Are U.S.-Brazil “Synthetic” Advance Pricing Agreements on the Horizon?

With Brazil having adopted the arm’s length system as a means of dealing with transfer pricing, can the subject of advance pricing agreements be far behind? There have already been some hints – or at least rumors – that Brazilian tax authorities might welcome applications for these specialized forward-looking rulings on the transfer pricing methods used by individual taxpayers, though perhaps limited to lower risk taxpayers.

Insofar as the United States and U.S. companies are concerned, however, there is a substantial impediment. Although discussions of a tax treaty between the United States and Brazil date to 1967, no full treaty has ever been adopted. A skeleton draft was initialed by the negotiators in 1979, but was abandoned by the United States after the draft received a frosty reception in the multinational community. (A bad precedent, it was said, because it did not reduce taxes at source. A foot in the door, replied the negotiators, but to no avail.)

There is, however, a Tax Information Exchange Agreement in force between the United States and Brazil, dating from 2013. This agreement permits the countries to exchange tax information and, perhaps more importantly, to discuss such information. It is true that a TIEA does not contain the normal Mutual Agreement Procedure article of a complete tax treaty, which might be seen as necessary for countries to negotiate over substance and agree to compromises that vary to some extent from the perceived requirements of domestic law of either country. But at least they can share information, and this provides an opening for creative adoption of the APA format.

Suppose, for example, a taxpayer – whether U.S. or Brazilian in parentage – sought unilateral rulings (APAs) in both countries. It might for example, propose the same methodology to each country and, of course, inform both countries regarding the proposals. Suppose one country or the other was to suggest a modification or two and the taxpayer was prepared to accept such modification as a small price for an agreed transfer pricing methodology. There seems no reason why the taxpayer could not turn to the other country and propose an identical modification, perhaps citing the rationale put forward by the country that first suggested the modification.

There would be no direct negotiation between the countries but each country would know – because the taxpayer would make sure it knew – what was being discussed and what the taxpayer was trying to achieve. Is there any objection to such a “synthetic” bilateral APA? It is hard to see the principle that would underlie any such objection, given that the synthetic APA would not be the product of a mutual agreement in any technical sense and, given the TIEA, there would have been no violation of any information exchange prohibition.

This is just a thought. But if there is any appetite for this approach in both Brazil and the United States, it seems a safe bet that the applications will flow.