Podcast: Brazil’s Game-Changer: How OECD’s Transfer Pricing Principles Revolutionize Local Taxes

On this episode of Weaver: Beyond the Numbers, Vince Houk and Josh Finfrock discuss the tax opportunities for businesses with cross-border activities and take a deep dive into Brazil adopting the OECD principles for transfer pricing.

Key Points:

• Brazil recently adopted the OECD principles for transfer pricing, aligning their regulations with international standards.
• The new transfer pricing rules in Brazil will be mandatory in 2024 but can be opted into for 2023 if companies choose to do so.
• The new rules will allow companies to have a uniform method for transfer pricing globally, eliminating mismatches and potential double taxation

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00:00:00

Vince: Welcome to another edition of Weaver Beyond the Numbers. I’m Vince Houk, partner-in-charge of international tax, and today we are going to be discussing tax opportunities for businesses with cross-border activities. And we’re going to dive in today — Brazil adopted the OECD principles for transfer pricing, and to discuss this topic, I have a very special guest, Mr. Josh Finfrock. Josh leads the transfer pricing practice at Weaver. Josh, great to have you here today.

00:00:34

Josh: Thanks for having me. Definitely an exciting topic to talk about. I mean, recently, June is when this was enacted into law in Brazil. So this is really one of the biggest changes in the transfer pricing world in several years because Brazil was kind of one of the last holdouts in an old regime that was different and didn’t align with the OECD guidance. So the new rules are to align to the arm’s length standard and the OECD principles.

00:00:57

Vince: So they’re the last country to adopt these principles, right?

00:01:01

Josh: Right, yeah. So you have a formulaic-based approach in Brazil that’s been unique for a long time. These new rules can be opted into for 2023. If you opt in by September 30th of 2023, which is awfully soon, we sort of anticipate there won’t be a lot of clientele clamoring to do that because it’s already a lot to absorb, but they will be mandatory in 2024. So that’s also still pretty soon, right, when you think about a change this big.

00:01:32

Vince: What should companies be thinking about currently as they think about these rules potentially coming into effect and positioning for the future. I mean what impact does this have on the business?

00:01:43

Josh: When you think about what the rules were, a much more formulaic approach where we didn’t have these arm’s length means to set the method, you had a lot of import and export-based methods where a fixed margin was attached to given categories of activity by the government. So there’s no comparables or analysis to it, economic analysis, it was just a fixed rate, right? So with that, you had this inherent certainty locally, which in some sense was nice because you knew what the outcome would be. But you had double taxation in a lot of situations or an exposure on the other side of the transaction, so say the U.S. owner of a Brazilian company. So when we think about where we need to go from there, really getting our arms around what the functions, assets and risks are of this local Brazilian operation is going to be pretty key early on so that we know what kind of method we’re going to be transitioning to or what adaptations need to be made locally to meet the arm’s length standard there. The benefit of this is going to be companies can ideally have a uniform method with the rest of their global transfer pricing arrangements. Where they may not have been able to deduct royalties or service expenses, these kinds of things had mismatches with customs and income tax in Brazil locally. Hopefully this will allow them to align that better. Those are the kind of things that we need to be thinking about with our clients as well as the operational side of it. Part of the reason companies will need to think about this sooner rather than later, is because you have local accounting teams and tax preparers, and this is new to all of them who will have spent their entire career in a different regime. So getting all that accounting right and implemented is going to be important, as well as the economic analysis that we need to do to understand what the answer needs to be.

00:03:22

Vince: So generally, I’m hearing this could be a good thing for companies in that it does align different transfer pricing methodologies because now there could be some instances where they’re not aligned, which could cause some tax efficiencies, maybe some additional tax costs or like you mentioned, maybe sometimes even non deductibility of costs. So it sounds like overall this will be a benefit to clients, but there is going to be a lot to transition, especially from a local perspective, I imagine, as well.

00:03:53

Josh: Right, and you have a federal change, so you may have some bumps along the way in terms of localized and regional tax levels that may take a little longer to figure out how this is going to really work from the federal level. But from a global perspective, it’s a huge change and it allows companies to align Brazilian operations with how they do transfer pricing everywhere else, which can alleviate double tax, and may be able to release some reserves that have been held on other sides, so it’s a great opportunity.

00:04:21

Vince: Very interesting and great to have you again, Josh, and thanks for all your insight today. That’s our show. Stay tuned for another edition of Weaver Beyond the Numbers, where we will continue to discuss solutions and opportunities for cross border activities.