Temu’s LATAM expansion stymied by Brazil’s complex tax policies

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After much preparation, PDD-owned Temu launched its Brazil site on June 8, marking the company’s 70th international site.

Temu’s entrance into the Brazilian market is cause for excitement. For one, Brazilians are known for their bargaining skills, consonant with Temu’s penchant for promotions like deep discounts, free shipping, and more.

However, a day before Temu’s launch, the Brazilian government approved a proposal to impose a 20% tariff on goods purchased from overseas platforms valued at less than USD 50. Previously, these low-value purchases were exempt from taxes, but will now face a 20% import tax as a result of the regulation. Goods valued over USD 50 will continue to be taxed at the unchanged rate of 60%.

Notably, goods valued under USD 50 shipped into Brazil by overseas platforms will be subject not only to the new import tax, but also an additional 17% ICMS sales tax. According to 36Kr, the Brazilian authorities have long maintained a system of high import and consumption taxes for protectionist reasons. Despite this, Brazil has been the fastest-growing market in Latin America over the past few years. In 2022, its e-commerce sales revenue increased by USD 8.1 billion compared to the previous year. In terms of scale, Brazil is the largest national market in the region, generating USD 49.2 billion in e-commerce sales.

Meanwhile, Payments and Commerce Market Intelligence (PCMI) predicts that, from 2023 to 2026, Latin America’s e-commerce growth rate will hover around 21%—the highest in the world—highlighting its immense potential, with Brazil standing out in particular. Thus, despite fluctuating and changing tariff policies, cross-border e-commerce platforms persist in competing for a share of the market, and Temu is no exception.

Sword of Damocles

In mid-May, various media outlets reported that Temu had been certified under a Brazilian tax benefit program, which would have exempted goods valued at less than USD 50 from import duties. However, 36Kr found that the government’s stance changed afterward, and by the time Temu officially launched, the tax benefit was no longer valid.

In fact, as early as April this year, Brazil’s finance minister Fernando Haddad announced that the government would end tax exemptions for cross-border goods valued at less than USD 50. This decision was temporarily suspended due to strong consumer opposition.

The Brazilian government’s attitude toward this tax exemption policy has been inconsistent. In April 2023, Brazil’s Ministry of Finance announced the cancellation of the tax exemption for customer-to-customer (C2C) goods valued at less than USD 50, aiming to protect the market competitiveness of local e-commerce platforms and sellers. Two months later, due to fierce opposition, the ministry said that it would annul the decision. Months later, in August last year, it implemented a new tax compliance program, allowing participating e-commerce companies to continue enjoying the tax exemption for cross-border purchases that are valued at less than USD 50.

Currently, it is unclear whether the Brazilian government will make new adjustments to the tariff policy on low-value imports. Globally, the trend of reducing tax exemptions for small purchases is prevalent. Previously, Reuters reported that Germany supports the tax exemption for foreign goods valued under EUR 150 (USD 160.4) in the European Union. South Africa also plans to impose a 45% import tax and VAT on low-value, small-batch clothing orders from platforms like Temu starting in July.

In April, the US Department of Homeland Security stated that de minimis shipments, which are low-value purchases usually sent directly to US consumers from China, would face stricter scrutiny in the future. For cross-border e-commerce, the de minimis exemption policy has been the starting point for many sellers. Changes to this policy will significantly impact many Chinese sellers. In 2016, the US government adjusted the tax policy for imported goods, raising the threshold for small package imports from USD 200 to USD 800. This means that goods valued at less than USD 800 imported into the US are tax-exempt.

The USD 800 threshold covers most categories of Chinese cross-border small packages, including 3C products, clothing, footwear, daily necessities, small appliances, and more. From 2012–2020, data from the US customs shows that the total value of small goods imported into the US soared from USD 40 million to over USD 67 billion. Other data indicates that more than 10% of goods exported from China to the US benefit from the USD 800 de minimis policy, whereas a decade ago, that proportion was much lower than 1%.

As Temu and Shein aggressively expand in the US market, over a billion parcels were sent to the US in 2023, most of which came from China. The Wall Street Journal said that about one-third of these de minimis shipments originated from Temu and Shein, according to a report published last year by the Chinese government’s House Select Committee.

Since 2022, US lawmakers have been closely monitoring Chinese cross-border products entering the US under the de minimis exception. Lawmakers have repeatedly proposed legislation to adjust the policy, viewing it as a trade loophole that harms American manufacturers. The announcement in April to strictly inspect de minimis parcels entering the US may only be the beginning.

For consumers in various countries, changes to such tax exemptions will significantly weaken the cost advantage of cross-border products compared to local alternatives, making consumers less likely to favor Chinese products.

Betting on the e-commerce market in Latin America

A day before Temu launched in Brazil, the Brazilian Senate voted to pass a proposal to impose a 20% tariff on cross-border goods valued at less than USD 50. The law requires immediate implementation upon effect, retroactively applying to purchases made before the new tax rate was announced but not yet arrived in Brazil. For Temu, which is new to the Brazilian market, the tax burden is heavy but unlikely to drive it out. After all, Temu is a latecomer, and the market is only midway through its growth stage.

According to PCMI, the Latin American e-commerce market is developing rapidly and expected to exceed USD 509 billion in value in 2023, up 27% over 2022 and with a CAGR of 23% through 2026. Additionally, although the annual growth rate of Latin American e-commerce will slow compared to the growth rates exceeding 35% in 2021 and 2022, the growth trend remains robust. The region’s internet penetration rate has surpassed 85%, and e-commerce penetration has reached 66%.

The report shows that convenience, affordability, and speed are important factors in Latin American consumers’ online shopping decisions. Specifically, 70% of consumers pay more attention to product prices and description accuracy when shopping online, and 60% care about the discount strength of products. The median price of various categories in Latin America is concentrated between USD 30–40, with the median price of the top 1,000 products being USD 32.17.

Despite the regulatory rollercoaster, Chinese products remain highly favored by Latin American consumers. According to data from JPMorgan Chase, most cross-border goods in Latin America come from China, the US, and Japan, with Chinese goods accounting for as much as 62%, about 2.6 times that of the US. Compared to mature e-commerce markets like China, the return rate of e-commerce purchases in Latin America is relatively low. According to 2022 data from Statista, the return rate in the Chinese market is 66%, while in Brazil, it is only 31%. Another report from the Mexican Association of Online Sales (AMVO) stated that the local return rate for e-commerce products is only 20%.

Consumers’ desire for cost-effectiveness and low return rates underline the potential of the Latin American e-commerce market. The performance growth of Latin American e-commerce platform Mercado Libre is a prime example. Its financial report shows that, in the fourth quarter of 2023, Mercado Libre’s revenue reached USD 4.261 billion, a year-on-year increase of 42%, the fastest quarterly growth since the third quarter of 2022. Its GMV reached USD 13.5 billion, a year-on-year increase of 29%, the highest level since the second quarter of 2021.

Brazil and Mexico account for half of the Latin American e-commerce market. Brazil also ranks as one of the top regions for per capita internet usage time on mobile devices, only behind China, India, and the US. As the usage time of mobile internet grows, Brazil’s online shopping usage time has also increased to the third highest globally, continuously driving the penetration rate of e-commerce in Latin America, based on data as of 2021.

Before opening the Brazil site, Temu’s online business had already entered Chile, Colombia, Peru, Mexico, Uruguay, Ecuador, the Dominican Republic, Panama, and Puerto Rico, covering major national markets in the Latin American region. Brazil is clearly a country Temu cannot miss on its path to globalization. However, the rapid pace of policy change will test the company’s ability to adapt comprehensively and accordingly.

KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Leslie Zhang for 36Kr.

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