Home Tax Brazil’s Worldwide Tax Reform: What Took So Lengthy?

Brazil’s Worldwide Tax Reform: What Took So Lengthy?

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Brazil’s Worldwide Tax Reform: What Took So Lengthy?

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After enduring criticism from buying and selling companions for many years and 5 years of joint technical work with the OECD, Brazil has lastly taken its first formal step towards harmonizing its heterodox switch pricing regime with multilateral requirements — a transfer broadly cited as a prerequisite for OECD accession. However the December 2022 launch of Provisional Measure No. 1,152, as important as it’s, raises an essential query: What took so lengthy?

The divergence between Brazil’s intercompany pricing regime and a switch pricing system primarily based on the arm’s-length precept — the usual for allocating earnings amongst related enterprises, which is endorsed in almost each bilateral tax treaty and by the OECD’s influential switch pricing pointers — has lengthy made Brazil one thing of a rogue state in multilateral tax affairs. Below the OECD-endorsed switch pricing requirements, earnings and prices are cut up amongst related enterprises by hypothesizing that the entities are unrelated events transacting on arm’s-length phrases.

Utilizing essentially the most applicable pricing technique beneath the circumstances, primarily based on the OECD switch pricing pointers’ method-selection standards, these transactions are given an arm’s-length worth. The earnings and prices related to paying this arm’s-length worth are supposed to depart the events with their applicable share of groupwide revenue or loss.

This isn’t in any respect how Brazil’s intercompany pricing guidelines labored earlier than January 1 of this yr. Though the OECD has graciously characterised the system — enacted in 1996 — as loosely primarily based on the OECD’s 1979 report on switch pricing, the distinction between the 1996 regime and evolving OECD requirements has expanded at relativistic pace within the years since.

As an alternative of following something just like the OECD’s most-appropriate-method rule, Brazilian taxpayers had been free to make use of any one of many strategies made out there for the related class of transaction. Quite than permitting taxpayers to make use of unspecified strategies — strategies not particularly acknowledged by the OECD switch pricing pointers — in applicable circumstances, taxpayers had been sure to make use of one of many strategies stipulated by Brazilian legislation.

Not like the OECD pointers, that are theoretically detached to the directional move of products, Brazilian legislation provided completely different strategies relying on whether or not the managed transaction concerned imports or exports. And when taxpayers utilized the Brazilian strategies that loosely correspond to the resale-price technique or cost-plus technique, the gross margin or markup was primarily based on some legally stipulated share as an alternative of comparables knowledge.

The Brazilian system additionally had few, if any, provisions that particularly handled intangible transfers, intragroup companies, or cost-contribution preparations. Of their place, Brazil relied on a sequence of arbitrary mounted caps and normal deductibility rules.

In keeping with a joint report ready by the OECD and Brazil’s tax administration in 2019, Brazil’s system was too harsh and too lenient on the identical time. It regularly led to double taxation in some instances whereas doing little to stop taxpayers’ base-eroding tax planning methods in others. The executive advantages usually attributed to Brazil’s use of mounted margins and arbitrary deductibility caps did nothing to ease coordination issues with Brazilian buying and selling companions or promote tax certainty for multinational taxpayers.

Rising recognition of those issues, together with the strain tied to OECD accession, led Brazil and the OECD to embark on an alignment mission in early 2018. After almost 5 years of periodic press releases and progress studies, Brazil’s president issued a provisional measure that faithfully reproduces the important thing rules contained within the OECD switch pricing pointers — together with steering on hard-to-value intangibles and monetary transactions.

However 5 years is a very long time to write down one thing that reads like an abridged Portuguese model of OECD switch pricing pointers. The “gradual alignment” strategy endorsed by Brazil and the OECD contemplated a transitional interval over which the brand new guidelines can be launched, but it surely didn’t recommend ready 5 years earlier than even starting the phase-in interval. And the provisional measure is, because the title suggests, provisional. The OECD-modeled regime is elective for taxpayers in 2023, however congressional approval might be vital for it to develop into necessary in 2024. So even this belated alignment may in idea be transitory.

Many elements could possibly be accountable for the timing, together with potential obstacles or delays related to Brazil’s rulemaking procedures, the necessity to prepare tax enforcement personnel, or distractions created by extra urgent authorities issues.

It is also potential that the January 2022 U.S. international tax credit score rules that seemingly single out Brazil for the denial of credit (particularly on the premise of non-adoption of the arm’s-length precept) or a need to affix the multilateral consensus whereas the work on pillar 1 remains to be underway gave Brazil new motivation to finish the mission. Regardless, Brazil’s transition won’t be really full till the measure is permitted by Brazil’s Congress, a growth that can’t come too quickly for taxpayers and Brazil’s buying and selling companions.

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