Why retailers criticize Shein, Shopee and AliExpress for ‘digital smuggling’ in Brazil

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The advance of international digital stores, mainly Asian ones, leads Brazilian businessmen to charge the federal government for measures to combat supposedly unfair competition and tax evasion. Companies say they follow local laws and regulations. Apps from Shopee, Shein and AliExpress Getty Images via BBC The arrival of Luiz Inácio Lula da Silva (PT) to Planalto led Brazilian businessmen to renew their efforts to try to cope with the advance of international retail platforms, especially Asian ones, in Brazil . Complaints did not give results in the management of Jair Bolsonaro (PL), but the change of government opened a window of opportunity for Brazilian businessmen to demand measures once again. Both sides of this dispute have already had meetings with the Minister of Finance, Fernando Haddad (PT), to present their arguments. Domestic retailers say the competition is unfair because international platforms don’t pay the same taxes and labor costs and are therefore able to offer lower prices. They also accuse competitors of practicing “digital smuggling” and tax evasion, by allegedly taking advantage of loopholes in the rules and defrauding sales to avoid charging import taxes. This would generate, by the accounts of Brazilian businessmen, a billionaire loss in revenue for the country. The platforms, which face similar charges in countries including the United States, South Africa and India, say they comply with local laws and regulations. They also claim that their services enable Brazilian consumers to buy products they would not otherwise have access to, at accessible prices, and that they have invested in the development of the national retail and e-commerce market. This is an especially sensitive issue in Brasília at this moment, when the Lula government needs to deal with a fiscal gap and get the money needed to get campaign proposals off the ground. The new government has stated that one of its priorities for this year is a proposal for a tax reform, which should start with changes in consumption taxes. The expectation of Brazilian businessmen is that measures dealing with digital retail will be announced soon. The Ministry of Finance confirmed to BBC News Brasil that it is analyzing the issue. “The proposals will be presented after internal validation by the government,” the folder said in a note. The rise of Shein international retailers has become a global retail phenomenon Getty Images via BBC The problem is not new. In recent years, Brazilian companies have seen foreign digital retailers, especially China’s AliExpress and Shein and Singapore’s Shopee, grab a share of the market with much cheaper products. Alberto Sorrentino, specialist retail consultant and founder of Varese Retail, explains that this has happened in Brazil and elsewhere as a reflection of trade agreements closed between countries. These agreements facilitate cross-border electronic commerce, or cross-border, in market jargon, and the sale of products on these platforms directly to international consumers. Sorrentino points out that Brazil and China signed a bilateral agreement in 2017 and that Chinese platforms took advantage of it. But the same movement did not occur in the opposite direction, despite Brazilian companies having the same opportunity at hand to sell directly to Chinese consumers. “But they didn’t have the appetite, and the pandemic got in the way with China’s shutdown. The fact is that Chinese companies invested. Not only them, but Amazon as well, Shopee started to attack emerging markets and, more recently, Shein, which has become a global phenomenon”, says Sorrentino. International platforms now have websites and apps in Portuguese, assist Brazilian consumers, improve logistics to shorten delivery times, run advertising campaigns and start offering products from local vendors. “This increased confidence in these platforms, and the consumer started to like and become attached to them. Then, it escalated very quickly”, says Sorrentino. Cross-border purchases more than tripled between 2018 and 2021, according to the Institute for Retail Development (IDV), an association of companies in the sector. Data from consultancy NielsenIQ Ebit indicate that these transactions went from R$ 7.7 billion to R$ 36.2 billion in this period. IDV calculates that cross-border already represented 16.5% of retail in Brazil in 2021, and Sorrentino says that they exploded from that year onwards with the growth of e-commerce, which became the alternative for shopping with circulation restrictions imposed because of covid-19. Transactions surpassed 36 billion in 2021, according to data from NielsenIQ Ebit, and the estimate is that they will have reached 50 billion in 2022. Shein, Shopee and AliExpress are the three main companies in this market in Brazil today, points out Sorrentino. “These are important, very large numbers. This started to represent brutal competition for Brazilian companies and now generates these legitimate complaints of lack of isonomy and competitive disadvantage, because there is not the same tax treatment in these transactions.” Complaints from national retailers Luciano Hang, owner of Havan, says that international retailers ‘smuggle’ EPA via BBC Brazilian retailers say that, in addition to having to bear taxes and labor costs that international competition does not pay, platforms would be using a loophole in the law to avoid the collection of taxes. “In the past, goods that entered Brazil without paying taxes came from Paraguay. Paraguay switched to platforms after international sellers, mainly from China, discovered a tax vacuum,” says federal deputy Marco Bertaiolli (PSD-SP), president of the Frente Parlamentar Mista do Empreendedorismo. Purchases made between individuals worth up to US$ 50 (R$ 262) are exempt from import tax by the Federal Revenue Service. The rule was created in 1980, and in 1999 the limit, which was previously $100, was cut in half. Brazilian businessmen say that platforms take advantage of this rule to circumvent Revenue control and defraud purchase information on delivery packages, underinvoicing the prices charged or informing that purchases were between individuals. Or that, if a customer buys several products on a website or application, they arrive in Brazil in individualized packages and prices, below the exemption limit. “In this rule, it is not explicitly said that it can accommodate business-to-person transactions and sales of e-commerce products, but that is not regulated either, so it is in this regulatory limbo,” says Sorrentino. Enforcement is another problem that national retailers point out. A report produced by businessman Luciano Hang, president of the Havan chain, states that less than 2% of products that pass through customs are inspected. BBC News Brasil questioned the Ministry of Finance about this, but the folder did not address the matter in the response sent to the report. Hang is one of the businessmen leading the charges against international retailers. He invited Ricardo Patah, president of the General Union of Workers, one of the main union centers in the country, for a meeting in early March. Patah says that, as he was agreed with Hang, he delivered the report to the Minister of Labor, Luiz Marinho (PT). “I gave him a copy and, if it’s with Lula, I’m going to give him one, because we have to worry about everything that could harm our members”, says Patah. Hang’s report says that Brazil failed to raise BRL 60 billion last year because of “digital smugglers” and estimates that the value will exceed BRL 100 billion in 2023. The IDV states that the damage was up to BRL $48 billion in 2020 and could reach R$99 billion in 2025. “We are in favor of free competition, it is the healthiest thing. Cross-border has been growing at galloping numbers, double digits, which is good, but we are starting to see that they are not complying with internal laws”, says Jorge Gonçalves Filho, president of IDV. He claims that the institute started making purchases on these platforms to prove that there are irregularities and that, “in most” cases, the taxes due would not be paid. “We find that these products come mainly from China as from individuals, but often they are not. You buy the product and it comes underpriced, without the correct import documents, and that comes in here in a huge amount”, says Gonçalves Filho. What International Retailers Say International e-commerce platforms say they’re doing nothing wrong and that they’re up to standard. Shopee, which has been selling in Brazil since 2020, adds that international transactions are now the minority of its business here. More than 85% of purchases in the country are made from local sellers, according to Felipe Piringer, marketing director for Shopee in Brazil, and 90% of sales made by the 3 million Brazilian sellers on the platform are made by companies. “Our cross-border operation is very small, and we follow Brazilian laws. Therefore, we do not agree to be quoted. There is a difference between the origin of a company and its purpose, which is the local market in our case. Not all companies that come from Asia are the same”, says Piringer to BBC News Brasil. AliExpress, one of the pioneers of this movement in the market, with 12 years of operation in the country and a website in Portuguese since 2013, claims that it requires its sellers to follow the rules of the Brazilian market, that it guides buyers in this regard and that it cooperates with the IRS. “Cross-border platforms allow access to millions of unique products that are not available in the country at affordable prices and that the consumer would not be able to access otherwise”, says Bueno. Shein, which has been in the Brazilian market since 2020, said in a note that “its unique production model, on a small scale and with guaranteed demand, produces quality and affordable products”. The company also stated “that it has also made an effort to establish partnerships with several suppliers and local vendors”. What national retailers want Jorge Gonçalves Filho says that national retailers do not want platforms to be prohibited from selling in Brazil, but that they act under the same conditions as Brazilian companies. “We heard that the platforms are going to invest billions in the country and we think it’s sensational, but we want equal competition, because the Brazilian industry and retail are being harmed and losing market”, says the president of IDV. His proposal is that the collection of taxes be made at the time of sale by the platforms, which would be responsible for collecting the amounts due from customers. “It doesn’t need a specific law, but rules and regulations”, says Gonçalves Filho. The president of the IDV says he discussed the matter with vice president Geraldo Alckmin (PSB), minister of Development, Industry, Commerce and Services. “He understood our proposal and asked for action.” This is not the first time that the industry has asked the federal government to do something about it. In 2020, the Federal Revenue rehearsed a response to these demands and said it would launch a provisional measure with new rules for this sector. But former president Jair Bolsonaro vetoed the idea. “It was not the right time for a measure like that, which was not friendly to the population, but it is only unpopular in the medium term, because it is good for the country and for job creation”, says Gonçalves Filho. Bolsonaro justified himself at the time, saying that the way out would be greater supervision and not more taxation. But retailers don’t agree. “About 500,000 packages a day enter Brazil through customs, it is a proportionate volume for the inspection structure. You can’t imagine that we’re going to have enough people to check package by package”, says Marco Bertaiolli, from the Frente Parlamentar Mista do Empreendedorismo. The deputy argues that tax collection should be a responsibility of the platforms, but says that the government also has the alternative of relieving national retailers to balance the game. “There is no elaborated model, but the Treasury and the Revenue are studying and should present solutions for this digital smuggling in the coming days or weeks. Whatever the solution, we defend isonomy. What we cannot do is have two scales and two measures and leave the industry vulnerable.”

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