OECD-Brazil final Report: next steps for the convergence of Brazilian transfer pricing rules with OECD standards

2020 Apr.13

On December 18, 2019, the OECD and the Brazilian Federal Revenue released the final Report of the joint project for transfer pricing policy convergence, in line with the Brazilian interest in accessing the OECD. The project started up in February 2018.

Although the country has a high level of policy convergence with the OECD, this is not true regarding transfer pricing rules, as Brazil has never applied the organization’s official guidelines, introduced in 1995, and updated in 2016 with the BEPS Project.

In the OECD’s view, the Brazilian system favors some categories of taxpayers over others, leaving a leeway for the practice of aggressive tax planning. According to the Report, divergences between the policies adopted by Brazil and those suggested by the OECD increase the risk of both double taxation and double non-taxation, brought mainly by the use of presumed profit margins and the absence of normative provisions for more complex transactions (involving intangibles, for example). The OECD also criticizes the fact that Brazil’s legislation allows the taxpayer to choose the most advantageous method for each transaction, since the choice may not be the most appropriate.

The major difference between the two standards (Brazil and OECD), however, is the use of fixed margins, which consists of presumed percentages for the calculation of prices determined by the type of activity performed by the company. Brazilian law applies it in two methods, which are equivalent to the “cost plus” and “resale price” suggested by the OECD, in order to simplify the system. Brazilian legislation also does not allow questioning the applied margin, so the tax burden for each company might be different, as these margins apply regardless of the cost structure of each taxpayer.

Thus, the Report suggests two approaches for the convergence of the Brazilian system to the OECD standards. The first option aims to achieve adherence to OECD standards immediately by a reform of the Brazilian legislation, while the second provides for a systematic process, allowing smaller multinational groups to adapt gradually and voluntarily during a transitional period.

In addition, the OECD also ruled out the creation of a dual system in order to preserve the unique characteristics of the Brazilian policy towards specific sectors, since this option would probably create opportunities for abusive tax planning.

Although the OECD’s conclusion in the Report is that the country needs to adapt to the system that the Organization suggests, it intends to maintain what is positive in the Brazilian system: the simplicity of tax collection and inspection. In this sense, the current presumed margin system could become a “safe harbor” system, to be refined in order to reflect economic reality and actual industrial practices in certain situations.

We remain at total disposal to answer any questions that may arise regarding this subject.

Related attorneys: Antonio José Ferreira Levenhagen / Frederico de Almeida Fonseca