And now for something a little different… I had the good fortune to visit in the beautiful city of Sao Paulo this month to talk to Brazilian accountants about cloud accounting. I gave a keynote lecture to an accounting association called SESCON. The themes included trends in cloud accounting, emerging business models and new sources of revenue for accountants in public practice.
Like everyone else, Brazil is making the transformation from desktop accounting software to the cloud. The same forces – digitisation, automation – are at work.
It’s amazing to see the similarities between Brazilian accountants and those in Australia, New Zealand, Canada, the UK and the US. And equally interesting to discover the differences. The tempo varies by country depending on the maturity of local software, government attitudes and the quality of business networks.
Too much tax
The biggest difference is unfortunately right at the top. The tax legislation has been taken hostage by the political class.
Congressmen make minor changes to benefit a campaign donor or as a reward for patronage. By some estimates, Brazilian tax law changes every two hours.
There are federal, state and city taxes to take into account, but that’s just the beginning. The tax on goods crossing borders changes depending on the states of origin and destination. It can also depend on the type of good (e.g., processed or unprocessed), the size of the packaging (bulk or retail), and any measures to “support” a particular industry. This can even be as specific as nominating a geographic area within a state.
Double taxation is common and an accepted cost of doing business. An enormous tariff on imported goods effectively doubles the price of luxury cars and all computers. (A 15-inch MacBook Pro costs US$6,700 in Brazil and US$3,042 in San Francisco.)
This seething sea of tax law, and the uncertainty for all businesses that sail upon it, puts a brake on foreign investment. Multinationals are reluctant to invest if they can’t predict how much tax they will have to pay.
The complexity generates a lot of work and costs entrepreneurs dearly. I heard from an executive at Santander, one of the big four Brazilian banks, the results of a survey comparing tax obligations globally. US businesses on average require 120 hours a year while Brazilian companies clock up 2,600 hours, ranking the country one of the worst in the world.
The government is not only hyperactive in passing legislation. It has also implemented quite a radical digital initiative called the Public System of Digital Bookkeeping, known by its Portuguese acronym, SPED.
The centrepiece of SPED is an electronic invoicing solution for business-to-business transactions. When making a sale, a business must send an e-invoice via a webpage to the government for approval. The government then sends it to the customer. Again, businesses face stiff penalties if they dare cut out the government middleman.
In this way the government knows the exact revenue of every registered business.
A consultant, lecturer and blogger, Roberto Dias Duarte, has written a short book detailing how SPED works. It is called “Big Brother Tax, the impact at small Brazilian companies”, and is available in an English translation.
Duarte uses an entertaining metaphor of roasting pigs to describe the insanities of the Brazilian tax system. In short, reforming the system would threaten too many jobs and the status quo of the political order. So the government looks for minor improvements instead.
Fighting the good fight is an army of 60,000 accounting firms. Accountants need to constantly monitor the changing legislation to make sure their clients are filing correctly. The tax department has a reputation for handing out punishing fines for mistakes, intentional or otherwise.
A land of fixed fees
The arduous nature of compliance has ironically forced Brazilian accountants into an advantageous business model. Every accounting firm charges their client a fixed fee each month to carry out their compliance.
This pricing model means that any improvement in efficiency in the compliance process will boost their margins. What luck there is a host of software companies aiming to do just that!
This puts Brazilian accountants at a distinct advantage compared to their colleagues in other countries. Accountants everywhere else need to move away from hourly billing as part of the migration to business models based on cloud software.
The complexity of compliance also encourages companies to invest in business process outsourcing (BPO). This is a growing market in Brazil and one that could be very lucrative for tech-savvy firms that automate as much of the process as possible.
The software scene
The Brazilian market is still dominated by desktop accounting software, although cloud startups are moving swiftly. The largest in the cloud is ContaAzul, based in Joinville in the south of the country. It has 30,000 businesses that use its ERP-style software.
Another cloud ERP, Omie in Sao Paulo, has slightly fewer customers (25,000) but they tend to be larger, higher-paying companies. Both companies intend to automate as much of the compliance as possible to reduce the compliance burden.
Bank feeds are a relatively new introduction. ContaAzul is setting up feeds with the largest four banks which hold roughly 80 percent market share. Bank data integrators have reportedly struggled to collect information from Brazilian banks.
Both are experimenting with algorithms to automate transaction processing in their software. Omie is about to release an update that will automatically calculate the taxes in a sales invoice before it is sent to the government for verification.
Connecting apps are still in their infancy. Both Omie and ContaAzul have fewer than 10 each.
The opportunity is enormous. An estimated 80 percent of businesses are running their accounts with Excel or pen and paper. Accounting software as a concept doesn’t even exist in the minds of many.
What next for Brazilian accountants
At the talk last week I ran through new business models, how to automate the main workflows and new revenue streams. The audience appeared very receptive and enthusiastic to the concepts – even to my poor Portuguese.
Brazilian accountants still need to understand how to run their firms without importing their clients’ data into practice management software. The incentive to do this will only happen at scale after a critical mass of clients start to move to the cloud.
And that could take a while.
In the meantime, proactive accountants are looking for apps to import from overseas. An app that reduces several hours per client will improve the profitability of their fixed-fee services.
A couple of Brazilian accountants may come visit Australia and New Zealand to talk to leading cloud firms.
Thank you to my hosts, Marcelo Zetune and Marcio Massau Shimomoto at SESCON Sao Paulo, a union for Paulista accountants, for the invitation.
I learnt many interesting things, made new friends and had a great time. Brazil is an amazing place and home to a wonderful people. I look forward to continuing the exchange. Até logo!