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Brazil Tax Forum: Concern mounts over comparables and intangibles in TP reform

Rio De Janeiro, Brazil in twilight

Tax directors warned Brazil’s alignment with the OECD guidelines could alter the way corporations use comparables and approach royalties in TP.

Brazil’s expected alignment with OECD standards will have a significant impact on comparable analyses and royalties as the country’s transfer pricing regime is currently based on fixed margins, according to tax directors who spoke at ITR’s Brazil Tax Forum, held virtually on August 24.

“One of the concerns from companies is to understand how these [OECD guidelines] apply to the TP system,” said Gustavo Pagliuso Machado, tax manager at pharmaceutical AstraZeneca in Sao Paulo.

“These changes are important – the budget is already prepared, and companies need to understand what the prices might be, such as import prices. This is a major concern for all of us,” he added.

Kyoji Ishikiriyama, international tax manager at social media platform Facebook in Sao Paulo, added that the implementation of OECD standards will not only be a “practical question” for companies but an “operational” one mostly.

ALP at the forefront

Today, the Brazilian TP regime relies on fixed pre-determined profit margins instead of the arm’s-length principle (ALP).

The Receita Federal do Brasil (FRB) does not match the transfer prices charged between companies with those of similar transactions carried out by independent parties, but instead relies on a fixed price established by Brazilian law that does not need a comparability analysis.

The jurisdiction’s TP regime is therefore different to those in other countries that have aligned with OECD standards and require the ALP.

Since 2007, the OECD has strengthened its cooperation with Brazil – but the risk of double taxation and the potential loss of government revenue has meant more collaboration between the FRB and the international organisation was needed.

The joint project between Brazil and the OECD was launched in 2018 to examine the differences between their TP approaches to cross-border transactions.

In January 2022, the country was invited to start the process of joining as a full member.

Phelippe Oliveira, tax attorney at the General Attorney’s Office for the National Treasure in Brasilia, said the TP regime in particular needed to be reshaped.

“Back at that time [2018] we started these projects to comply with OECD guidelines – this was also coordinated to analyse internally what needed to be changed,” he explained.

“One of the points was the TP regime. That’s how the working groups first appeared – the cooperation between the federal revenue [FRB] and OECD,” added Oliveira.

Ishikiriyama said he is confident the revised TP regime will be finalised in the next couple of months, but that a complete alignment with OECD standards means companies must understand how to adjust to the new rules – and comply with the ALP.

Choosing the right comparables

Cristiane Drumond, TP specialist at the Brazilian Institute of Tax Law organisation in Sao Paulo, said moving towards a TP analysis based on comparability presents concern for taxpayers.

This is particularly due to the complexities of the OECD guidelines, as taxpayers’ TP will have to reflect the economic reality instead of a fixed price.

“We will have to follow a big number of different realities that have happened in different countries. It’s important to choose these comparables well. We have directives and the rules for our auditors are very important within the guidelines,” she said.

“We have to think about the reliability of data,” added Drumond.

Corporations will have to consider territorial and economic comparisons to make adjustments in their TP, for instance. They may have to endure some TP risks that they had not encountered before.

“Taxpayers have to start now and study what the new guidelines are,” said Drumond.

Royalties in TP regime

In Brazil, TP rules do not apply to most transactions involving royalty payments.

The transactions are instead subject to “special measures whereby the deductibility of the royalty expenses is limited to fixed percentages of the taxpayer’s turnover,” according to the OECD country profile of Brazil, published in February this year.

Laws in Brazil concerning intellectual property often conflict with other jurisdictions’ OECD-aligned regulations. This is because Brazilian subsidiaries can only remit and deduct royalties abroad up to 5% of the net sales of licensed goods.

“These rules were created to tackle tax avoidance in Brazil. These payments that are made by associates and companies should be incorporated in the TP,” said Drumond.

The country’s potential convergence with OECD rules means the TP system would cover all inter-company transactions such as intangible assets, which would be more efficient against tax avoidance measures and in alignment with the ALP.

Change on the horizon

Moving away from an obsolete TP regime is necessary, according to Drumond, despite what is an expensive project for the Ministry of the Economy and Social Affairs.

To become an OECD member, Brazil has little choice but to revise its tax regime, including TP.

“It’s not just a commercial pressure from partners. Today, we see companies – multinationals in the US – that are focusing on these [TP patterns] because there has been a change in legislation, also with the taxation system,” said Drumond.

“Unless Brazil makes this transition, we will not be able to move on,” she added.

The FRB is expected to release further information on Brazil’s TP regime in the next few weeks as it presents its final draft to Congress.

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