Federal Revenue Service and OECD Present New Transfer Pricing System for Brazil
Free Tax News Service Highlight
On 12 April 2022, the Federal Revenue Service of Brazil, together with the OECD and the United Kingdom, presented the main features of a new transfer pricing system for Brazil.
Among the participants in the event were Paulo Guedes (Minister of Economy of Brazil), Pascal Saint-Amans (director of the Center for Tax Policy and Administration of the OECD), Julio Cesar Vieira Gomes (special secretary of the Federal Revenue Service of Brazil) and Melanie Hopkins (ambassador interim member of the United Kingdom in Brazil).
Julio Cesar Vieira Gomes explained that, since 2018, the Federal Revenue Service of Brazil and the OECD have developed a project to assess Brazil's legislation on transfer pricing. This project is carried out with the technical support of the OECD and the United Kingdom.
Paulo Guedes stated that the new transfer pricing system represents an unprecedented situation for Brazil as well as a decisive step towards its accession to the OECD.
Pascal Saint-Amans stated that this project was one of the most fruitful collaborations implying technical assistance by the OECD in the area of taxation and highlighted the role of Brazil as an active member of the inclusive framework on BEPS. Saint-Amans also mentioned the fact that Brazil had signed the joint statement with an agreement on a new framework for international tax reform (Pillar 1 and Pillar 2) on 8 October 2021. Saint-Amans stated that the new transfer pricing system for Brazil will allow securing revenue for the country, integrating it into the value chain and creating an environment that promotes growth and investment by providing tax certainty.
The new system will be composed of rules addressing the general principles that apply to transfer pricing, which would be in line with the OECD standards. In addition, it will provide rules on specific types of transactions (e.g. intangibles, financial transactions) and on certain topics that are relevant from a transfer pricing perspective (e.g. royalties).
The main features of the new transfer pricing system are the following:
- Incorporation of the arm's length principle in Brazilian legislation;
- A new scope of application of transfer pricing rules. Rules in force only apply to import, export and loans, but the new legislation will apply to all types of transactions;
- Introduction of a definition of "related parties", as well as a list of situations that will fall under this definition (e.g. parent companies, subsidiaries);
- Rules on the delineation of transactions, based on relevant characteristics (functions performed, assets involved, risks borne, contractual terms, business strategies and market conditions);
- Introduction of the transactional net margin method and profit split method in Brazilian legislation. The application of other methods will also be authorized (e.g. the valuation method in the case of unique and valuable intangibles);
- Introduction of a rule on the application of the most appropriated method, according to the characteristics of the relevant transaction, availability of information and degree of comparability between the transaction under review and transactions carried out between non-related parties. Currently, taxpayers may freely choose the method to be applied;
- Choice of tested party, either domestic or foreign, when it is relevant for the application of the specific method;
- A comparability analysis will be at the centre of transfer pricing. The new system will provide guidance on comparability. Participants pointed out that, at present, a comparability analysis is partially present in Brazilian legislation, but there are some limitations in its application (e.g. comparability factors to be considered and application of fixed margins);
- Transfer pricing adjustments. The Revenue Service will be authorized to make primary adjustments in case of non-compliance with the arm's length principle. Secondary adjustments would be made to address consequences of profit shifting. The new system will include the possibility of making corresponding adjustments in case of the application of MAP mechanisms to reduce double taxation;
- Commodities transactions. The new system will focus on the application of the arm's length principle. The ultimate objective of the new rules will be to capture the market value of the commodity. The new system will provide the possibility of performing comparability adjustments supported by evidence. The date of conclusion of the transaction will be accepted by the Revenue Service if it is aligned with market practices and duly supported by documentary evidence;
- Intangibles. The new system will provide general guidelines and will define intangibles for transfer pricing purposes. It will also introduce the DEMPE functions for allocation of income, and include guidance on how to deal with transactions related to unique and valuable intangibles (e.g. the use of valuation methods). Royalty deductibility limitation rules will be reviewed to ensure their effectiveness as an anti-avoidance measure;
- Introduction of rules on intragroup services, including safe harbour rules for low-value-adding services;
- Introduction of rules on cost contribution arrangements;
- Introduction of specific rules on business restructurings;
- Scope of financial transactions. Current legislation in Brazil only applies to loan transactions and interest paid under such loans. The new system will expand this scope to cover all types of financial transactions carried out between related parties (e.g. cash pooling and guarantees);
- Tax certainty. Legislation will design safe harbours in line with economic reality and the Revenue Service will be authorized to conclude advance pricing agreements; and
- Obligation to prepare a Master File and a Local File in addition to the country-by-country report currently foreseen in legislation. Additionally, a new penalty system in line with these new obligations will be implemented.
The next step of the project includes consultations with different sectors, in particular with industries that will be the most affected by this new system. A bill proposal will then be submitted to the National Congress. Subsequently, implementation aspects will be addressed by the Revenue Service to provide more legal certainty (e.g. compliance aspects, dispute prevention, simplification measures, safe harbours and adoption of regulations).
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