Brazilian transfer pricing in the era of Big Data
Carlos Ayub from Deloitte Brazil explore Brazil’s complex transfer pricing environment, which has grown even more burdensome in light of tax technology changes brought in to deal with Big Data.
The Brazilian Revenue Service (RFB), informally referred to as "The Lion" for its aggressiveness, deploys high-end technology ranging from meters in breweries to sophisticated software tracking all inbound and outbound transactions of tangible goods, services, license fees, and those of a financial nature to ensure taxpayers fully declare, and pay, their share to the government.
The RFB, which has gained global recognition for its creative tactics, is one of the most important keys to the country's economic prospects for 2014 and beyond. The RFB is expected to help the government meet aggressive budget targets without overwhelming the country's stagnant economy.
In Brazil, technology and manpower play large roles. Teams of accountants and legal experts are deployed to monitor the books of companies year-round. The RFB was one of the first tax agencies in the world to fully embrace the internet as a compliance and revenue collection tool. It has approximately 3,000 agents across the country and their tasks include, but are not limited to, making sure that multinational corporations engaging in intercompany transactions fully comply with the complex (and not OECD-aligned) Brazilian transfer pricing rules. For that purpose alone, the RFB created a special team that monitors taxpayers engaging in cross-border intercompany transactions.
The government has also managed to instill habits among Brazilians that help prevent evasion. Cashiers at supermarkets and other retail outlets in big Brazilian cities constantly ask their customers: "Do you want your taxpayer identification number on the receipt?" By consenting to enter their taxpayer identification number, consumers get a small tax refund – and the government gets access to Big Data that allows officials to better track a company's sales.
It is no different when it comes to the application of the Brazilian transfer pricing rules. Through SISCOMEX and SISCOSERV, which are acronyms for Big Data database systems controlled by the RFB, the tax authorities have full visibility of every tangible good, service, and license transactions (either inbound or outbound) entered by local taxpayers. The RFB knows whether the buyer and seller, service recipient and service provider, payee and payor are part of the same economic group or even if any of the foreign parties is located in jurisdictions Brazil considers as tax havens. The RFB also looks for non-compliance clues by monitoring whether the types of transactions being entered into are commonplace in the industry where taxpayers operate.
In 2007, the RFB created the public bookkeeping system (SPED), whereby taxpayers subject to the actual profit regime (that is, a taxation regime which can be either an election or an imposition when certain criteria are met) should file their invoices and digital accounting records with the tax authority electronically.
Starting in 2014, the scope of SPED was extended to include the electronic filing of tax books and records. With this significant change, Brazilian corporations will no longer have to file annual income tax returns (DIPJ). This is because the RFB now has full visibility of all taxpayers' accounting and tax books. Further, the application of the SPED is no longer limited to taxpayers subject to the actual profit regime.
Data from the RFB indicates that during calendar year 2013 transfer pricing assessments amounted to approximately $4 billion, making transfer pricing audit assessments alone the second highest source of revenue for the RFB. The majority of these assessments resulted from field audits (when the tax authority pays a visit to the taxpayer to review the accuracy of its transfer pricing analysis and documentation). Not surprisingly, vice presidents of tax, tax directors, and financial controllers identify transfer pricing as the most important international tax issue faced by multinational corporations operating in Brazil today. A significant and increasing number of multinational corporations operating in Brazil have been through a transfer pricing audit conducted by the RFB. Unfortunately, most of those audits resulted in significant tax costs.
The Brazilian transfer pricing rules follow a formula-based approach. It is not uncommon for taxpayers to believe they are compliant by simply following the application of a mathematical formula. The level of detail associated with the application of the Brazilian transfer pricing rules is gigantic. The use of Excel spreadsheets or less sophisticated software solutions typically create more problems than solutions. It may give some level of comfort for a couple, perhaps three calendar years until the RFB knocks on the taxpayer's door, digs into its books, conducts exhaustive fact-finding and data gathering interviews and finally hands to the controller or tax director a multimillion dollar tax assessment that frequently reverts all of the company's net operating losses or results by creating substantial tax disbursements. Many taxpayers still venture indicating in their tax returns that they do not engage in intercompany transactions with foreign related parties.
With the full implementation of SPED, the RFB will likely lower its efforts conducting field audits and will rely on the use of Big Data to achieve its goals. Since taxpayers will already be providing the RFB with all the information it needs to assess the accuracy of a company's transfer pricing through the combination of SISCOMEX, SISCOSERV, and SPED, taxpayers should be proactive and improve the quality of their transfer pricing analysis to ensure full compliance with the regulatory framework. In the Big Data era small discrepancies may lead to significant tax costs.
Unfortunately, complying fully with the complex tax environment in Brazil can be burdensome. Often, subsidiaries of multinational corporations operating in Brazil have local tax teams that are bigger than the tax teams employed by their parent companies. The technology cost to meet local compliance criteria is gigantic. We believe that those costs tend to either decrease or stabilise after the initial implementation phase. We also believe there is a tendency that foreign tax agencies will, sooner or later, start following the Brazilian approach when it comes to relying on Big Data to track every single transaction entered by taxpayers, whether it be internal or cross-border.
Tax partner – transfer pricing
Deloitte Touche Tohmatsu
R. Alexandre Dumas, 1981
São Paulo – SP - Brazil
Tel: +55 11 5186-1227
Fax: +55 11 5181-3693; +55 11 firstname.lastname@example.org
Carlos Ayub is tax partner based in São Paulo, Brazil, focused on transfer pricing services.
He provides services to local, European, Asian, Latin and North American clients operating in various industries such as automobile, chemical, pharmaceutical and electronic, among others.
Carlos has more than 24 years of professional experience, also including accounting audit, corporate tax and transfer pricing services.
In 2001, Carlos Ayub was transferred to Mexico City office to work with transfer pricing projects under the OECD approach, matching Brazilian and international rules.
He has authored various articles on transfer pricing for reputable magazines, newspapers and other publications of national and international circulation.
Carlos is a member of the Brazilian transfer pricing group, which has been recognised by different institutions for several years as the best transfer pricing team in Brazil.
He has been recently quoted as one of the best references in transfer pricing in Brazil by the most recognised publication in the world in its area, Euromoney Expert Guides.
Carlos speaks English and Spanish as well as his native Portuguese.