With the advancement of the regulation of fixed-odds betting activities in Brazil, the market has seen a significant movement of operators establishing themselves in the country to secure their authorization by the end of the year, enabling them to operate regularly from January 1, 2025. However, in addition to observing regulatory, exchange and tax standards, operators must be aware of an extremely relevant issue: the situation of their suppliers.
To facilitate online betting offerings, operators, who are largely currently based abroad, rely on licensing software and services from other companies also located outside of Brazil. However, with operators now moving to establish themselves in Brazil, importing all these services may result in a prohibitive tax burden.
Operators in Brazil could end up paying no less than six different taxes on the amounts paid to their foreign suppliers:
(i) Withholding Income Tax (IRRF) ranging from 15% to 25% on remittances abroad for service payments;
(ii) PIS (Social Integration Program) -Importation tax of 1.65%;
(iii) Cofins (Contribution to Social Security Financing.) -importation tax of 7.6% on imported services;
(iv) CIDE tax (Contribution of Intervention in the Economic Domain) of 10% on contracts involving technology transfer, technical services, or technical assistance;
(v) ISS (service tax) of 2% to 5% on imported services; and
(vi) IOF (Financial transaction tax)/Exchange tax of 0.38% on foreign currency remittances.
Given that foreign suppliers typically demand net-of-tax pricing, this implies that, in addition to the service cost, Brazilian contractors end up shouldering a tax burden exceeding 60% of the service price. This could significantly hinder the development of the 'bets' activities in the country.
Beyond the tax burden on imported services, the sector is already heavily taxed on operator revenues, including:
(i) 12% on gross gaming revenue (GGR);
(ii) 34% in Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL) on operator profits;
(iii) 9.25% in PIS and COFINS on gross revenue; and
(iv) 2% to 5% in ISS on the service price, not to mention the hefty fees imposed by local authorities just to obtain operational authorization.
In the context of tax reform, consideration must be given to the potential imposition of CBS (Contribution on Goods and Services) and IBS (Goods and Services Tax) on lottery revenues, as well as the possibility of a selective tax on this type of activity, which is currently under discussion in Congress.
In this scenario, it seems that the solution to enable the development of the betting sector in Brazil would be to create conditions for the simultaneous entry of this supply chain into the national territory.
Brazil may soon witness something similar to what happened in the 1950s and 1960s, with the arrival of major multinational automotive companies. It wasn't just the arrival of car factories, but the concurrent entry of an entire industrial complex that integrated the supply chain of those markets (manufacturers of auto parts, tires, glass, etc.).
In a more contemporary context, in the post-pandemic world, we also observe the phenomenon of "nearshoring," with the restructuring of global production chains to move businesses from distant countries to centers located in markets closer to the end consumer.
Should 'Bets' suppliers follow this trend and establish themselves in Brazil, they could benefit from a range of local structures that could significantly reduce the tax burden on their activities, potentially lowering it to around 15% of the total tax burden.
We know that many foreign companies sometimes hesitate to invest in Brazil due to the well-known criticisms of bureaucracy and tax complexity. However, it is important to emphasize that Brazil is one of the largest economies and democracies in the world and one of the countries that has attracted the most foreign direct investment in recent years, according to OECD (Organisation for Economic Co-operation and Development) data.
It is true that the country invariably alternates between periods of economic euphoria and skepticism, but one constant over the past few years has been the growth of the Brazilian online betting market, which has been steadily gaining momentum with increasing state regulation of the activity.
Brazil is already considered the third most relevant betting market in the world, attracting many international operators to establish themselves in the country. The high tax burden on imported products and services in Brazil has remained a constant over the years, with no sign of change in this scenario, especially given the fiscal pressure to increase revenue to meet fiscal balance targets.
While there are always risks involved in investing in a country, the truth is that staying out of Brazil at this moment could mean missing out on the game. In this scenario, being well-structured from a fiscal and business perspective to serve the sector in Brazil seems to be the best bet. As a legendary hockey player once said, "You miss 100% of the shots you don't take."
João Rafael Gândara
Partner at Pinheiro Neto Advogados
André Santa Ritta
Associate at Pinheiro Neto Advogados
Maria Eduarda de Andrade
Associate at Pinheiro Neto Advogados
