Mutual Agreement Procedure in Brazil: challenges and contributions
Gil Mendes explores the new approach taken by Brazil through Normative Instruction No. 1,846/18, to tackle the highly litigious and inefficient local tax dispute environment.
Historically, Brazil has adopted a unique international tax approach in several fronts.
From the perspective of international tax treaties, Brazil’s unique approach contributes to country’s highly litigious and inefficient local tax dispute environment.
Although Brazilian tax treaty network follows, to the great extent, the OECD Model Tax Convention, which mostly grants exclusive taxing rights to the state of residence of the beneficiary of the income; Brazil, as a capital-importer, has followed the long-lasting tradition of Latin American countries, which advocates for more taxing powers for sourcing states.
The above approach along with a particular view of the Brazilian tax authorities on how to interpret tax treaties trigger several court disputes.
Recently, Brazil has been showing off great efforts to align its tax policies with OECD and reduce the gap between the different systems.
Brazil officialised the country’s request to join the OECD, in May, 2018, and followed to promote a joint 15-month project with OECD officials to review thoroughly Brazil international tax and transfer pricing legislation to better align it with OECD guide.
Hopefully, this strengthening in the relation with OECD will improve the practical application of Mutual Agreement Procedures (“MAP”) in Brazil on international tax treaty dispute resolutions.
OECD regards MAP as an important mechanism for the resolution of international tax disputes and, recently, has promoted a series of updates on MAP guidelines.
Improvements on international dispute resolution have been addressed through the OECD Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”) which one of the goals has been ensuring transparency while promoting increased certainty and predictability to taxpayers.
Accordingly, BEPS Action 14 – “Making dispute resolution mechanism more effective” (“BEPS Action 14”) was created with the focus of calling countries to commit in strengthening MAP mechanism effectiveness and efficiency, keeping it as simple as possible and eliminating any unnecessary formality.
All 33 tax treaties Brazil is signatory include MAP provisions.
A successful MAP project in Brazil could improve country’s current scenario of chaotic litigiousness and juridical instability - at least on international tax treaty matters.
MAP is a more flexible and non-litigious procedure that engage competent authorities and taxpayers in the resolution of cases of double taxation (juridical and economic) and inconsistencies in the interpretation and application of tax treaties.
Open discussions under a more flexible and non-litigious procedure between Brazilian taxpayers, RFB, and in case of a bilateral phase, the competent authority of the treaty partner may provide a complete change in the current mindset in Brazil and improve the quality of negotiation an agreement on a given matter.
Recent government endeavor for greater alignment with OECD’s internationally acceptance standards - viewed as an important element of any future process of accession to the Organization and as a means of attracting foreign direct investment, build on our high hopes for greater improvements in Brazilian tax dispute resolution with MAP. We do have a positive view on that.
Brazil Recent Developments on MAP and the Most Relevant Modification
On November 28, 2018 Brazilian Revenue Authority (“RFB”) issued the Normative Instruction 1,846 regulating MAP procedures and published in December, 2018, RFB a complete manual on NI 1,846/18 provisions interpretation (“RFB Manual”).
NI 1,846/18 replaces Normative Instruction 1,669 of November 9, 2016 issued by RFB in view of BEPS Action 14, which was received by Brazilian taxpayers with certain reservations, especially because of relevant dissonances with OECD guidelines.
NI 1,669/16 denied access to MAP to taxpayers that have submitted the matter to the administrative or judicial courts appreciation and a decision have been issued (even if still subject to appeal), even though Brazil’s tax treaties stipulate that MAP is available “irrespective of the remedies provided by the domestic law.” This was perceived to be a huge barrier to engage taxpayers in discussions on double taxation with the Brazilian tax authorities through MAP.
NI 1,846/18 eliminated the restriction imposed by NI 1,669/16 allowing taxpayers access to MAP regardless of the existence of administrative or judicial court decision on the matter, provided that RFB is informed of the so-called “parallel” procedure. Such regulation states that at the appreciation of the matter RFB should not depart from the content of the administrative or judicial decision issued in view of the relevant taxpayer, but this does not prevent RFB and taxpayer carrying out the bilateral phase of MAP procedure.
The extent of the wording on that “RFB should not depart from the content of the decision” is debatable. Because of the unclear language, one view may be that RFB is binding to follow the administrative or judicial court interpretation on deriving from a dispute brought in the past by a taxpayer or tax authorities. Another possible take on this provision is that RFB should take court decisions of subjects covered by a MAP only as reference or guideline when reviewing the case at hand.
OECD Commentaries clarify that this debate strictly depends on domestic rules, since the relationship between tax authorities and court proceedings is at most determined by constitutional and civil proceedings rules that govern the binding effects of decisions issued in respect to a taxpayer.
In Brazil, there is no express local guidance. Discussions exist on the constitutionality of restraining someone to judicial courts appreciation in the context of MAP. MAP would then not be able to preclude the access to courts, nor to override a final court decision issued afterwards.
RFB responses to the OECD Report on “Brazil Dispute Resolution Profile – Resolution of MAP Cases” clearly states its understanding that in accordance with Article 10 of NI 1,846/16, RFB is legally bound to follow a domestic court decision in the MAP.
Also, RFB Manual expressly prevents RFB from going against an existing court decision. In accordance with RFB Manual wording, in practice, under a situation in which the matter subject to MAP had a decision issued by administrative or judicial spheres, RFB is required to inform the context to the competent authority of the treaty partner and that RFB is bound by the decision.
Nonetheless, in a situation RFB in bound to a decision, Brazilian tax authorities acknowledge that it should request the treaty partner to consider to take the necessary actions to avoid double taxation under a bilateral phase of MAP process.
Therefore, even considering that RFB might be bound to a court decision (although we still consider the unclear language may give room to discussions) under NI 1,846/18 taxpayers are still allowed to pursue the bilateral MAP phase for a proper resolution depending then on the good will of the treaty partner. Thus, the taxpayer would still have chances that the other Contracting State modifies its position with regard to the situation leading to taxation.
Other Interesting subjects under NI 1,846/18
Non-resident taxpayers living in Brazilian treaty partner are allowed to enter into a MAP process in Brazil, to the extent the tax treaty provide so.
Once a MAP decision is reached, the implementation depends on (i) taxpayer express written acceptance, in accordance with Annex IV of NI 1,846/18 and (ii) proof that no other judicial or administrative discussions regarding the same matter are in place.
Pursuant to RFB Manual, the explicit acceptance and proof of withdrawal must be made within 30 days from the notification of the result of the MAP. Failure to comply with the legal provisions ends the procedure by withdrawal of the applicant and prevents the admission of a new MAP request with the same object.
Taxpayers are not obliged to accept, but if it does the subject decided under MAP should not be discussed before administrative or judicial courts anymore.
Transfer Pricing Matters
Transfer pricing in particular provide fertile grounds for international disagreements, as related adjustments inherently lead to double taxation.
Not surprisingly, OECD MAP Statistics indicate that transfer pricing issues represent a relevant number of MAP cases in the world.
Brazil’s approach on transfer pricing presents some particular features that diverge from the OECD guidelines, mainly with respect to the adoption of fixed profit margins derived from industry practices and considers this in line with the arm’s length principle. On the other hand, OECD countries adopt a methodology for determining transaction prices (i.e. the method of calculation and the level of margins / prices) under a more economic approach, based on database case studies.
Obviously, the mismatch in methodologies potentially results in double taxation over a transaction carried out by a Brazilian company and its foreign related party.
In order to avoid double taxation in such cases, OECD MTC, under Article 9 (2) provides for specific adjustments by the treaty partner if the profits so included are profits accrued to the enterprise of the other treaty partner
In the past, Brazil has made reservations to Article 9 (2). The country’s position, at that time, was that in the absence of Article 9 (2) in the tax treaty, economic double taxation arising from transfer pricing adjustments would not fall within the scope of MAP.
Brazil was not alone: the matter has not reached a consensus in international community. As a matter of comparison, other countries such as Argentina, Bulgaria, the Philippines and Thailand have also made reservations to Article 9 in the past. On the contrary, Germany, for example, has specifically addressed transfer pricing issues as a matter eligible to MAP resolution.
This approach has substantially changed in the context of BEPS, since Brazil, as a member of G20, has expressly stated its engagement with the implementation of BEPS’ recommendations, including seeking to grant access to MAP even when it comes to transfer pricing issues.
This is definitely good news, since the submission of transfer pricing cases to MAP, even if jurisdictions do adopt different interpretations on the determination of the arm’s length price in a given transaction, can still lead to satisfactory solutions. In spite of divergences on the best method to reflect the arm’s length principle, in case of Brazil it is true that the adoption of fixed margins would not conflict – at least prima facie – with the arm’s length standard (all in all, the margins represent rebuttable presumptions).
Brazil’s recent approaches towards not only dispute resolution but also in the support and efforts to promote BEPS’ basilar standards are aligned with the country’s admission as an OECD member.
OECD released in 2017 global MAP statistic which shows slight improvements for Brazil in terms of cases received, cases closed and average timeframe in resolving MAP cases. While up to January, 2016, 9 MAP cases started in Brazil (3 of them on transfer pricing) out of which 2 concluded on an average time of 35.52 months; as from January, 2016 other 12 MAP cases started (6 on transfer pricing) out of which 1 concluded in 12.40 months.
It has been consistently reported by the government the interest in becoming part of the OECD. Brazil’s engagement with the OECD’s Fiscal Affairs Committee has proven to be extremely important for our legislation to harmonize with international standards and to enable the country to become more integrated into the globalized economy.
MAP plays an important role in the path Brazil seems to be treading. Increasing the volume of MAP procedures for discussions of internal tax treaty matters contributes for the alignment of Brazil with other countries. This improves local juridical stability, tend to meliorate the volume of courts contends and by its turn boost foreign direct investments.
Our hopes remain high since the government keeps reaffirming the intentions of Brazil to be more globally connected at different levels, being a more business oriented tax system a relevant part of such connection.
 While juridical double taxation refers to the imposition of comparable taxes in two or more States on the same taxpayer on the same income, economic double taxation describes situations in which the same economic transaction is taxed in two or more states, but to different taxpayers. VOGEL, Klaus. International Tax Treaties and their Interpretation. Int'l Tax & Bus. Law. 1 (1986). Available at: http://scholarship.law.berkeley.edu/bjil/vol4/iss1/1. p. 5-6.
 It does not provide that an administrative (or judicial) proceeding must be paused when a MAP is initiated.
 This is confirmed by the manual, as it mentions that “filing for the MAP does not require forfeiting any judicial or administrative procedure on the same matter;”
 Item 28 on OECD Comentaries.
 XAVIER, Alberto. Direito Tributário Internacional do Brasil. 8 ed. Rio de Janeiro: Forense, 2015. P. 192.
 RFB. Manual do Procedimento Amigável. Available at: http://idg.receita.fazenda.gov.br/noticias/ascom/2019/janeiro/receita-federal-disponibiliza-manual-de-procedimento-amigavel/manual_de_procedimento_amigavel.pdf. p. 41. Therefore, in practice, Brazilian competent authorities are bound to previous administrative or judicial court decisions issued prior to the conclusion of a MAP case and in such case case should inform the competent authority from the other Contracting State about such decision and that it is bound to its content, asking the latter to adopt the measures to prevent double taxation.
 REIMER, Ekkehart and RUST, Alexander (Editors). Klaus Vogel on Double Tax Conventions. v. 1. 4 ed., Amsterdam: Wolters Kluwer, 2014. p. 1794.
 Probably, this is mostly due to the existence of conflicting domestic provisions on the determination of transfer pricing adjustments in transactions between related parties, in line with the arm’s length principle, set forth in Article 9 of the OECD MTC.
 According to OECD Statistics for 2017, which as per March 2019 cover 129 jurisdictions taking part of the BEPS Inclusive Framework, including Brazil (full list available at http://www.oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf), 2,745 MAP cases were closed in 2017, being 1,235 related to transfer pricing issues. It is important to mention, however, that by “transfer pricing issues” the OECD refers to any MAP case related to attribution/allocation issues, in which the taxpayer’s request encompasses either Article 7 or 9 of the OECD Model Tax Convention. (Available at: http://www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics.htm).
 SCHOUERI, Luís Eduardo. Arm’s Length: Beyond the Guidelines of the OECD. In: Bulletin for International Taxation. Netherlands: IBFD, 2015. p. 210.
 OECD. Positions on Article 9 (Associated Enterprises) and its Commentary. Available at: https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-2014-full-version/positions-on-article-9-associated-enterprises-and-its-commentary_9789264239081-74-en#page1
 Memorandum on International Mutual Agreement and Arbitration Procedures in the Field of Taxes on Income and Capital. Important to mention that the previous German Memorandum (dated of 13 July 2006) already referred to transfer pricing issues.
 “Brazil provides for an approach in its domestic legislation that makes use of fixed margins derived from industry practices and considers this in line with the arm’s length principle. Brazil will continue to apply this approach and will use the guidance in this report in this context. When Brazil’s Tax Treaties contain Article 9, paragraph 1 of the OECD and UN Model Tax Conventions and a case of double taxation arises that is captured by this Treaty provision, Brazil will provide access to MAP in line with the minimum standard of Action 14”. (OECD. Aligning Transfer Pricing Outcomes with Value Creation - Actions 8-10 - 2015 Final Reports. 2015. Available at: http://www.oecd.org/tax/aligning-transfer-pricing-outcomes-with-value-creation-actions-8-10-2015-final-reports-9789264241244-en.htm).
 For details about the development of MAP, refer to: BARBOSA. Matheus C. O procedimento amigável nos acordos de bitributação brasileiros. São Paulo: Quartier Latin, 2018. pp. 125-132.
 OECD. 2017 MAP Statistics Brazil. Available at: http://www.oecd.org/tax/dispute/2017-MAP-Statistics-Brazil.pdf.
Gil F. Mendes
T: +55 11 3147 4632