U.S. Government supports Brazil’s adhesion to OECD

2019 Jun.11

The United States have officially announced, on May 23rd, 2019 their support for Brazil’s adhesion to OECD. The U.S. The whole process will take up to five years, and it will require several changes to the Brazilian tax system and to the commercial and intellectual property rules in order to meet OECD standards.

One of the key aspects of OECD’s standards is the adoption of BEPS Recommendations (Base Erosion and Profit Shifting), an action plan published by the Organization in 2015 that aims to combat the tax avoidance by multinational enterprises (MNE).

Brazil is OECD’s ‘key partner’ since 1994 and has actively contributed to the BEPS Project, offering inputs and joining the inclusive framework (an expanded group that allows all interested countries to help and work on the project).

The BEPS Project published 15 actions needed to close the gaps exploited by MNE to achieve tax avoidance and double non-taxation. Not all of the actions have specific recommendations – for instance, Action 1 addresses the tax challenges of the digital economy and it is the most controversial one, still pending a final resolution. Action 11 establishes methodologies to collect and analyze data on BEPS, but it does not require any specific changes in legislation.

Meanwhile, four actions predict “minimum standards” whose implementation is mandatory for every member of the Inclusive Framework, including Brazil. The minimum standards comprise recommendations to fight harmful tax practices (Action 5), prevent tax treaty abuse (Action 6), improve transparency with Country-by-Country Reporting (CbC) (Action 13) and enhance the effectiveness of dispute resolution (Action 14).

Action 5 concerns the compulsory spontaneous exchange of information on certain tax rulings (written statements from tax authorities such as the Brazilian Federal Revenue’s Normative Rulings). It was implemented in Brazil through the Normative Ruling No.  1,689/17, allowing the sharing of rulings amongst the countries that adopted the OECD’s Multinational Convention on Mutual Administrative Assistance.

Brazil also complied with Action 13 by creating a new accessory obligation for MNE with annual consolidated group revenue equal to or more than BRL 2,26 billion, the Country-by-Country Report, instituted by the Normative Ruling No. 1,681/16.

Concerning Actions 6 and 14, they both involve changes to bilateral tax treaties, and Brazil has implemented their recommendations in all of the six new or amended tax treaties celebrated since the BEPS Project (Russia, Switzerland, Singapore, Sweden, India and Argentina). The latest treaties fulfill the OECD standards by including a “Limitation of Benefits” clause and a “Principal Purpose Test” rule, which serve to prevent the granting of treaty benefits in inappropriate circumstances, coupled with a “Mutual Agreement Procedure” clause, intended to provide an efficient tool for treaties dispute resolution. Brazil also regulated the workings of the Mutual Agreement Procedures on a domestic basis, issuing the Normative Ruling No. 1,846/18.

As for the remaining BEPS Actions, Brazil’s legislation not only complies with every recommendation, but in some instances go further than the OECD’s standards. Such is the case of Action 3, regarding the design of effective “Controlled Foreign Company” (CFC) Rules, whose the final report suggests the creation of well-defined rules that aim to tax specific affiliated companies located in low-tax jurisdictions. However, Brazil’s CFC rules, provided for in Law nº 12,973/2014, are a “full-inclusion” system, granting the right to tax virtually every foreign affiliate, no matter where they are located. The same goes for other Actions, such as Action 4, concerning the limitation of interest deductibility.

The biggest mismatch between Brazilian tax legislation and OECD’s standards surely is the Transfer Pricing Rules, encompassed by Actions 8, 9 and 10 of the BEPS project. While the official recommendations require a fine-tuning application of the “Arms’ Length Standard”, which involves several specific calculation methods for different types of transaction, Brazil’s peculiar transfer pricing rules make use of “fixed profit margins” in order to simplify the calculations. Due to the discrepancy in this area, in February 2018 the OECD and Brazil launched a 15-month project to analyze and explore options for an alignment of the transfer pricing rules with global standards. The key findings and conclusions of this work are scheduled to be announced in July, 2019.

The OECD accession process requires an in-depth review of a country legislation. For that reason, being endorsed by the U.S. is an important step, but the road ahead is a long one, and Brazil will have to adapt its legislation in order to converge on several topics, including tax.

This brief report analyzed the country’s current alignment to the BEPS standards, which comprise the necessary recommendations for adapting the international tax rules. Brazil is very much on par with most of the BEPS Actions, with one notable exception regarding the Transfer Pricing Rules (Action 8, 9 and 10), but even those are already being assessed in a joint project with the organization, leading us to conclude that, at least on this topic, the country is well prepared to join the OECD.

Related attorneys: Frederico de Almeida Fonseca /