How BRICS can impact your transfer pricing

The BRICS often need careful handling, however. They represent almost three billion people, with a combined nominal GDP of $13.7 trillion. The tax administrations are aggressive in protecting the countries' revenues but their staff can lack in experience.

None of the BRICS are OECD-member countries (though they are all involved in tax policy discussions to differing extents) but their strong economies and attractive investment opportunities mean they have a relatively strong presence in OECD discussions.

Antoine Glaize, the global head of transfer pricing for Taxand, based in Paris, said, because of the BRICS' separation from the OECD, the biggest concerns for taxpayers include "limitation of certain intangible payments, application of withholding tax on services, normative rules for local returns and difficulties [for authorities ]to explain transfer pricing policies changes even [those] well documented".

Double taxation is a constant threat and represents the biggest headache for taxpayers.

"Brazil effectively ignores arm's-length principles and instead mandates arbitrary results according to the taxpayer's functional profile," said Michael Leonowitz, global transfer pricing leader and head of Americas taxes at SABIC, a manufacturing company.

"Comparability, reliability and industry dynamics are not properly taken into account. China, too, seeks to justify local profits, no matter what, by asserting vague notions of location savings and market premium, asserting such value drivers automatically accrue to China itself," he added.

Despite the BRICS' non-membership at the OECD, the organisation is still considered the biggest influencing factor in their tax policy. "This single organisation has been extremely proactive in publishing needed guidance – non-binding – to taxpayers and tax authorities and is providing thought leadership on emerging issues," said Leonowitz.

Because these countries are in a stage of relatively new advanced economic development, there are other, stronger, factors at play in terms of driving transfer pricing development but the BRICS do play a part.

"While BRICS may have viewed transfer pricing as a potential threat for them and symmetrically have adopted very aggressive positions, they tend to soften their approach and to converge towards international standard rules even though field practice may remain far from MNEs expectations," said Glaize.

Leonowitz said the China and India are particularly aggressive by challenging the application of traditional transfer pricing methodologies and positing creative arguments not previously addressed such as China's location savings. "Such debates are healthy, I think, to the extent the tax authorities remain open minded in tackling these interesting, thorny questions. The other countries do not yet exert much influence. The transfer pricing environment in Russia and South Africa is simply too new; Brazil is too arbitrary."

Complying with each of the BRICS in turn requires a balance between local country law and reconciling against the other party to such transactions, which typically accept the arm's-length principle and OECD guidelines.

Return to the BRICS tax cooperation special focus

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