On 7 July 2019 the OECD and Brazil’s tax administration (RFB) published a report on the results of the work programme launched in February 2018 to analyse Brazil’s transfer pricing framework and the similarities and divergences between the Brazilian and OECD transfer pricing approaches.
The differences identified between the two approaches were assessed in relation to their ability to fulfil the primary objectives of transfer pricing rules and other tax policy objectives. The work programme also explored possible options for aligning Brazil’s rules with OECD principles, either gradually or with immediate effect. Changes would aim to ensure adherence to the arm’s length principle; simplification measures to facilitate compliance; administrative effectiveness; and tax certainty.
The analysis began with the identification of the main areas in the Brazilian transfer pricing framework that diverge from the OECD transfer pricing standard. The effectiveness of the existing rules and practices was assessed in relation to the policy objectives of transfer pricing rules. This “gap analysis” identified thirty issues in the Brazilian transfer pricing rules.
The issues identified were assessed in relation to the policy objectives of the transfer pricing rules using objective criteria such as the need to secure the appropriate tax base and avoid double taxation while ensuring ease of tax administration, ease of tax compliance and tax certainty. Most of the issues identified increased the risk of double taxation and were therefore an obstacle to international trade and investment. Many also created a potential risk of base erosion and profit shifting (BEPS) and loss of revenue.
The report found that there were significant weaknesses in the Brazilian system owing to the absence of special considerations for more complex transactions such as those involving intangibles, intragroup services and business restructurings. Particular features of the system in Brazil including the fixed margins approach were also seen as a weakness. Significant international tax uncertainty therefore results from the misalignment of the rules with the OECD transfer pricing.
Some of the features of Brazil’s transfer pricing rules provide simplicity, including the absence of the need for a comprehensive comparability analysis, the freedom to select a transfer pricing method and the use of the fixed margin approach. There is however complexity as a result of other features, such as the item-per-item approach to transactions, the strict comparability standard and some of the documentation requirements.
The transfer pricing methodology applied in Brazil can permit the taxpayer to overcome challenges from lack of comparable information and can reduce the costs and time involved in litigation. The system can protect the Brazilian tax base to a certain extent and can ensuring some predictability and certainty. In some cases however the features contributing to simplicity may also undermine the primary objectives of transfer pricing rules and this can lead to potential BEPS issues and double taxation.
