008/06.

The main benefits brought about by the aforementioned laws are:

1. The establishment of tax incentives to companies that develop or produce goods and/or services related to information technology and automation;

2. The requirements for the inclusion of new product lines in the incentive program have been simplified; and

3. Further incentives to investments in research and development (R&D) carried out in the North, Northeast and Mid-West regions of the country;

Among the legal requirements for benefiting from the incentives are the accomplishment of desirable levels of local added value, in compliance with rules of basic production process (PPB) issued by the above mentioned ministries, as well as with quality production standards. It is also necessary to present a project bringing information such as the company name, its legal representatives, revenue, number of employees and details about the project to be developed, the manufacturing process, quality control program and profit sharing program for employees.

Furthermore, companies must provide for the investment of resources on local R&D in IT related activities. Nothing prevents such R&D investments from being made in accordance with the company’s own program, nonetheless, the program must comprise mandatory annual investments of at least 5% of the company’s gross revenue with the sales of IT goods and services in the Brazilian market, calculated after deduction of taxes triggered by the respective sales and acquisition costs of the products contemplated by such incentives.

The information technology and automation goods and services eligible for taking part on the incentive program are defined as follows:

1. Electronic components for semiconductors, optical-electronics, as well as the respective electronic supply materials;

2. Machinery, equipment and digital technology devices with functions of collection, processing, structuring, storage, switching, transmission, recovery or presentation of information, as well as the respective electronic supply materials, parts, components and hardware for the operation;

3. Software for computers, machines, equipment and devices for information processing and respective technical documentation; and

4. Technical services pertaining to the products and services specified above.

Eligible products are listed in Decree no. 5906/06, including items such as optical fiber cables, LCD panels, printers and digital no-breaks, as well as not so obvious items such as digital medical equipments and electronic fuel injection devices, among others. Notwithstanding, audio, audio and video, leisure and entertainment products do not fall under the category of information technology for the purpose of the incentives, even if incorporating digital components in their assembly.

The incentives applicable to companies engaged in the local production of IT goods and services are mainly as follows:

1. Exemption or reduction of the Tax on Manufactured Products (IPI) of up to 95% until December 2015, and of 85% from January 2016 to December 2019, and reduction of the Import Duty (II), depending on the country region;

3. Preference in purchases from government agencies, public foundations and other organizations directly or indirectly controlled by the Federal Government;

4. Accelerated depreciation of new machines, equipment and devices used in the manufacturing process.

Finally, it is worth highlighting that ventures located in the North, Northeast and Mid-West of the country are subject to specific rules, generally more favorable, including rules defining the IPI exemption or reduction and the Import Duty reduction. Irrespective of the country region, the IPI credit setoff is granted in relation to raw materials, intermediary products and the packaging material used in the manufacturing of IT goods benefited by the incentives.

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