Brazil seeking to align transfer pricing regime with OECD norms

by Francisco Lisboa Moreira, Bichara Advogados, São Paulo

Brazilian and OECD officials have launched a joint 15-month project to review thoroughly Brazil’s international tax and transfer pricing legislation to better align it with OECD guidelines and recommendations.

The project, announced last week, has been undertaken in relation to Brazil’s formal request to join the OECD, made last May, and will likely to result in significant, taxpayer-favorable, changes to Brazil’s transfer pricing system.

As Brazil has always been a frontrunner in source-oriented taxation, it will be interesting to watch these new developments.

A meeting held in Brasilia last Wednesday, attended by the Ministry of Finance’s Henrique Meirelles, showed strong signs of cooperation.

According to an OECD note:

“The 15-month work programme will analyse the legal and administrative framework behind the Brazilian transfer pricing system, as well as its implementation. It will examine strengths and weaknesses in the Brazilian approach while exploring options for greater alignment with the OECD’s internationally accepted standard, the OECD Transfer Pricing Guidelines, which would be an important element of any future process of accession to the Organisation.”

Further, Brazil’s ambassador of the United Kingdom, during a recent event, said that the UK will make available a fund of 80 million Sterling Pounds to support greater harmonization of Brazilian international tax legislation and OECD principles and guidelines.

During the meeting, OECD Secretary-General Angel Gurría stated that Brazil need not implement all OECD system and policies, but must reduce the gap between the different systems – reducing double-taxation and compliance costs for taxpayers.

Brazil/OECD cooperation

Brazil has contributed to OECD working groups on international taxation matters in the past.

The best example was Brazil’s lengthy participation in the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, where Brazil promoted its international tax position in some of the final reports, such as the Final Report to Action Plans 8-10 (Aligning Transfer Pricing Outcomes with Value Creation).

That report states:

“Brazil provides for an approach in its domestic legislation that makes use of fixed margins derived from industry practices and considers this in line with the arm’s length principle. Brazil will continue to apply this approach and will use the guidance in this report in this context. When Brazil’s Tax Treaties contain Article 9, paragraph 1 of the OECD and UN Model Tax Conventions and a case of double taxation arises that is captured by this Treaty provision, Brazil will provide access to MAP in line with the minimum standard of Action 14.” (Note 1, page 185 at OECD (2015), Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10 – 2015 Final Reports, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris.)

From a transfer pricing perspective, some aspects of Brazilian transfer pricing law are clearly contrary to OECD principles, like Brazil’s fixed margins approach for the resale price method and the maximum royalty rates for deduction and payment to related parties abroad.

 Fixed margins, royalty deductions

As mentioned in the note to BEPS Action Plans 8-10 reports, though, Brazil believes that fixed margins already respect industry practices and provide certainty to taxpayers. While the former is definitely true, taxpayers in Brazil have significant complaints about how the particularities of their situations are not respected in this “one size fits all” approach.

Historically, however, Brazilian legislators have always resisted broad, general, tax rules, seeking to reduce avenues for taxpayer abuse and provide Brazil’s limited tax enforcement workforce with objective criteria to more easily review and implement transfer pricing adjustments.

In addition, Brazil’s percentage limitations on royalty rate deductions have been fixed since 1958; although, recently, the Brazilian Trade and Patent Office (INPI) stopped reviewing royalty rates in IP contracts as a prerequisite to remit, leaving it to taxpayers to apply, instead of rejecting registration of contracts.

The situations above are just examples. As Brazil always took a capital importing approach to tax policy, many other situations will require a careful and thorough review.

As such, several scholars in Brazil have predicted, and we agree, that it is likely that Brazil will retain its fixed margin approach, but allow taxpayers that possess documentation to apply a lower profit margin for the resale price method, should the economics and value chain analysis provide for it.

The next 15 months will be marked by great expectations from both sides.