As a G20 country, Brazil has been engaged in the OECD’s work and the Brazilian Revenue Service has said it intends to adopt BEPS recommendations.
Nevertheless, Brazil has a long history of going its own way where international tax standards are concerned, and it’s possible that Brazil could adopt only those aspects of the proposals that suit Brazil’s domestic purposes.
As a recipient of significant foreign direct investment, Brazil has been concerned with BEPS for many years. The country has longstanding international tax rules and other measures in place to stem the flow of earnings outside the country. For example, royalty payments for foreign related parties are subject to statutory limits and require approval by a regulatory agency based on a detailed analysis.
Traditionally, Brazil has been unwilling to harmonize with OECD international taxation principles, for example, in its transfer pricing and thin capitalization rules and CFC regime. Brazil’s current versions of these rules leave little space for BEPS-style tax planning. Rather, they often expose companies to double taxation risk.
It currently appears that Brazilian tax authorities are determining how the OECD’s guidance on BEPS affects existing rules in Brazil.
As a result, any domestic tax changes might require a lengthy process of debates and discussion by the Brazilian Congress. For example, inspired by mandatory disclosure recommendations under Action 12 of BEPS, the Executive Branch of the Brazilian government’s introduced a provisional measure (PM 685/2015) requiring taxpayers to formally report transactions that could result in a tax benefit for Brazilian taxpayers. However, the proposal’s wording prompted heated debate, and the Brazilian Congress did not pass the provisional measure.
Because Brazilian transfer pricing rules do not follow the arm’s length principle, most companies face challenges in supporting their transfer pricing policies in Brazil. A recent ruling by the Brazilian tax authority states that a report issued by an independent company is acceptable for evidencing the costs incurred by the tested party abroad, provided the report verifies the costs of production incurred by the supplier abroad and supports the costs using data available at origin. By potentially allowing taxpayers to align their transfer pricing policies, this ruling could help to eliminate potential contingent liabilities, reduce taxable adjustments, and/or eliminate double taxation arising from transfer pricing rule mismatches.
In 1999, Brazil established a list of countries that are considered as low-tax jurisdictions (with further updates) and, in 2010, published a new list of ‘privileged tax regimes’. Payments made to entities in listed countries are generally subject to withholding tax rate of 25 percent (instead of the usual 15 percent rate). Brazil’s transfer pricing, thin capitalization and tax deductibility rules are generally stricter in relation to transactions with entities in listed countries or operating under privileged tax regimes.
Some changes suggest that Brazil is willing to bringing its domestic tax rules closer to OECD principles in cases where doing so suits the country’s interests. For example, amendments to Brazil’s CFC regime were introduced in May 2014 appear to accept OECD recommendations in this area.
According to new CFC rules that entered into force in 2015, Brazilian companies are required to disclose their profits for tax purposes individually for each foreign investment, including profits of all their foreign subsidiaries. The required report is similar to the type of report required under the OECD’s country- by-country tax reporting proposals, but the information is provided in the companies’ accounting records.
Brazil has also became a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes. In the OECD’s Phase 2 Review of Brazil’s compliance, the OECD found the country’s practice is in line with the international standard for transparency and exchange of information for tax purposes.
In 2016, Brazil moved forward to implement some steps related to BEPS Actions.
Regarding Action 13, Brazil signed the Multilateral Competent Authority Agreement on Exchange of Country-by-Country Reporting and implemented the agreement domesticallyin 2016. This agreement enables forms of administrative assistance in tax matters between the countries, including the exchange of information for tax purposes.
The Brazilian Revenue Service also imposed country-by-country reporting requirements for Brazilian entities that are the ultimate parent entity of a multinational group, among other situations. The required report follows the OECD’s Action 13 guidelines.
Regarding Action 14, the Brazilian Revenue Service issued a normative instruction providing rules on the mutual agreement procedure (MAP) under treaties for the avoidance of double taxation. All of Brazil’s 32 tax treaties have a MAP article establishing a specific channel for consultation by taxpayers in cases where measures result in taxation that is not in accordance with the tax treaty. The normative instruction establishes a specific regulation for this consultation process and a channel of discussion between Brazil and the treaty partner.
Some developments in Brazil’s domestic tax legislation are also influenced by the BEPS project. These include changes to the Brazilian Corporate Taxpayers Registry (CNPJ), which now requires the disclosure of information with respect to ‘ultimate beneficial owners’.
Even though Brazil may be aligning some of its international tax rules with global standards to some extent, its piecemeal approach to adopting the OECD’s recommendations could potentially generate more double taxation and tax disputes. Foreign multinationals operating in Brazil and Brazilian companies with foreign operations will all be affected, with different impacts:
All companies should make every effort to document the economic substance of their cross-border transactions and business arrangements. With adequate preparation, international businesses in Brazil can adapt to the new tax landscape without incurring excessive tax costs or business disruption during the transition.