Fabian Alfonso, Managing Director, Salim Vagh, Director, and Jaime Sepulveda, Analyst, in Duff & Phelps’ Transfer Pricing practice, and Igor Scarano, Partner at Transfer Pricing LAB, recently jointly published an article in Bloomberg Tax titled, “Implementing the Transaction Net Margin Method for Transfer Pricing in Brazil.”
In February 2018, the Brazilian tax administration, Receita Federal do Brasil (RFB), began working with the Organization for Economic Cooperation and Development (OECD) to evaluate the similarities and differences between the two transfer pricing systems. As a result of this effort, known as the “Transfer Pricing in Brazil Project,” the OECD and RFB concluded that Brazil would need to make changes to its transfer pricing system to better align with the OECD Guidelines as a precursor to joining the OECD. On June 30, 2020, as part of the Transfer Pricing in Brazil Project, the OECD and RFB launched a survey to seek public input to inform the work related to the development of safe harbor provisions, use of available comparable company data, and sector-specific advance pricing agreements (APAs).
Now that RFB has significantly committed to the implementation of the OECD Guidelines, the country is faced with determining how to efficiently transition from its legacy transfer pricing regulations (1996 transfer pricing regulations), enacted in 1996 with the passage of Law 9430/1996 and amended by Law 12.715/2012, to adopting the arm’s-length standard, which is the guiding principle of the OECD Guidelines. Brazil’s 1996 transfer pricing regulations were primarily designed to price tangible goods transactions.
In 1996, intangible transactions, business restructurings, and the digital global economy were issues that did not have a material impact on the Brazilian economy. Updates to the 1996 transfer pricing regulations have focused on refining the current system while doing little to address the challenges associated with non-tangible transactions, including intangible transactions, business restructurings, and intercompany services. However, technological progress in Brazil and globally in the past 25 years has made non-tangible transactions as important if not more important than tangible goods transactions and has had a material impact on the Brazilian tax base.
As Brazil moves towards converging its transfer pricing regulations with those of the OECD Guidelines, RFB must determine which aspects of its current transfer pricing structure should be replaced with internationally accepted standards and which aspects should be maintained, albeit with certain modifications, to reflect what many Brazilian transfer pricing practitioners believe is the main strength of its current system: certainty.
There are many technical challenges in the implementation of an OECD system that has been developing for decades. It will take significant efforts by RFB, taxpayers, practitioners, and academia to change the Brazilian system.
Duff & Phelps’ transfer pricing practitioners talk about certain aspects of the adoption and application of the OECD’s transactional net margin method (TNMM) in Brazil, focusing on comparable company data, comparability adjustments and the possible use of safe harbors for functions traditionally tested with the TNMM. They outline the practical considerations for implementing the OECD’s TNMM in Brazil, including an approximation to best practices in designing a safe harbor regime based on the TNMM.
Read the full Bloomberg Tax article here.
