BRAZIL COST OF HAVING A BUSINESS AND WHY THE EVASION:
Custo Brasil: The Hidden Burden Fueling Business Relocations and Economic Challenges
Recent social media discussions, including posts criticizing Brazilian President Luiz Inácio Lula da Silva’s tax policies, have highlighted a growing concern: companies and capital appearing to exit Brazil amid plans to increase taxes on the wealthy. While the debate often centers on politics, the underlying driver is a long-standing phenomenon known as Custo Brasil—the extra costs of doing business in Brazil. This structural issue, combining bureaucracy, taxes, infrastructure deficits, and regulations, is pushing manufacturers toward neighboring countries like Paraguay.15
What Exactly Is Custo Brasil?
“Custo Brasil” (Brazil Cost) is not a single tax or fee but a collective term for the additional expenses companies face when operating in Brazil compared to many peer economies. It encompasses structural inefficiencies that inflate production and operational costs, making Brazilian goods less competitive internationally and domestically.
Key components include:
- Complex and high taxation: Brazil’s tax system is among the world’s most complicated, with cascading taxes that can add 40-100% to product costs. Compliance alone requires an average of 1,501 hours per year—the highest globally.
- Bureaucracy and regulation: Excessive red tape, overlapping rules, and slow processes increase administrative burdens.
- Infrastructure and logistics: Poor roads, ports, and transportation networks raise shipping and supply chain costs significantly.
- Labor costs and charges: High payroll taxes, benefits, and rigid labor laws add to expenses.
- Other factors: Security concerns, energy costs in some regions, and regulatory unpredictability further compound the burden.
Estimates put the total annual cost at around R$1.7 trillion, or roughly 19.5% of GDP. The tax system alone contributes R$240–280 billion in extra operating costs yearly, with regulations and security adding substantially more.17
CWuEP“LARGE”
Workers in a textile manufacturing facility—sectors like apparel have been among those shifting operations to take advantage of lower costs elsewhere.
Quantified Impacts on the Economy and Businesses
Custo Brasil directly hampers competitiveness, investment, and growth. It contributes to lower productivity, deters foreign direct investment in manufacturing, and raises the price of Brazilian exports.
Brazil’s economic growth has moderated in recent years: 3.4% in 2024, slowing to around 2.3% in 2025, with projections for further moderation in 2026 amid high interest rates and structural constraints. While services and agriculture have shown resilience, industrial sectors feel the pinch most acutely from elevated operational costs.24
For individual businesses, these costs erode profit margins, discourage expansion, and make relocation or nearshoring attractive. Small and medium enterprises are particularly vulnerable, often lacking the resources to navigate the complexity.
Real-World Consequences: The Paraguay Exodus
One of the most visible effects is the relocation of manufacturing operations to Paraguay. Reports indicate that more than 200–230 Brazilian companies have moved part or all of their production there in recent years, often under Paraguay’s Maquila regime. This program offers streamlined taxation (as low as 1% on value added in Paraguay), significantly lower labor and energy costs, and simpler regulations—delivering potential savings of 30–40%.34
Notable examples include apparel and textile firms like Lupo (which expanded operations in 2025) and others in footwear, bedding, and food processing. Many companies adopt a hybrid model: production in Paraguay for cost efficiency, while retaining headquarters, sales, and distribution in Brazil’s large domestic market. This allows them to serve Brazilian consumers via Mercosur trade rules without full import tariffs.
The trend is not entirely new but has gained attention amid ongoing tax reform debates and perceptions of increasing fiscal pressure. It reflects broader nearshoring dynamics in the region, where Paraguay’s advantages in stability, cheap hydroelectric power, and business-friendly policies draw investment.
Broader Implications and Outlook
The impacts extend beyond individual firms:
- Employment and regional effects: Manufacturing job losses in Brazil, particularly in border or industrial states, though offset somewhat by service-sector growth and retained corporate functions.
- Tax revenue and fiscal health: Reduced domestic production can pressure government revenues, complicating efforts to fund social programs.
- Competitiveness: Brazil risks falling further behind in global value chains if costs remain elevated.
- Positive notes: Brazil retains strengths like a massive internal market, natural resources, and a vibrant entrepreneurial culture.
Encouragingly, the government has pursued reforms to address these issues. The landmark indirect tax reform (approved in 2023, with implementation phasing in from 2026 to 2033) replaces five complex consumption taxes with a dual VAT system (CBS at federal level and IBS at state/municipal levels). This aims to simplify compliance, reduce cascading effects, improve transparency, and lower administrative burdens over time. Complementary efforts include regulatory streamlining (“Regula Melhor” strategy) and updates to transfer pricing rules.40
Conclusion
Custo Brasil represents a deep-seated challenge that transcends any single administration or policy proposal. While recent discussions around taxing the wealthy have spotlighted capital flight, the migration of industries to Paraguay underscores how cumulative structural costs erode Brazil’s industrial base.
Addressing it fully will require sustained focus on tax simplification (already underway), infrastructure investment, labor market flexibility, and regulatory efficiency. If successful, these reforms could enhance competitiveness, attract investment, and support more inclusive growth. Brazil’s economic resilience—driven by its scale and diversity—provides a strong foundation, but tackling Custo Brasil remains essential for unlocking higher productivity and sustained prosperity in the years ahead.
Sources drawn from government reports, international organizations (OECD, World Bank), business analyses, and recent economic outlooks as of mid-2026. Economic conditions evolve, and readers should consult current data for the latest developments.