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Brazil in the OECD: A TP transformation ahead

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Carlos Ayub, Deloitte Brazil’s transfer pricing lead partner, examines the country’s transfer pricing rules in light of its desire to join the OECD. Brazil must not delay in reforming its system.

Brazil is experiencing times of change and a social and political paradigm shift. The recently inaugurated government of President Jair Bolsonaro sent a wave of hope that the adverse economic scenario, which began in 2014, would be reversed.

The president appointed Paulo Guedes as minister for the economy in his cabinet. Guedes is one of the greatest talents in economics today and has supported Bolsonaro since his electoral campaign. He promises to transform several areas of the Brazilian government that should have far-reaching effects on the economy.

Among the promises and prognostications that got the administration elected were social security reform, tax reform and a foreign policy steered towards closer trade relations with strategic countries.

Even though social security reform is a major pillar in the strategy to regain control over government spending, the other initiatives are just as urgent. These initiatives are clearly perceived as simultaneous arrangements for the new team at the ministry. One of these arrangements is the stated wish to make Brazil a member of the OECD.

This intention became known to the public at the time of Bolsonaro's visit to the White House before the 90th day of his government. In this meeting, US President Donald Trump signalled that he would support Brazil's request to join the OECD. This confirmed the Brazilian market's enthusiasm, even though in turn Trump suggested that Brazil would have to relinquish its developing nation status at the World Trade Organisation (WTO), which ensures the country special treatment in accords entered into under the auspices of the WTO.

Of all the candidate countries (which include Argentina and Romania, with apparent priority, as well as Bulgaria, Peru and Croatia), Brazil says it is the one with the highest compatibility and that it is already in an advanced stage of the process, having adopted 30% of the OECD's 249 legal instruments. Brazil is, as alleged by the Brazilian government, ready to request compliance with another 100 OECD standards. This would leave 40 legal instruments to be adopted, primarily on the tax side.

It was with this alignment in mind that last year (February 2018) during the previous administration that a meeting was held in Brasilia, the federal capital, between an OECD delegation, which included OECD Secretary-General José Ángel Gurría, and the then Brazilian Minister of Finance Henrique Meirelles.

This meeting launched a 15-month project to review, among others, one of the primary bottlenecks in the process aimed at the standardisation of OECD and Brazilian models: the Brazilian tax rules regarding foreign trade.

Modernising the crumbling TP framework

In the pursuit of options to harmonise the Brazilian rules with the basic precepts followed by the OECD, a key focus was the locally adopted transfer pricing framework.

Since then, the project has been focusing on assessing the effectiveness of Brazilian transfer pricing rules through research based on feedback provided by the management teams of Brazilian multinational companies and foreign multinational companies operating in Brazil to identify and review any inconsistencies between the Brazilian system and the OECD standards.

The conclusion reached, based on the compilation of comments made by approximately 50 foreign multinationals from different industry segments with headquarters across 11 different jurisdictions, was not surprising. It merely confirmed the clamour for modernisation of the crumbling transfer pricing model that has been defended by lawmakers and praised simply for being different just for the sake of it.

After many years of having to live with this jabuticaba (a fruit that only exists in Brazil), multinationals and other entities subject to transfer pricing rules learned how to assimilate its peculiarities. In this scenario that is more than two decades old, some companies also managed to identify and leverage some of advantages that the legislation can give some industries or companies with certain business specificities. Others simply had to learn to live with something that continues to cause harm to their business strategies and Brazil's economy.

There are countless aspects that set the Brazilian framework apart from the standards followed by other countries in the world. In brief, we can mention:

  • The impossibility of offsetting taxable adjustments among different traded goods;

  • The non-observance of functional analyses;

  • The lack of an economic perspective in the rules;

  • Double taxation; and

  • Vulnerability to the impacts of changes in foreign exchange rates.

However, among the many other aspects where Brazilian transfer pricing laws and regulations differ from the provisions of the OECD standards, the key difference is that in Brazil the arm's-length principle is not followed as the methodology for setting fixed profit margins.

It is not necessary to have a deep knowledge of the economy to realise that the distortions caused by the Brazilian rules, in particular for adopting fixed margins right from the start, have structural impacts, such as the loss of investment, loss of competitiveness and increases in consumer prices, among others. It is correct, therefore, to say that whenever a fixed margin is inconsistent with the margin actually used under arm's-length conditions, applying the transfer pricing rules could result in distortions from an economic standpoint.

Considering a hypothetical scenario: let's say that for several reasons (we will not delve into details now), lawmakers continue to believe that migrating the Brazilian system to an OECD model would be premature. The immediate implementation of clear mechanisms for requesting a change in margin, based on studies per industry, including direct discussions with tax authorities, should, therefore, be considered.

It is worth emphasising that this is, in effect, the appropriate time to reassess the transfer pricing standards regardless of the candidacy to an OECD membership. It is necessary to identify and eliminate their distortions to promote the very urgent and much needed economic recovery.

Even if we have stressed the peculiarities that set the Brazilian laws and regulations apart from international transfer pricing guidelines, we would be unfair if we said that these Brazilian laws and regulations have not evolved over the years. In effect, seven years ago there was a major development when Law 12715/2012 was modified to include methods that could be considered equivalent to the comparable uncontrolled price (CUP) method for commodity imports and/or exports.

More recently, specifically on November 28 2018, another important step was taken when the Federal Revenue Service of Brazil issued Regulatory Instruction 1846/18, setting provisions on the mutual agreement procedure (MAP) that set rules for the resolution of disputes involving the interpretation of international agreements to avoid double taxation (DTA).

It cannot be denied, therefore, that the inclusion of comparison methods applicable to commodities introduced in 2012 and the MAP regulation enacted in 2018 are key developments towards becoming OECD compliant, but we need to do more.

In this sense, in the interim between the request and acceptance of Brazil into the OECD's 'group of rich countries', the Brazilian authorities could, as a strong contemporaneous, good-faith gesture, hear the appeal of foreign multinational companies and start to incorporate some of the international methods. This could include, for example, the transactional net margin method (TNMM) and the profit split method (PSM), even without discontinuing the existing methods, by granting each taxpayer the right to choose their own method.

Finding the right balance

As we know, it is not simple to find the right balance between having transfer pricing laws and regulations that achieve their primary goal (i.e. avoiding the overseas outflow of taxable income generated in Brazil) and at the same time manage to attract foreign capital, the investment of which generates taxable income in Brazil.

Obviously, as with any system, the Brazilian framework has its positives, mainly with regard to its objectivity, which make the whole tax audit process simpler, faster, and automatic, which is good for tax authorities and, in a certain way, for taxpayers too.

However, the fact is that in light of Brazil's candidacy to the OECD, it is impossible not to scrutinise the model now in place and realise how outdated it is and hear the clamour for changes that would allow a transition to something more modern and consistent with international standards.

Postponing the inevitable should, therefore, cease immediately. The easing of the transfer pricing rules to a model closer to the OECD standard should take place as soon as possible if the wish to become a member of this organisation is genuine.

The government needs to distance itself from its comfort zone and muster the courage to overcome its fear of losing tax revenue, since an alignment with OECD standards, even if partially, would surely motivate multinational groups to ramp up their transactions in Brazil. This is by creating new production centres, or at least by transferring their regional distribution centres into Brazil, thus creating jobs and other compensating forms of tax collection.

It is key, therefore, that the new administration acknowledges the harmfulness of the standing Brazilian rules and recognises the need to initiate an immediate transformation in transfer pricing legislation as a clear statement of the willingness to be aligned with the principles that are already followed by the OECD member countries.

Finally, the Brazilian government needs to start to let its guard down and start the deconstruction of one of the largest barriers to the inflow of investments, which is the impact of double taxation.

Carlos Ayub


Transfer pricing partner


Tel: +55 11 5186-1227

Carlos Ayub has been a transfer pricing partner for 11 years, with seven of those years spent serving as the transfer pricing practice leader.

In the transfer pricing area, where he has been working since 1999, Carlos provides services to local, European, Asian, Latin American and North American clients operating in various industries, such as automobile, chemical, pharmaceutical, electronics, etc.

Carlos has more than 29 years of professional experience, which besides transfer pricing services includes accounting audits and corporate tax. In 2001, he moved to the Mexico City office to work with transfer pricing projects under the OECD approach, matching Brazilian and international rules.

Carlos has authoured various articles on transfer pricing for reputable magazines, newspapers and other publications with national and international circulation. He is a member of the Brazilian transfer pricing group, which has been recognised by different institutions for several years as having the best transfer pricing team in Brazil.

He has been recently cited as one of the best references for transfer pricing in the Brazilian territory by the most recognised publication in the world in its area: Expert Guides.

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