Brazil’s entry into the OECD and new rules on transfer pricing

Brazil’s entry into the Organization for Economic Cooperation and Development (“OECDE”) has been on the agenda of a number of studies and debates over the past few years and, in order to expedite this process, some measures are being adopted, seeking the alignment of the Brazilian tax treatment with OECD’s standards.

One such measure was the determining the gradual reduction of the Tax on Financial Operations-Foreign Exchange to zero until 2028, so as to eliminate major obstacles for operations with foreign currency in Brazil.

The agreements to avoid double taxation signed by Brazil today will possibly be revisited, so there is greater compatibility with OECD’s provisions, and so the enforcement of the rules is carried out in a cohesive manner by the administrative and judicial spheres.

Recently, however, the focal point involves the new transfer pricing rules in force in Brazil, a project that was announced on April 12, 2022 by the Brazilian Federal Revenue Service (“RFB”), with the Minister of Economy, Paulo Guedes, and OECD’s Center for Tax Policy and Administration, Pascal Saint-Amans.

According to the RFB, Brazil is significantly misaligned with the standards adopted by OECD’s member-states, which impairs foreign investments, as well as the enforceability of tax treaties, particularly where the enforcement of rules that involve mutual agreement to solve the issue involving transfer pricing (article 9 (1) of OECD’s Model Tax Convention) is required, considering that the documentation and rules adopted in Brazil are substantially different that those adopted in the rest of the world.

Moreover, the RFB recognized that the current treatment of fixed margins does not consider the actual economic aspects of the transactions, which, according to a study started in 2018, involves a substantial loss of revenue for public coffers and greater ease for the transfer of profits to other jurisdictions.

Even if the transfer pricing issues are commonly associated with international transactions carried out by large multinational corporations, the topic is relevant for companies of any size that conduct transactions with related parties abroad.

Below you find our highlights regarding the first considerations about the new transfer pricing rules.

1. Adoption of the arm’s length principle/standard: the arm’s length standard can be defined as the adoption of market prices that would be realized under the same terms and conditions by unrelated parties independent of each other.

2. Expansion of the definition of related parties: the RFB indicated that “related parties” will be defined according to principle-oriented bases, but practical example will be provided for greater clarity of the concept and judicial security.

Brazil currently adopts the concept of “concerned person”, provided in article 23 of Law no. 9.430/96, in which natural and legal persons are encompassed, particularly legal persons that are parent companies, branch offices, subsidiaries, associated and affiliated companies of other legal persons abroad.

3. Outlining of the actual transaction based on objective comparability factors: the actual transaction will be the focus of any investigation, and will be observed according to key economically relevant characteristics. Such characteristics, called “comparability factors” by the RFB, were summarized by it into: (i) contractual terms; (ii) roles, assets and risks; (iii) characteristics of the asset or services; (iv) economic circumstances of the parties and the market; and (v) business strategy.

4. Introduction of methods adopted by the OECD: the OECD methods can be divided into two categories, namely (i) traditional transactional methods and (ii) transactional methods based on profits.

Overall, there are 5 basic methods, which are the Comparable Uncontrolled Price Method, the Cost Plus Margin Method and Resale Price Method of the category (i), Transactional Net Margin Method and Profit Split Method.

The RFB highlighted that the Transactional Net Margin Method and the Profit Split Method will be integrated into the Brazilian system, which proves to be positive.

Such methods require the examination of economic and financial information of companies that operate in the same industry and under similar conditions, which are currently disclosed only by publicly traded corporations. For the correct application, RFB signaled that it will authorize comparability adjustments, in line with the practice adopted by other countries that use them, such as the United States.

Lastly, the RFB emphasized that other methods will also be provided for, for instance, the case of valuation of unique and valuable intangibles.

Camila Cabral, Tax Consultant at Drummond Advisors, is the author of this article

5. Best method rule: in the current legislation, the taxpayer is authorized to adopt any method provided. According to the best method rule, it will be necessary to observe which method best measures and represents the arm’s length standard.

In order to determine the best method, factors such as the degree of comparability between controlled and uncontrolled transactions, as well as data and assumptions taken into account in the analysis are relevant (comparability factors mentioned above).

6. Choice of the tested party: the party tested for purposes of transfer price can be located in Brazil or abroad, provided that it is the one that presents more consistent results.

7. Adjustment treatment: initially, the adjustment treatment will follow the current treatment, through which the taxpayer adjusts their results spontaneously, according to their needs. The tax administration’s arbitration will be maintained in the event of lack of adjustment or irregular or insufficient adjustment.

The “secondary adjustment” type was also presented, being the use of approaches such as loan for profit repatriation used as an example by the RFB.

The RFB also indicated that it intends to include, in domestic law, the provision for corresponding adjustment in the event of mutual procedure, as a way to avoid double taxation and double non-taxation.

8. New definition of commodities: the definition of commodities is currently based on the market price. With the new rules, in addition to the market price, the pricing adopted by non-parties/unrelated parties will be used as parameter, allowing for greater flexibility.

9. New definition of intangibles: according to the RFB, there will be a definition of intangibles specific for the enforcement of the transfer pricing rules with the purpose of closing the currently existing gap that results in a number of intangibles dodging the enforcement of transfer pricing rules.

Other topics, such as the provision of services between related parties and the cost sharing contract will also get special attention in the new rules, particularly the latter, which was “regulated” over the years only by Answers to Inquiry.

Regarding financial transactions, the scope and coverage of all transactions are expected to be expanded, considering that only loans between related parties are addressed by the current Brazilian transfer pricing rules. Such expansion will rely on the enforcement of the arm’s length principle regarding guarantee, insurances, etc.

Furthermore, according to the RFB, the transfer pricing rules will not prevent the enforcement of other interest deductibility limit rules.

It is important to note that company restructurings with the transfer of activities from a jurisdiction to another will also get special attention by the new rules.

Over the following months, we can expect the disclosure of new approaches regarding safe harbors and royalties, and, with regard to the latter, authorities are assessing if they maintain the current deductibility limitation rules or not.

Before the new law is finalized and subsequently submitted to the National Congress, there should be dialogue with stakeholders, so they can send their comments regarding the provisional draft. Our team will accompany future statements regarding the new transfer pricing rules and is available for clarifications.


Written by Camila Cabral, Tax Consultant at Drummond Advisors

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