Market Brazil

Is the coffee economy grinding to a halt?

Brazil, once the rising star, has seen virtually no growth so far this year. And its tax regime does the art market no favours whatsoever

With the World Cup and the Olympics just around the corner, can anyone save the Brazilian economy?

Brazil is the “art world’s ‘it country’”, according to Art Review’s Power 100 list. Major Western dealers have been paying careful attention to the country’s economic success story over the past decade and several are now making their moves. White Cube announced its plans to open a space in São Paulo on 1 December with a show of works by Tracey Emin. Gagosian staged a temporary exhibition worth $130m to coincide with the ArtRio fair in September and declared the event a “home-run… one of the strongest fairs we’ve ever done”, in an interview with the Wall Street Journal.

As the country’s economy shows signs of a serious slowdown, however, the huge confusion over the tax situation in Brazil looks set to hamper the growth of the market.

The local art trade has long been lobbying the government to get rid of the hefty taxes that have hamstrung its ability to be competitive internationally. On top of a state tax on the circulation of goods and services (ICMS, which can go up to 25%, but is 18% in São Paulo, 19% in Rio de Janeiro), art is subject to a federal import tax of 4% and a federal VAT of 9.25%. The organisers of the ArtRio and São Paulo’s SP-Arte fairs have persuaded government authorities to make art purchases at the fairs exempt from state taxes for the past two years. But, the current system is confusing. “The promise before [ArtRio] was that [taxes] would mostly be waived for the duration of the fair, but there was never a clear indication of exactly what this would mean. Basically, the [organisers] didn’t know,” says one Western dealer. “It’s very hard to do business when you can’t tell people what the work will cost them. An approximation isn’t good enough,” he adds.

Local sales for local people

By the end of the fair, it became clear that only residents of Rio de Janeiro would qualify for exemption, meaning São Paulo-based buyers had to pay all the taxes. The reverse is true for the São Paulo fair. And there is no certainty that the temporary tax benefits will be granted each year as fair organisers must file a request with government authorities for each event. 

The Brazilian Association of Contemporary Art (Abact) is seeking a permanent change in the tax situation at a federal, rather than state, level. “The Brazilian art market is prosperous, but we are not considered part of the economy,” says Alessandra d’Aloia, a partner at São Paulo’s Galeria Fortes Vilaça who was one of the founders of Abact in 2008.

The non-profit membership group wants to completely remove the 4% federal import tax and to permanently half the 9.25% federal VAT rate. This would reduce import duties on works of art to between 23% and 24%, depending on state tax, says the São Paulo-based lawyer Celso Grisi of the firm GDALaw.

Abact has allied itself with segments of the entertainment industry and expects to have an answer before President Dilma Rousseff leaves office in two-and-a-half-years time. The president “is trying to lower taxes in Brazil to make it more competitive, and one of the areas that she is considering is the creative industry [that] puts software, art galleries and entertainment together,” Grisi says. The decision will have a direct impact on the trade: “Whatever we do going forward will be subject to the sales import tax situation,” says Gagosian director Victoria Gelfand-Magalhães.

Meanwhile, the country’s economy is showing signs of slowing. Since around 2003, Brazil’s wealth has been increasing. Its middle classes have grown by around 35 million, and its spending power risen in tandem. In 2010, the country’s growth rate was 7.5%, the highest in 25 years. Based on its 2011 figures, Brazil, which is the world’s ninth largest oil producer, overtook the United Kingdom to become the world’s sixth largest economy. But Brazil is struggling to maintain its momentum. This year the economy has barely grown at all, managing a paltry 0.1% in the first quarter and 0.4% in the second, despite earlier predictions by the government of a 4% economic expansion in 2012. The country “has quietly emerged as the economic laggard of the Bric countries,” according to a recent article in the Atlantic. The headline read: “Party’s over: how did Brazil’s economy get so bad so fast?” It blames the disappointing economy on the country’s unresolved structural problems, convoluted taxes and complicated regulations.

The government is trying to tackle some of the issues and is spending heavily on infrastructure in advance of the 2014 football World Cup and the 2016 Olympic Games taking place in Rio de Janeiro. Brazil is investing an estimated $470bn of public and private funds in infrastructure projects including the construction of at least five museums in Rio, an attempt to create a rival to the established institutions in São Paulo.

Some in the art trade see Brazil as the first step in a long-term plan. White Cube gallery director Tim Marlow acknowledges that “it would be disingenuous to say that the high import tax rate will have no effect on the sale of Western art in Brazil,” but adds that its new gallery is part of “a much longer-term strategy; it’s a gateway to a region.”

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