BRAZIL - Transfer pricing joint project with OECD
In February 2018, the OECD and Receita Federal do Brasil (RFB - Brazilian Tax Authorities) launched a joint project to analyse the Brazilian Transfer Pricing rules and compare them with the OECD guidelines, with the objective of identifying the similarities and existing gaps of the Brazilian rules. The 15-month project was concluded in July 2019 and, among other conclusions, outlined possible options to be explored for Brazil’s alignment with the OECD guidelines.
It is important to remember that the current transfer pricing legislation, in force since 1996, was created in an economic scenario many years ago, and was designed for an economy that essentially transacted goods and merchandise. In view of the delicate fiscal situation of the country with external debt, and having recently emerged a period of inflation, a low administrative and high predictability solution was sought.
Over 20 years later, some multinational entities with a global transfer pricing policy in place following the OECD guidelines are facing a double taxation scenario due to the mismatch of the Brazilian legislation with the rules followed by the most relevant economies in the world.
OECD/Brazil Joint Project structure and outcome
According to the OECD/Brazil Joint Statement, the work programme was structured in three stages:
- Preliminary analysis of the legal and administrative framework of Brazil’s transfer pricing rules;
- Assessment of the strengths and weaknesses of Brazil’s existing transfer pricing rules and administrative practices; and
- Options for alignment with the OECD transfer pricing standard.
The assessment identified 30 gaps between the Brazilian rules and OECD guidelines. It also revealed that 27 out of these 30 gaps increased the risk of double taxation, and therefore hindered international trade and investment. Significant weakness was also reported due to the absence of special considerations for complex transactions (Eg: transfer of intangibles, business restructuring, etc.) and in the fixed margin approach.
In 2018, the RFB expressed a desire for the transfer pricing rules to be simple and practical for the taxpayer and public administration, to ensure legal certainty, avoid double taxation and non-taxation. The assessment recognised that the local rules had some attractive qualities with respect to simplicity (Eg: the absence of comprehensive comparability including functional and risk analysis, the freedom of selection of the method, the use of the fixed margins approach, etc.). However, complexity arose from other existing features such as item-per-item approach and documentation for cost plus.
The RFB stated that the project’s conclusions will be evaluated by the Government, and the idea is that it will result in effective changes in the current legislation, with the objective of aligning the local rules to the OECD guidelines. As the changes demand planning by both Government and taxpayers, the RFB believes that these changes should not be included in the tax reform proposal to be sent to the Congress this year.
In view of this statement, it is possible that the RFB will opt for gradual implementation of the new and/or amended transfer pricing provisions over a longer period, instead of an immediate alignment to the OECD rules.
In the coming months the RFB will be working to propose the expected changes in the legislation, so that the Brazilian rules are in line with the global economy and cease being an obstacle to attracting foreign investment to the country.
Our expectation is that the fixed margin approach will still be available in the legislation, but with a greater range of percentages, and incorporating the OECD’s internationally accepted transfer pricing standards, mainly to avoid double taxation.
We now await the next chapter of Brazilian transfer pricing legislation.