Western University Scholarship@Western Electronic Thesis and Dissertation Repository 9-12-2017 3:00 PM Transfer Pricing Rules in the BRICS World: A Shifting Balance in Global Taxation Governance? Thassiane Ayres Gossler The University of Western Ontario Supervisor Chios Carmody The University of Western Ontario Co-Supervisor Colin Campbell The University of Western Ontario Graduate Program in Law A thesis submitted in partial fulfillment of the equirr ements for the degree in Master of Laws © Thassiane Ayres Gossler 2017 Follow this and additional works at: https://ir.lib.uwo.ca/etd Part of the Taxation-Transnational Commons Recommended Citation Ayres Gossler, Thassiane, "Transfer Pricing Rules in the BRICS World: A Shifting Balance in Global Taxation Governance?" (2017). Electronic Thesis and Dissertation Repository. 4930. https://ir.lib.uwo.ca/etd/4930 This Dissertation/Thesis is brought to you for free and open access by Scholarship@Western. It has been accepted for inclusion in Electronic Thesis and Dissertation Repository by an authorized administrator of Scholarship@Western. For more information, please contact [email protected]. Abstract The rise of the BRICS (Brazil, Russia, India, China and South Africa) as major emerging powers has challenged existing important structures in the global economy. For this reason, there is an expectation that this restructuring may also occur in the international tax regime. In this respect, transfer pricing is one potential area for cooperation between the BRICS, which have faced challenges in applying the existing international standard – the traditional arm’s length approach as established by the OECD – in practice. Therefore, this thesis investigates the differences between the transfer pricing regulations of the BRICS and those of the OECD, examining the potential for cooperation between these countries and their impact on the international tax debate. The author concludes that the substantial differences among the BRICS prevent them from developing a unified and cohesive transfer pricing policy. However, the BRICS have demonstrated an ability to individually influence the international transfer pricing regime. Keywords Transfer Pricing, Arm’s Length Principle, BRICS, International Taxation, OECD, Cooperation, Law. i Dedication This thesis is dedicated to my mother, Rozangela Gossler, and to my father, Vanderlei Gossler, who have supported and encouraged me all the way since the beginning of my studies. I also dedicate this thesis to my husband, Tiago Souza, for his remarkable patience and unwavering love over the course of my research. ii Acknowledgments This thesis is the result of one of the most challenging and enriching periods of my life, upon which many people have contributed. First, I would like to express my sincere gratitude to my supervisor, Professor Colin Campbell. His knowledge in international taxation and his guidance on legal writing were extremely helpful. I am deeply grateful for his support. I would like to extend my gratitude to my co-supervisor, Professor Chios Carmody, for his guidance and support during the completion of this work, and to Professor Jennifer Farrell, for her inspiring classes and instigating ideas in the area of international taxation. I would also like to appreciate Professor Margaret Ann Wilkinson for reading my research proposal and providing insightful comments and suggestions that really helped me in improving my thesis. Finally, I would like to thank Western University and the Faculty of Law for providing the financial support to develop this research and to acknowledge all the Faculty and Administration staff at Western Law who supported me during this graduate program. iii Table of Contents Abstract ................................................................................................................................ i Dedication ........................................................................................................................... ii Acknowledgments .............................................................................................................. iii Table of Contents ............................................................................................................... iv List of Tables ...................................................................................................................... x List of Abbreviations ......................................................................................................... xi Chapter 1 ............................................................................................................................. 1 1 Introduction .................................................................................................................... 1 1.1 Research Objectives ................................................................................................ 4 1.2 Methodology ........................................................................................................... 4 1.3 Organization of Thesis ............................................................................................ 5 Chapter 2 ............................................................................................................................. 6 2 Transfer Pricing Concepts and International Standards ................................................. 6 2.1 Transfer Pricing ...................................................................................................... 6 2.2 The Arm’s Length Principle ................................................................................... 8 2.2.1 The OECD Transfer Pricing Guidelines .................................................... 12 2.2.1.1 Transfer Pricing Methods ................................................................ 13 2.2.1.2 Legal Status of the OECD Transfer Pricing Guidelines .................. 14 2.2.2 The UN Practical Manual .......................................................................... 17 2.3 The Base Erosion and Profit Shifting (BEPS) Action Plan .................................. 19 2.4 Conclusion ............................................................................................................ 23 Chapter 3 ........................................................................................................................... 25 3 The BRICS Countries .................................................................................................. 25 3.1 Globalization and the BRICS ................................................................................ 26 3.2 Overall Perspective ............................................................................................... 28 iv 3.3 The Tax Systems of the BRICS: Similarities and Differences ............................. 31 3.4 BRICS Institutional Aspects ................................................................................. 33 3.4.1 The BRICS as a Group .............................................................................. 34 3.4.1.1 The Debate Regarding the BRICS Performance as an International Institution ......................................................................................... 37 3.4.2 The International Tax Dialogue ................................................................. 39 3.4.3 The Platform for Collaboration on Tax ..................................................... 40 3.4.4 The Global Forum on Transparency and Exchange of Information .......... 41 3.4.5 The G20 ..................................................................................................... 42 3.5 Conclusion ............................................................................................................ 43 Chapter 4 ........................................................................................................................... 45 4 Transfer Pricing Rules in the BRICS Countries .......................................................... 45 4.1 Brazil ..................................................................................................................... 45 4.1.1 Introduction ............................................................................................... 45 4.1.2 Historical Background: The development of Transfer Pricing Rules in Brazil 46 4.1.3 Transfer Pricing Rules in Brazil ................................................................ 49 4.1.3.1 Brazilian Transfer Pricing Methods ................................................ 52 4.1.4 Peculiarities and Challenges in Brazil’s Transfer Pricing Practices .......... 57 4.1.4.1 The Use of Predetermined Margins and the Arm’s Length Principle: A Practical Approach Regarding the Lack of Comparables and the Complexity Present in the OECD Methodology ............................. 57 4.1.4.2 Location-Specific Advantages ......................................................... 62 4.1.4.3 Intangibles ....................................................................................... 63 4.1.5 Conclusion ................................................................................................. 64 4.2 Russia .................................................................................................................... 66 4.2.1 Introduction ............................................................................................... 66 v 4.2.2 Historical Background: The Development of Transfer Pricing Rules in the Russian Federation