Brazil Considering Adoption of the OECD Transfer Pricing Standard
After much anticipation, Brazil finally may have adopted the Organization for Economic Cooperation and Development (OECD) Transfer Pricing Standard on December 28, 2022. The OECD’s guidelines represent the international consensus on transfer pricing. The draft of this new legislation has been released by Brazil’s federal revenue authority (RFB) and must be approved by Brazil’s legislative branch, the equivalent of the U.S. Congress and Senate.
If enacted, Brazilian taxpayers may be able to opt for the new OECD standard-based transfer pricing rules over the current rules for fiscal year 2023. The new set of rules will be mandatory beginning on January 1, 2024.
Brazil’s decision to align with the OECD standard represents a major step toward integrating the Brazilian economy into the international economy. This move will create an avenue that potentially mitigates double taxation and resolves tax disputes provoked by transfer pricing adjustments.
Key Reasons for Change
Brazil’s transfer pricing regime has remained relatively unchanged since its inception in 1996. This regime was based on the early version of the OECD guidelines published in 1979. The guidelines have been updated several times in an effort to adapt to a more dynamic international tax environment1, but since Brazil did not implement the updates, the country’s transfer pricing policies became inadequate.
In 2015, the OECD launched a comprehensive plan, the BEPS 15 action points, to combat base erosion and profit-shifting arrangements. The focus of this initiative was to address tax challenges that resulted from the digitalization of the economy. It tackled tax avoidance, improved coherence of international tax rules, and promoted a more transparent tax environment among countries. Actions 8-10 introduced important technical guidance to the arm’s length principle (ALP)2 for related party transactions.
In 2016, Brazil joined incorporated the obligation of the country-by-country report (CbyCR) in a manner consistent with OECD action 13 recommendations3, and in 2018 began a joint project with the OECD to align its regulations to the OECD standard. Brazil’s original transfer pricing rules adopted a framework of practicability and predictability. However, the simplicity of this framework usually resulted in double taxation and tax uncertainty for taxpayers.
The simplicity of the previous system failed to comply with OECD guidelines in a number of ways:4
- There was no direct reference to the Arm’s Length Principle;
- The related party definition extended beyond common ownership and control;
- Covered intercompany transactions included only import and export of goods, services, and rights;
- Specific methods for export and import of commodities and interest on intra-group loans were allowable; and
- Both transactional profit-based methods, transactional net margin and profit split methods, were excluded from consideration.
Embracing the OECD Standard
Aligning with the OECD standard will require eliminating the gaps between the current transfer pricing regime and OECD guidelines. Major benefits include avoiding double taxation, preventing loss of revenue due to current BEPS practices, and integrating Brazil into global value chains.
From a technical perspective, below are some of the most important changes included in the proposed regulations:
- Adoption of the arm’s length principle (ALP);
- The addition of comparability, functional, and benchmark analyses replacing the fixed-margin approach;
- Special considerations for intangible and financial transactions as well as for business restructurings consistent with published 2022 OECD guidelines; and
- Advance transfer pricing agreements (APAs) and mutual agreements procedure (MAP) will be introduced to mitigate uncertainty and double taxation.
Even after the new regulations are adopted and aligned with OECD guidelines, some aspects will remain inconsistent with the OECD standard, such as the specific treatment for commodities transactions and the limitations for loan interests and guarantees.
Relevance for U.S. Multinationals with Operations in Brazil
For U.S. multinational groups with operations in Brazil, the adoption of the OECD standards will increase certainty in transfer pricing and bring welcome relief with respect to U.S. foreign tax credit regulations (FTC).
FTC final regulations, released on December 28, 2021, implemented a new attribution requirement to determine whether a foreign income tax is creditable in the United States. In the case of foreign tax imposed on residents of a jurisdiction, the FTC regulations established that a foreign tax only meets the attribution requirement when the allocation rules in said tax jurisdiction are consistent with the ALP (as stated in U.S. Internal Revenue Code Section 482 and the OECD guidelines). As a result, foreign taxes paid or accrued in tax jurisdictions unaligned with the ALP will not be considered creditable in the United States. Brazil’s adoption of the OECD standard will allow U.S. taxpayers to apply FTC regulations for taxes paid.
The benefits of Brazil’s move to adopt the OECD standard are indisputable. If the proposed regulations are not implemented in 2023, it is likely only a matter of time before Brazilian transfer pricing rules are aligned with the OECD standard.
- Since its first edition released in 1995, the OECD Guidelines have been subject to significant updates in 2010, 2017 and 2022.
- Action 8 addresses transfer pricing issues relating to controlled transactions involving intangibles. Action 9 deals with risks & capital considerations. Action 10 focuses on other high-risk areas (i.e. management fees and head office expenses).
- Action 13 introduced a three-tiered approach for transfer pricing documentation, including the requirement for organizations to prepare CbyCR detailing transactions between commonly controlled entities as well as a master file, and a local file. The CbyCR discloses aggregate data on the global allocation of income, profit, taxes paid, and economic activity among tax jurisdictions in which Multi National Enterprises operate, and can be shared with tax administrations for use in high-level transfer pricing analysis.
- OECD Transfer Pricing Profiles – Brazil, downloaded from https://www.oecd.org/tax/transfer-pricing/transfer-pricing-country-profile-brazil.pdf
- OECD Transfer Pricing in Brazil – Towards Convergence with the OECD Standard Highlights, downloaded from https://www.oecd.org/tax/transfer-pricing/transfer-pricing-in-brazil-towards-convergence-with-oecd-standard-brochure.pdf