A new TP regime will implement the full ALP model, which is expected to increase investments and tax certainty for the nation.
To increase foreign investment, increase tax certainty, and avoid double taxation, Brazil's tax administration unveiled a new transfer pricing regime on June 29 that will adhere to OECD standards.
Victor Kampel, tax partner at the So Paulo-based law firm Campos Mello Advogados (in collaboration with DLA Piper), claims that the Brazilian TP model is not based on the arm's-length principle (ALP), but rather on fixed margins.
According to Kampel, the Receita Federal do Brasil (RFB) will now permit the use of comparability when evaluating the arm's-length price, which is a significant change for the nation's TP system.
Brazil will need to adapt to the new regime's changes and work with updated data.
According to Kampel, "until today, the TP work was done by accountants – when the new model is going to come into effect, the TP work will be performed by economists that perform calculation models to determine the comparable price."
The new legislation requires that Brazilian subsidiaries and headquarters review their inter-group transactions, reset their TP policies, and implement a TP implementation plan.
The upcoming changes will be significant, according to Cristiane Drumond, an international tax consultant with the So Paulo firm Drumond Vitae. This is true from both a regulatory and a taxpayer and tax authority perspective.
The TP system that was more practical and applicable to a smaller range of transactions was what market participants were accustomed to. Since 2012, there have been comparatively few domestic controversies as a result.
Now that comparability analysis is a core component of Brazil's TP system, businesses or subsidiaries operating there must take economic data into account when determining the arm's-length price.
Functional analysis, which is used to identify the significant economic activities, assets used, and risks taken by relevant parties, will change as a result of the regime.
It also takes into account particular types of transactions, such as financial transactions, cost-sharing agreements, reorganizations, and intangibles.
Brazilian businesses will be able to adopt techniques and determine which ones suit their transactions the best. More conversations with tax authorities might result from this in turn.
A second feature of the RFB regime is the introduction of transactional net margin and transactional profit methods, which, according to Drumond, are more appropriate for complex situations.
There will also be new mechanisms to prevent double taxation and disputes, as well as requirements for documentation, including local and master files.
For Brazilian corporations, arbitrage, mutual agreement processes, and advance pricing agreements will also be available.
The ALP must be implemented in Brazil in accordance with international standards in order to allow for future tax treaties with the US and the allowance of foreign tax credits for domestic income taxes paid.
But initially, these new TP regulations might cause some problems for businesses.
In addition to facing tax uncertainty, corporations may incur higher compliance and training costs.
According to Drumond, "the alignment with the OECD standard, which is more sophisticated and encompasses a much broader diversity of cross-border transactions, is expected to – at least during the initial stages – increase the complexity and costs of tax conformity of taxpayers and auditing of tax authorities."
To prevent tax litigation, the modifications made to Brazil's TP system will necessitate extensive training for tax professionals and a more cooperative setting.
Brazil's TP regime has not changed since it was established in 1996, but the nation has demonstrated a desire for improvement because of significant gaps and deviations from OECD recommendations.
The new system might offer substantial advantages.
According to Drumond, "Brazil’s current TP system’s reliance on predetermined margins that are irrefutable in practice due to impossibly restrictive documentation requirements is incompatible with the 'ability to pay' principle linked to the OECD arm’s-length standard."
Brazil could become more integrated into the global value chain and there will probably be an increase in foreign investment, which is encouraging given the country's gloomy economic prospects.
By fLEXI tEAM