Tax authorities unveil plan to align Brazil's transfer pricing rules to international standard
The OECD and Brazil's tax authorities held a joint event on 12 April 2022 in Brasília to present the key features of Brazil’s proposed new transfer pricing system that will be aligned to the OECD standard.
During the event, organised by Brazil’s Federal Revenue, the Ministry of Economy, the OECD, and the U.K. government, Sandro de Vargas Serpa, special assistant secretary at the Federal Revenue of Brazil, confirmed that the government is working on legislation to adopt a new transfer pricing regime, and that consultations are ongoing.
Welcoming this important step forward, Brazilian Finance Minister Paulo Guedes said: “As we successfully converge with the OECD standard, we are not only celebrating a key step forward but also addressing two main challenges: the harm of excessive taxation and double taxation that prevent investments; and the damage of tax avoidance through the transfer of profits to locations providing for a more favorable taxation. This is fundamental because it allows us to gain in efficiency, with effective allocation of investments across this global community that is embracing itself through the convergence of these practices.”
Brazil’s tax authorities and the OECD have been working together since 2018 to align Brazil’s domestic transfer pricing rules with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations as part of Brazil’s entrance process into the OECD.
Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, participated in the presentation, and stated “This alignment is a transformational change that will support Brazil’s development objectives,” and added that “It will facilitate the smooth implementation of the two-pillar solution to address the tax challenges of the digitalisation of the economy, with significant revenue potential for Brazil. We stand ready to provide support in making the new system operational.”
Proposed Transfer Pricing System
The arm’s length standard, currently absent from Brazilian transfer pricing legislation, will be the anchor of the new system. Transfer pricing rules are expected to be applicable to all controlled transactions.
Other features of the proposed regime include the following:
- Delineation of the actual transaction would be based on key economic comparability factors – contractual terms, functions assets and risks, characteristics of property or services, economic circumstances of parties to a transaction and the market.
- The new transfer pricing system is expected to recognize all OECD methods, including the transactional profit methods – the transactional net margin method and the transactional profit split method. The use of “other methods” would be accepted in specific instances, such as valuation methods in the case of unique and valuable intangibles.
- The new regime is also expected to include criteria for the selection of the most appropriate method.
- The comparability analysis will become the cornerstone of the new system, and guidance will be provided on the reliability of data on comparable uncontrolled transactions, the appropriateness and correctness of comparability adjustments and the arm’s length range and its application.
- Taxpayers will continue to make adjustments at the end of a period, but the tax administration will be authorized to make primary adjustments in the case of non-compliance with the arm’s length standard. Secondary adjustments will be made to address the consequences of profit shifting, and double taxation will be eliminated through corresponding adjustments and relying on the mutual agreement procedure.
- In a significant shift from the current rules, the new regime will no longer rely on rigid formulas for the transfer pricing of commodities. Rather, the new system will provide principles-based guidance focused on the ultimate objective of capturing the commodity’s market value.
- The new regime will address the issue of intangibles, removing a gap in the current system, which led to the frequent transfer of intangibles out of Brazil without proper compensation. The new legislation will include a definition of intangibles for transfer pricing purposes, guidance on the application of fundamental principles in the context of intangibles, and guidance on how to deal with hard-to-value intangibles.
- The new regime will recognize the importance of intragroup services through specific provisions on issues such as the situations in which it is appropriate to charge for a service and those in which it is not (shareholder activities or duplicative services, for example), centralized service operations and low-value-adding services.
- Cost contribution arrangements – both development and services CCAs – will be addressed.
- Principles-based guidance to address the transfer pricing considerations in business restructurings and to determine an appropriate compensation in those cases will be provided.
- Preventing disputes and enhancing certainty are top goals, including through the possible introduction of safe harbours and advance pricing agreements.
- Transfer pricing documentation rules will follow international best practices, specifically, the three-tiered approach to documentation that entails the filing of a master file, a local file and a country-by-country report.
The way forward includes engagement with stakeholders and consultations with the sectors and industries affected by the new law, followed by a period to process any input received. A legislative package would then be finalised and submitted to Congress. No specific time frame has been set, but it seems likely that Brazil’s transfer pricing rules will (finally) align with the OECD guidelines.