Brazil - response to BEPS

Brazil - response to BEPS

As a G20 country, Brazil has been engaged in the OECD’s work and the Brazilian Revenue Service has already expressed its intention to adopt BEPS recommendations.


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Nevertheless, Brazil has a long history of going its own way where international tax standards are concerned, and it’s possible that Brazil will pick and choose to adopt only those aspects of the proposals that suit Brazil’s domestic purposes.

BEPS already on tax authorities’ agenda

As the recipient of significant foreigndirect investment, Brazil has been concerned about BEPS for many years. The country has had a number of international tax rules and other measures in place for several years 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 unwillingto harmonize with OECD international taxation principles, for example, in its transfer pricing, thin capitalization and controlled foreign corporation (CFC)regimes. Brazil’s current versions of these rules leave little scope for BEPS-style tax planning. Rather, they often expose companies to double taxation risk, and there is no recourse to OECD-sanctioned mechanisms, such as mutual agreement procedures, for resolving double tax disputes. 

Moving closer to international norms?

As a G20 country, Brazil has beenengaged in the OECD’s work and the Brazilian Revenue Service has expressed publicly its intention to adopt BEPS recommendations. Despite this, it appears that Brazilian tax authorities are currently determining how the guidance affects Brazilian existing rules.

As a result, any domestic tax changesmight require a lengthy process of debates and discussion before the Brazilian Congress. For example,inspired by mandatory disclosurere commendations under the OECD’s Action 12, the Brazilian government’s Executive Branch introduced a provisional measure (PM 685/2015) requiring taxpayers to formally report transactions that result in a tax benefit to the Brazilian tax authorities. However, the proposal’ swording prompted heated debate, and the Brazilian Congress did not pass the provisional measure. 

Because Brazilian transfer pricing requirements 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 are port 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 documents the costs using data available at origin. By potentially allowing tax payers to align their transfer pricing policies, this ruling could help eliminate potential contingent liabilities, reduce taxable adjustments, and/or eliminate the double taxation arising from transferpricing regulation mismatches.

In 1999, Brazil established a list ofcountries that are considered to be 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 subject to a withholding tax at a rate of 25 percent (instead of the usual withholding tax rate of 15 percent). Brazil’s transfer pricing, thin capitalization and tax deductibility rules are stricter in relation to transactions with entities in listed countries or operating under privileged tax regimes.

Some recent changes suggest that Brazilis open to bringing its tax rules closer to OECD principles in cases where doing so serves the country’s interests. For example, amendments to Brazil’s CFC regime introduced in May 2014 appear to draw on OECD recommendations in this area.

Starting in 2015, Brazilian companies arerequired to disclose their profits for tax purposes by country, including profits ofall their foreign subsidiaries. The required report is similar to the type of report required under the OECD’s country-bycountry tax reporting proposals, but the information is provided in the companies’ accounting records.

Brazil has also signed up as a memberof 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 to be in line with the international standard for transparency and exchange of information for tax purposes.

Piecemeal adoption opens double tax risk

Even though Brazil may be aligningsome of its international tax rules in stepwith global standards to some extent,its piecemeal approach to adoption of the OECD’s recommendations could open potential for more double taxation and tax disputes. Foreign multinationals operating in Brazil and Brazilian companies with foreign operations will all be affected, but with different impacts:

  • Brazilian companies will be directlyaffected as the countries theydo business in translate the final OECD BEPS recommendations intodomestic law. These companies should monitor developments in their countries of operation closely,and prepare contingency plans in the event that BEPS-related legislative change upsets existing arrangements.
  • Foreign companies with operations in Brazil should keep a close watchon Brazilian tax policy changes and ensure their tax reporting systems and processes can provide the necessary data to satisfy their parent company country-by-country tax reporting obligations.

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 created by BEPS without incurring excessive tax costs or business disruption during the transition.

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