Brazil may be ready to harvest the fruits of a joint project with the OECD as it considers two options to bring its transfer pricing regime in line with OECD standards.
In a July 11 joint statement at the conclusion of the OECD’s transfer pricing project with Brazil, the OECD noted key findings from the three-stage work program. The program resulted in a stage 1 report comprising an initial analysis of Brazil’s legal and administrative framework for its transfer pricing rules, a stage 2 report assessing the Brazilian system’s strengths and weaknesses, and a stage 3 report laying out options for its alignment with the OECD transfer pricing standard.
“The time is ripe to make political decisions regarding whether to align and how this alignment should occur,” the statement says, adding that the three reports will not only give Brazil relevant technical analyses, but could also serve as the foundation for lawmakers to consider the best way forward.
The OECD and Brazil started the project in February 2018 to analyze Brazil’s cross-border tax rules and assess options to conform its transfer pricing system to the OECD transfer pricing guidelines. The joint effort began after Brazil expressed interest in becoming an OECD member in May 2017; the OECD Council is still considering whether to start Brazil’s accession process.
The stage 1 report took stock of the Brazilian transfer pricing system and how it interacts with the arm’s-length standard, and it identified points at which the OECD and Brazilian transfer pricing approaches diverge. Specifically, it examined Brazil’s primary and secondary transfer pricing laws and administrative processes and involved collecting input on the country’s transfer pricing framework through questionnaires.
The stage 2 report provided a more thorough analysis and comprised a “gap analysis,” which examined how Brazil’s system measured up to the main elements of each chapter of the OECD’s transfer pricing guidelines.
The analysis pinpointed 30 divergent issues in Brazil’s regime, although the statement does not elaborate on the specific issues identified. Twenty-seven of those issues were found to increase the risk of double taxation, the statement says, adding that several created base erosion and profit-shifting risks, which could lead to revenue losses.
Moreover, “the assessment revealed significant weaknesses in the Brazilian transfer pricing system, notably because of the absence of special considerations for more complex transactions,” the statement says, pointing to intragroup services transactions, the use or transfer of intangibles, and transactions involving corporate restructurings as examples.
The assessment also highlighted other weak points in Brazil’s transfer pricing regime, including the fixed margins approach, the statement says. Moreover, it found that Brazil’s transfer pricing system provides tax certainty from a domestic point of view, but gives rise to “significant tax uncertainty” internationally.
Brazil’s system provides ease of tax administration and compliance, according to the statement, noting that it is often described as practical and predictable, at least from a domestic perspective. However, complexity still arises in areas such as the item-per-item approach, the strict comparability standard, and documentation requirements, according to the statement.
The stage 3 report offered two separate options that would put Brazil’s transfer pricing system in full alignment with the OECD’s transfer pricing guidelines: immediate alignment with the guidelines, or a gradual phased-in approach.
The latter option could adopt different approaches, but the most reasonable could be a progressive transition in which taxpayers are brought into the new regime on a short-term basis, according to a specific threshold, starting with the largest taxpayers in Brazil, the statement says.
Each option considers ways in which the existing simplification measures in Brazil’s system can be maintained, such as the fixed margins approach with tailored safe harbors and rebuttable presumptions. But there are some critical outstanding issues, which means Brazil must replace or amend some of its rules. Therefore, the government should create a “blueprint or implementation roadmap” to help the political decision-making process along, the statement adds.
Full Steam Ahead?
The joint statement was published at the conclusion of a conference hosted by the Brazilian National Confederation of Industry (CNI) July 11, in which representatives from the OECD, the Federal Revenue of Brazil, the IRS, and other bodies gathered to discuss the outcomes of the project with business representatives and other stakeholders.
Marcos Cintra, revenue secretary at the Federal Revenue of Brazil, said he anticipated that the government would do a merger of the two transfer pricing models, and that Revenue would work on ensuring that the merits of both are incorporated and deviations are eliminated, according to a July 11 CNI release. Although much work remains to be done, it will help support Brazil’s request for OECD membership, he said.
Ian Frew, chargé d’affaires to the United Kingdom in Brazil, said the United Kingdom supports Brazil’s bid for OECD membership and has been working at both the technical and political levels to support that goal, according to the CNI release.
Tax reform is likely to be next on the government’s agenda once Brazil’s pension reform is approved, according to the CNI release.
It’s significant that Brazil has decided to consider the two options, according to Grace Perez-Navarro, deputy director of the OECD’s Centre for Tax Policy and Administration, who presented at the CNI conference. “What they are saying is, 'We are going to choose one of these two options to move ahead,' so that’s huge news,” she told Tax Notes. The government's next step is to choose one of the options, while the OECD will continue to support the next phase of work, which is the design, transition, and implementation of a new system, she noted.
The OECD Council is still deciding whether to grant Brazil’s request to begin the accession process, which will likely be revisited after September, Perez-Navarro said. It certainly seems like Brazil is moving toward full alignment with the OECD transfer pricing standard, “but the question is how and when,” she said.
Changes to Brazil’s transfer pricing system will take some time, according to Ana Claudia Utumi of Utumi Advogados in São Paulo, who attended the conference. The OECD made it clear that Brazil would need to make major changes if it wants to start the accession process, so she speculated that Brazil would adopt a phased-in approach.
“I would expect significant changes within two to three years, rather than . . . next year,” Utumi told Tax Notes. However, there are some legislative issues that may need to be ironed out, such as a law prohibiting differential treatment of taxpayers, which could affect a taxpayer-based phase-in process, she said. It’s also likely that Brazil will start allowing transactional methods, which would be huge progress, Utumi added.
Business is certainly looking at the project with optimism, according to Utumi. “It’s a sure thing that change is coming,” she said.