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Dialogue Between Brazil and OECD on the Alignment of Brazilian Transfer Pricing Rules with the OECD Standard

Brazil could be moving towards an alignment of its transfer pricing rules with the OECD standard, as communicated in two events held in Brasília in July and December 2019 to disclose the results of a joint project of the OECD and the Brazilian Federal Revenue Service (“RFB”). During the 15-month project, the OECD and RFB evaluated differences and similarities of Brazilian transfer pricing rules and the OECD transfer pricing approach.

In December, the OECD and RFB launched a report outlining the strengths and weaknesses of the current Brazilian transfer pricing system and the amendments required to comply with international transfer pricing standards. In the events, the OECD representatives conveyed the message that the alignment was a necessary step for the accession of Brazil to the OECD

The project included a gap analysis based on five objective criteria, namely the prevention of BEPS risks, avoiding double taxation, ease of tax administration, ease of tax compliance and maintaining tax certainty.

One important topic analysed in the report is the status of the arm’s length principle in Brazil. Although the Brazilian transfer pricing legislation was originally inspired by the OECD when enacted in 1996, it has not been significantly amended since then, and the report concludes that it does not explicitly reflect the arm’s length principle. Such conclusion is mainly based on the fact that Brazilian transfer pricing methods basically rely on fixed margins regardless of the nature of the transaction, and on the absence of an actual and complete comparability analysis.

The report also identifies other gaps between Brazilian transfer pricing legislation and the OECD framework, such as: (i) Brazilian taxpayers can freely choose the applicable transfer pricing method; (ii) Brazilian transfer pricing rules do not allow the use of profit/based methods such as the transactional net margin method or the profit split method; and (iii) there are no rules specifically designed for transactions involving intangibles and financial transactions, nor rules on the allocation of profits to permanent establishments.

The report also evaluates how a convergence with the OECD standard in Brazil could be reached, i.e. whether the amendments to local rules could be immediately or gradually introduced. According to the report, the gradual implementation with a progressive transition of taxpayers into the new system is the favourable option, since it would be easier for all involved parties to cope with the challenges of a transfer pricing reform in Brazil.

It is worth noting that if the transfer pricing legislation is reformed and aligned with the OECD standard, the implementation and adoption of new transfer pricing rules would be a major challenge for taxpayers and especially for the RFB, which would require professionals prepared for an analysis focused on an economic approach instead of a mathematical perspective. Taxpayers may benefit from the experience of the group companies outside Brazil who use the OECD’s transfer pricing approach. In the above-mentioned events, RFB representatives highlighted the need for training tax auditors to deal with a new transfer pricing approach, as well as having administrative Court judges prepared to analyse transfer pricing cases.

Even though the report of the OECD and the RFB does not provide a clear timeline for the alignment of Brazilian transfer pricing rules with the OECD standard, nor outlines the possible future rules, it is a big step towards a Brazilian transfer pricing reform.