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Concern grows concerning comparables and intangibles in the TP reform

Tax experts said that Brazil's adherence to OECD standards might change how businesses utilize comparables and handle royalties in TP.

According to tax directors who spoke at ITR's Brazil Tax Forum, conducted electronically on August 24, Brazil's planned convergence with OECD standards would significantly affect comparative analyses and royalties as the country's transfer pricing framework is presently based on fixed margins.

The ability to comprehend how these [OECD principles] relate to the TP system is one of the worries from businesses, according to Gustavo Pagliuso Machado, tax manager of pharmaceutical company AstraZeneca in Sao Paulo.

"These changes are important – the budget is already prepared, and companies need to understand what the prices might be, such as import prices. This is a major concern for all of us,"  he continued.

According to Kyoji Ishikiriyama, worldwide tax manager at social media giant Facebook in Sao Paulo, the adoption of OECD standards will primarily be a "practical question" for businesses rather than only a "operational" one.

In place of the arm's-length concept, the Brazilian TP regime currently depends on predefined, predetermined profit margins (ALP).

The Receita Federal do Brasil (FRB) depends on a set price established by Brazilian legislation that does not need a comparability study to compare the transfer rates paid between corporations with those of identical transactions carried out by third parties.

As a result, the jurisdiction's TP system is distinct from those in other nations that have OECD standards alignment and demand the ALP.

The OECD and Brazil have been working together more closely since 2007. However, the possibility of double taxation and the possible loss of government income made it necessary for both parties to work together more closely.

2018 saw the start of a cooperative initiative between Brazil and the OECD to compare the disparities in respective TP strategies for international trade.

The country was asked to begin the application process to become a full member in January 2022.

The TP regime in particular has to be changed, according to Phelippe Oliveira, a tax attorney at the General Attorney's Office for the National Treasure in Brasilia.

He said, "Back at that time [2018] we started these projects to comply with OECD guidelines – this was also coordinated to analyse internally what needed to be changed."

"One of the points was the TP regime. That’s how the working groups first appeared – the cooperation between the federal revenue [FRB] and OECD," continued Oliveira.

Ishikiriyama expressed his confidence in the updated TP regime's completion in the coming months but said that in order for there to be a perfect alignment with OECD standards, businesses must be aware of how to adapt to the new regulations and adhere to the ALP.

Moving toward a TP analysis based on comparability raises anxiety for taxpayers, according to Cristiane Drumond, TP specialist at the Brazilian Institute of Tax Law organization in Sao Paulo.

This is especially true given the complexity of the OECD regulations, which require taxpayers' TP to represent economic reality rather than a set price.

"We will have to follow a big number of different realities that have happened in different countries. It’s important to choose these comparables well. We have directives and the rules for our auditors are very important within the guidelines ," she stated.

Drumond said, "We have to think about the reliability of data."

For example, while adjusting their TP, corporations will need to take geographical and economic comparisons into account. They could have to deal with TP dangers they have not seen previously.

"Taxpayers have to start now and study what the new guidelines are," according to Drumond.

In Brazil, the majority of transactions involving royalty payments are exempt from TP regulations.

The OECD national profile for Brazil, released in February of this year, states that the transactions are instead subject to "special measures whereby the deductibility of the royalty expenses is limited to fixed percentages of the taxpayer's turnover."

Intellectual property laws in Brazil frequently contradict with OECD-aligned rules in other countries. This is so that Brazilian subsidiaries can only remit and deduct royalties from net sales of licensed items that total no more than 5% overseas.

"These rules were created to tackle tax avoidance in Brazil. These payments that are made by associates and companies should be incorporated in the TP,"  according to Drumond.

The TP system would apply to all inter-company transactions, including those involving intangible assets, as a result of the country's anticipated convergence with OECD laws. This would make it more effective against tax dodging strategies and consistent with the ALP.

Drumond argues that while being a costly effort for the Ministry of the Economy and Social Affairs, moving away from an antiquated TP system is vital.

Brazil has little choice except to change its tax policies, including TP, in order to join the OECD.

"It’s not just a commercial pressure from partners. Today, we see companies – multinationals in the US – that are focusing on these [TP patterns] because there has been a change in legislation, also with the taxation system," Drumond continued.

"Unless Brazil makes this transition, we will not be able to move on," she continued.

As it prepares to deliver its final draft to Congress in the coming weeks, the FRB is anticipated to provide further details on Brazil's TP regime.


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