Officials discuss aligning Brazil’s transfer pricing laws with OECD standards

By Francisco Lisboa Moreira, Tax partner, Bocater Advogados, São Paulo

On Wednesday, a public joint-meeting between OECD and Brazil’s tax authority officially launched the report “Transfer Pricing in Brazil: Towards Convergence with the OECD Standard.”

This report marks the conclusions of the project launched in February 2018 to examine the proximities and differences between the two transfer pricing regimes (Brazil’s and the OECD’s).

According to the document released at the same date, the main objective of the project was to assess the strengths and weaknesses of the Brazilian transfer pricing framework and to point out the possible options for reaching alignment with the OECD standards.

Let’s recap that another joint-meeting held in Brasília on July 11 marked the finalization of the project. After that, both parties had produced a comprehensive set of reports and evaluations, which was then prepared for publication, marking the conclusion of the assessment work.

Several tax directors from the largest Brazilian MNEs and foreign-based MNE subsidiaries attended the meeting, as well as tax professors and academics.

The report points out the key findings of the project, namely: that there are a large number of gaps in Brazilian tax law that result in double taxation or that create base erosion or profit shifting risks or the loss of tax revenue; that the current system lacks horizontal fairness and provides planning opportunities; that the tax administration and compliance of the current system are felt only domestically; and that the system lacks domestic certainty and creates international uncertainty.

Moreover, special transactions are not covered properly, including the transfer of intangibles, intra-group services, transactions comprising business restructurings, cost contribution arrangements, and attribution of profits to permanent establishments.

Besides exploring the findings, the report also points out the options for alignment, and the two under consideration are: full vs. gradual.

A partial alignment or a dual system approach was also rejected. The report points out that gradual alignment seems to be the more rational approach, providing time and care for the designing of the legislation.

During the event, it became clear that the Brazilian tax authority, the Receita Federal, changed its mindset as they explained their evaluation of the country-by-country reports being received and that there is profit being shifted from Brazil and not taxed elsewhere.

One example mentioned is the ease to transfer IP ownership at a cost plus 15% without a market value to challenge the transaction or a commensurate with income provision, such as the existing one under section 482 of the US Internal Revenue Code.

The general perception, from this point on, is that Brazil is favoring alignment, the alignment will be gradual, and it should take at least three years for the necessary legislative changes to be put in place..

However, some tools already in place, such as the utilization of mutual agreement procedures, and others on track, such as the reviewing of the outbound royalty deduction limitations, will show the market the speed of the alignment to take place.