On 18 December 2019 the OECD issued a report entitled Transfer Pricing in Brazil: Towards Convergence with the OECD Standard. This examines the differences between Brazil’s transfer pricing rules and the OECD transfer pricing guidelines with a view to aligning the systems.
After Brazil had expressed the intention to become a full member of the OECD, the OECD and Brazil began a project in February 2018 to look at the similarities and divergences between the transfer pricing rules in Brazil and the OECD guidelines.
The report looks at the options available to Brazil in aligning its rules with OECD transfer pricing guidelines at the same time as improving the more positive aspects of its current approach to transfer pricing. After identifying the gaps or issues in the Brazilian framework the report assesses these according to five objective criteria. The criteria include the ability to secure the appropriate tax base in each of the jurisdictions involved in the transaction, the ability to avoid double taxation, ease of tax administration, ease of tax compliance, and tax certainty from a domestic and international perspective.
Weaknesses in the Brazilian transfer pricing rules include the absence of special considerations for more complex transactions such as those that involve the use or transfer of intangibles, intra-group services or business restructurings which the rules cannot deal with adequately. Weaknesses also arise from unique features of the Brazilian system such as the use of fixed margins and the freedom of method selection.
The risk of double taxation arises from the departure of Brazil’s rules from the arm’s length principle, with the consequence that the determination of the tax base for taxing a multinational enterprise is different from most other countries. In addition to this there are differences in relation to the comparability analysis, with no concept of accurately delineating the transactions, a limited comparability analysis and limited scope for comparability adjustments. The transactional profit methods are not used. There are also divergences in relation to the attribution of profits to permanent establishments.
The report looks at possible ways forward in aligning the Brazilian rules with the OECD Transfer Pricing Guidelines. One option is to immediately align the rules with the OECD guidelines and the other possibility is to gradually align the two systems. These paths would both lead to full alignment with the OECD guidelines. The possibility of a partial alignment, aligning the rules only in certain areas, would leave significant gaps between the two sets of rules and would not achieve tax certainty or eliminate the risk of double taxation and loss of tax revenue. Partial alignment is therefore not considered to be an option for the way forward.