Source: ITR - International Tax Review

By Sam Sholli - December 5, 2024

But advisers also suggest that the proposals may lead to increased compliance costs and obligations

A Brazilian consultation on new transfer pricing rules represents a “commendable” step but the proposals raise some compliance concerns, according to local experts.

Brazil’s federal revenue authority (the RFB) opened the consultation on November 27.

Under the rules, taxpayers would be obliged to register controlled commodity transactions and declare related information to tax authorities within a specified timeframe.

ITR reported last week that the proposals sought to resolve TP issues related to the volatility of commodity prices, a sector the RFB described as “particularly important to the Brazilian economy”.

Compliance concerns

The proposal is in line with general rules stipulated in Brazilian TP legislation, say Thais Veiga Shingai and Matheus Cunha, tax lawyers at law firm Mannrich e Vasconcelos Advogados in São Paulo.

However, they note one key concern regarding the proposed deadline for registering controlled commodity transactions.

“Under the general rule, the registration must be completed within 20 days following the 10-day period in which the contract was executed,” they say.

“However, this deadline may be deemed too short for business reality, due to the nature of commodity transactions, which often involve multiple parties, different jurisdictions, and complex negotiation processes that require additional time for consolidating the relevant information.

“A longer deadline for completing the registrations would be more appropriate, especially considering that the regulation imposes severe penalties on taxpayers for delayed or inaccurate registrations,” they tell ITR.

Shingai and Cunha add that the proposal being made available for public consultation is “commendable”.

This is because, they argue, it allows private sector participation, helps prevent distortions in the regulation of such matters, and contributes to promoting tax fairness.

Meanwhile, Allan Fallet, a tax partner at law firm Duarte Garcia in São Paulo, tells ITR there are concerns about the RFB’s technology systems not meeting all the needs for registration.

There’s an expectation that the suggested registration requirements will increase compliance costs for businesses, Ana Carolina Fernandes Carpinetti, a partner at law firm Pinheiro Neto Advogados in São Paulo, tells ITR.

Carpinetti also says that, for highly dynamic transactions, the proposal will likely introduce greater subjectivity and demand extensive documentation.

This, according to Carpinetti, would be to substantiate the ‘realistically available options’ outlined in the draft instruction.

She highlights transactions in various sectors dealing with commodities as examples.

“This challenge is compounded by the inherent difficulty of forecasting market trends for transactions based on public price quotations, which are already subject to natural market pricing mechanisms,” Carpinetti adds.

A welcome dialogue

Carlos Eduardo Ayub, a TP expert at Deloitte in Brazil, welcomes the consultation.

He says it is “clearly positive,” and argues it reflects the desire of the RFB to strengthen dialogues with taxpayers.

“During all the years since TP legislation came into force in Brazil in 1997, tax authorities have maintained their distance from taxpayers, conducting their tax audit processes as remotely as possible, carrying out fieldwork only when it was strictly necessary,” Ayub says.

“Now, with the recent changes in legislation that align us with OECD principles, the RFB has recognised the need to dialogue with companies to make inspection processes viable,” he says.

But Ayub qualifies his optimism by warning against placing high expectations on the RFB when it comes to accepting feedback arising from the consultation.

“What has been seen in recent history is the prevalence, if not the total maintenance, of the precepts incorporated in its original text,” he says.

Stephanie Makin, international taxation partner at Machado Associados in São Paulo, also suggests taxpayers’ compliance obligations will increase if the proposed rules are approved.

In addition to information already required to be disclosed, taxpayers will need to provide specific details on the dates and amounts of commodities transactions, as well as criteria for revising prices, she points out.

However, Makin also tells ITR that a proposed extension of the deadline for submitting information on commodity transactions from 10 days to 20 days will be welcomed by taxpayers, going against Shingai and Cunha’s concerns.

“The short deadline of 10 days was heavily criticised when introduced as it was considered impracticable to comply [with],” she claims.

Makin also agrees with her peers that the RFB opening the consultation is “an important move.”

The RFB is, at least in terms of the application of TP rules, seeking to reinforce its commitment to improving the relationship between the tax authorities and taxpayers, she argues.

While there may be concerns about the proposal’s likelihood to increase companies’ compliance burdens, the RFB’s willingness to engage with taxpayers is evidently well-received.