Brazil’s challenge to becoming a member of the OECD
Brazil made a formal application to join the OECD in 2017, but the process is still mired with political uncertainty. BaseFirma's Davi Santana de Jesus outlies how the economy can expedite its application by reforming its transfer pricing framework.
In May 2017, Brazil sent a formal request to join the OECD. The Brazilian government believed that becoming an OECD member would help attract foreign investment into the economy. However, the acceptance of Brazil as an OECD member is currently uncertain.
Just a few years ago, Brazil’s chances for acceptance into the OECD were much more favorable.
Brazil’s historical membership bids
In 2009, the former OECD Secretary Angel Gurría, who was visiting Brasília to present an analysis on the Brazilian economy, noted that “the possibility of Brazil becoming a formal partner of the OECD is up to the Brazilians; our doors are open to Brazil".
Such an invitation was to be evaluated by Guido Mantega, the former Brazilian Finance Minister. However, at the time, Mantega expressed a lack of interest in the invitation. Subsequently, the opportunity to join the OECD then was missed.
Nowadays, the conditions to join the OECD have changed, and Brazil’s 2017 request has been subject to a more stringent evaluation with additional requests for economic adjustments and the possibility to be subject to veto by OECD member countries. Currently, Mexico, Chile and Colombia are the only Latin American members of the OECD.
Following Brazil’s application for OECD membership in 2017, which was supported by former President Michel Temer, several lobbying attempts by the Brazilian authorities have been made to expedite the process.
At the beginning of 2018, Henrique Meirelles, the then Finance Minister, along with Angel Gurría, the OECD Secretary-General, and Jorge António Rachid, the Secretary of the local tax authorities, launched an OECD-Brazil work programme to start making local transfer pricing (TP) rules more compatible with the OECD TP guidelines. This programme seeks to align Brazil’s rules and unique characteristics with internationally accepted practices.
OECD membership requirements
The decision to accept Brazil into the OECD is now partly dependent on the OECD Committee for Tax Affairs, one of the 23 committees that advise the OECD Council. The committee’s assessment, which is related to local TP rules, can vary ranging from:
Acceptance with a specified deadline for implementation;
Acceptance after reservations or modifications to local TP rules, to rejection of local TP rules.
The 23 OECD Committees deal with various topics that range from fiscal, to the environment, education, and policies specific to topics such as the working group on bribery on international business transactions, which are all guided by OECD's core values.
These core values include a commitment to pluralistic democracy based on the rule of law, respect for human rights, adherence to open and transparent market economy principles, and sustainable development.
The recent election of Jair Bolsonaro as the new president of Brazil, and Paulo Guedes as Finance Minister, has raised doubts on whether the government would continue to seek membership of the OECD. However, last January, during the World Economic Forum at Davos, Guedes met with Gurría and indicated Brazil's intention to enter the OECD as soon as possible. The OECD secretary characterised the meeting as very productive.
As mentioned above, the acceptance of Brazil to the OECD is subject to veto from its members. In March 2019, during a state visit by the Brazilian president to the US, Bolsonaro secured US President Donald Trump's support for the country’s entry into the OECD. However, Trump’s support did not come free, and came with conditions that notably included Brazil renouncing preferential treatment as a "developing country" by the WTO.
Protectionism and preferential treatment of developing countries by the WTO was harshly criticised by Trump in a press conference in October 2018. He noted:
They charge us what they want…If you ask some people, they say that Brazil is among the toughest in the world – may be the toughest in the world. And we don't call Brazil and say, ‘Hey, you're treating our companies unfairly, treating our country unfairly….’
BaseFirma believes that Brazil’s acceptance to the OECD should not be contingent upon its non-inclusion in the list of countries that the WTO supports in its effort to overcome poverty and become more developed.
That was not the case for countries such South Korea, Mexico and Turkey, which are members of both the G20 and the OECD, and are also included in the WTO’s list of developing countries.
Transfer pricing alignment
From a local perspective, BaseFirma supports aligning Brazilian TP rules with the OECD model in order to create a more favorable treatment of multinationals doing business in Brazil.
Brazil’s unique methods in testing import and export transactions with fixed statutory margins fail to consider risks and functions assumed by the local entity. The required fixed margins may require up to a 66% mark-up for tangible goods imported from related parties, depending on the company's economic sector.
If Brazil wants to minimise the reasons why OECD members may veto its acceptance, it should start by giving up its current TP system, and re-design it to be more in line with internationally accepted principles.
Taxpayers and international investors have been waiting for changes to the Brazilian TP rules for decades. It is about time to move on and make it easier to do business in Brazil.
Davi Santana de Jesus
This article was written by Davi Santana de Jesus (email@example.com) of BaseFirma Brasil.