How Easy is to Take Transfer to Us in Deloitte

São Paulo, Brazil. International transfer pricing is able to accept place in Brazil, outside of the OECD

Writer: Carlos Ayub, Tax Partner at Deloitte

February 24, 2015

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The economic view of Brazil has always been two fold for investors: on the one hand, there are expert opportunities for sustainable growth; on the other, there is suspicion and concern virtually the management in which Brazil is marching, economically and politically.

The latest downturn decreased the country'due south growth rates while bumping upwardly inflation – just two of the uncertainties Brazilian investors face up. With ane of the globe's highest tax burdens, a circuitous tax structure, a highly bureaucratic surround, and continuous government spending, Brazil is stumbling through a period of high institutional risk and shrinking strange direct investments.

The most obvious challenge is the fact that Brazil is not a fellow member of the OECD, which ofttimes causes misunderstandings and unexpected tax and transfer pricing problems

Brazil only spends ane-third of the average amount spent by other countries in infrastructure, even though the need for advanced investments in infrastructure is high. Generally, the land seems to focus more on keeping private consumption high, instead of having a strategic view of market development with a perspective of sustainable growth.

The about urgent problem Brazil must tackle is the steep pass up in competitiveness; to do this, it will need individual-sector interest to better its infrastructure. In spite of these issues, Brazil even so offers 1 of the world's best investment opportunities.

The land's GDP growth is no longer thriving as it was five years ago (see Fig. 1), merely the economy overall remains solid. It has a clean energetic matrix and a large domestic market place. As the earth'due south seventh largest economy, the state also plays a leading office in Due south American economy and politics, standing out with increased attractiveness on the international scene. Brazil's major competitive advantage includes social and economical growth, combined with stability and environmental sustainability; macroeconomic structure; a potent domestic market; richness of natural and cultural assets; open market; and democratic stability.

These positive factors helped Brazil benefit from sizable foreign investments over the last ii decades. In 2012 the Southward Korean automaker Hyundai invested $273m, and established its starting time factory in South America in Piracicaba, São Paulo, Brazil. The global President of Hyundai, Chong Mong Koo, stressed the compact HB20 was developed exclusively for the Brazilian market place. He said the new subsidiary will "contribute to the evolution of the Brazilian automotive manufacture and the local economy." High german automaker BMW chose the state of Santa Catarina equally the site for its get-go mill in Brazil. BMW will invest about £249m in the initial installation, which started operations in 2014.

Driving Brazil'south economic system forward
The automotive sector represents about 20 pct of GDP of the Brazilian economy, and the German language and South Korean automakers' investment will concenter new companies in the automotive supplier industry. Those companies are often subsidiaries of international conglomerates, and appoint in purchase and sale transactions for goods, services, and rights. Those related-party transactions are subject to Brazilian rules of transfer pricing.

These rules can essentially increase companies' tax brunt if not previously considered when making an investment decision, that is, before setting upwardly concern in Brazil. The additional costs of college taxes or double taxation tin can essentially reduce the expected profit from investment in Brazil. When considering the Brazilian revenue enhancement and transfer pricing regimes, the near obvious challenge is the fact that Brazil is non a member of the OECD, which oftentimes causes misunderstandings and unexpected taxation and transfer pricing problems.

The transfer pricing methods for testing the pricing of intercompany transactions established by Brazilian police force vary according to the nature of the transaction – for example, import or export operations – rather than according to the taxpayer's functional profile. Brazil's transfer pricing methods establish maximum import prices and minimum export prices.

To avoid transfer pricing adjustments, the import price charged should exist lower than the parameter cost; conversely, consign prices should exist college. Brazilian legislation on transfer pricing has ever given rise to give-and-take and controversy. The law has recently been changed to avoid misinterpretations of the rules and possible uncertainties in the time to come, reducing controversial topics.

However, the biggest and still remaining difference betwixt the Brazilian approach to transfer pricing and the OECD approach is the consideration of unmarried production prices, whereby offsetting is not possible. In practical terms, this means that as long as intercompany pricing on a unmarried production line meets the transfer pricing requirements, the overall net profit at twelvemonth-end does no longer play a role from a Brazilian transfer pricing perspective.

Unlike the OECD approach, under Brazilian law market weather are predetermined and set by the regime. That is, fixed margins are to be used for transactions, leaving changing market atmospheric condition and multiple-year analyses unconsidered. The economic circumstances of an individual company are non taken into consideration to decide whether transfer prices are at arm's length.

The arm's length rule
The footing of the OECD transfer pricing guidelines is the arm'southward length principle, taking into account the individual analysis of each visitor in terms of economical circumstances and market weather. Companies freely stipulate the structure of their business co-ordinate to such marketplace weather condition. The OECD transfer pricing guidelines seek to achieve a transaction value established between related parties as skilful between unrelated parties under the aforementioned, or similar atmospheric condition.

While Brazil imposes stock-still margins, the OECD transfer pricing guidelines consider variables, such as business risks borne, functions performed, market weather of the area of operations, and peculiarly profit margins of comparable third-party companies.

Intercompany pricing policies adopted by economic groups are frequently inconsistent with the Brazilian legislation. Pricing policies adopted globally are generally based on the OECDs transfer pricing arroyo and thus non accustomed in Brazil, which at times tin can give rise to loftier transfer pricing adjustments.

For this reason, many multinational enterprises have ready up different pricing policies for Brazilian entities, than those used for the rest of the group. When making the determination for or against business organisation in Brazil, information technology is therefore important to suit and align intercompany pricing policies according to the Brazilian requirements.

The alignment of two divergent systems is a challenging chore for multinational groups. Sometimes companies accept double taxation, because the creation of an aligned policy would require a high caste of sophistication and professional involvement. For some companies, information technology might not be worth investing in this legal certainty, if the complexity of an aligned transfer pricing organisation would generate higher costs than the expected tax exposure.

The current transfer pricing rules accept cracking potential to cause double tax situations, which in plough would discourage investment in Brazil. One would await the tax regime to increasingly adapt to the economic approaches consort in the OECD transfer pricing guidelines; however, when this may happen remains uncertain. Adoption of the OECD transfer pricing guidelines would facilitate business concern decisions, and the rates of foreign directly investment could surpass the expected. Moreover, this change would facilitate understanding of the rules and controls for both Brazilian companies operating abroad, and for international companies that invest in Brazil.

Ways to increment investment
Loftier tariffs on imports and the complexity of customs procedures represent some other major obstacle to foreign investment. From a Brazilian perspective, a reduction in legal uncertainties and protectionist behaviour may be less effective in the brusk term, only would certainly increment investment and sustainable growth in the long-term. Encouraging foreign investment would render business in Brazil more competitive, especially if commodity prices are unlikely to bail out Brazil's economy with another growth spurt.

Mergers and acquisitions – as one possible form of foreign investment in Brazil – raise a number of bug in relation to tax and regulatory compliance, assessing and influencing the choice of concern structure. The conclusion of the resource allotment price of tangible and intangible assets of target companies has a cardinal role in the interaction between transfer pricing and purchase accounting.

Determining an appropriate market place price for nugget transfers during restructuring operations requires consideration of transfer pricing issues in the countries involved. This includes the choice of financial structure, equally well every bit finding a tax-constructive business structure. When pricing assets – especially intangible assets – from a transfer pricing perspective, it is ordinarily difficult to identify advisable market prices.

Therefore, a hypothetical arm's length range of prices – a maximum toll that the buyer would be willing to pay and a minimum price the seller would be willing to sell for – may exist considered. These can usually be adamant using discounted greenbacks flows of expected profits or losses.

The simple relationship between take a chance and opportunities for investments in the Brazilian economy is piece of cake to confirm. Great potential opposes loftier levels of bureaucracy and complex tax structures, which in turn increase the risk of failure.

Brazilian transfer pricing regulations are no exception, but stress the importance of local taxation and concern planning when deciding whether to invest in Brazil. In the years to come, tax practitioners expect further changes to Brazilian transfer pricing legislation and harmonisation with the OECD approach practical in most other countries.

Meanwhile, despite the differences between the Brazilian transfer pricing rules and the OECD guidelines, it is possible for Brazilian taxpayers to mitigate double-taxation issues through proactive transfer pricing planning. Many multinational groups operating in Brazil are succeeding in mitigating transfer pricing adjustments by marrying – to the extent possible – the Brazilian transfer pricing rules to the international transfer pricing standards.

For more information emailcarlosayub@deloitte.com

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Source: https://www.worldfinance.com/strategy/how-to-navigate-transfer-pricing-in-brazil-deloitte-advises

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