Brazil’s New Transfer Pricing Rules Align With Global Practice

In June, the Brazilian Congress converted Provisional Measure No. 1,152/2022 into Law No. 14,596/2023. The new law is the result of a long-discussed process of convergence with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration that started in 2018 and overhauls the country’s transfer pricing legislation.

The new rules expressly adopt the arm’s-length principle, specifying that the terms and conditions of transactions between related parties should be adjusted as if negotiated between unrelated parties in comparable transactions. The rules also introduce new concepts into Brazilian law that are relevant to determining the arm’s-length principle, such as the delineation of the transaction, and the functional and comparability analysis.

Wider Scope, New Methods and APAs

The new legislation enlarges the scope of Brazilian transfer pricing rules. In addition to applying to tangible assets, services, and rights, the rules apply to all types of transactions, including royalty payments. As a result, this ends the royalty deductibility limitation for corporate income tax purposes, applicable to royalty payments until now.

The law maintains the traditional methods but eliminates the use of a formulaic approach based on pre-fixed margins for the cost plus method and resale price method, using comparables as a benchmark instead. It also introduces the profit split method and transactional net margin method and allows the use of an alternative method when it proves consistent with the arm’s-length principle and as long as the other methods are inapplicable or produce unreliable results.

The legislation also ends taxpayers’ choice of method, providing that taxpayers should select the most appropriate method based on aspects including the circumstances of the case and the availability of reliable information on comparable transactions. The new rules, however, consider comparable uncontrolled price as the most appropriate method when reliable comparables are available for cross-border transactions involving commodities.

The new legislation introduces a comparable range (interquartile or complete) and provides for different types of adjustments that can be made in the taxpayers’ taxable basis to conform to the arm’s-length principle—spontaneous, compensatory, and primary. It also provides guidelines on the transfer pricing documentation that taxpayers are required to present to tax authorities and the penalties applicable in case of noncompliance.

The country’s new transfer pricing legislation contains sections on intangibles and hard-to-value intangibles, intragroup services, cost contribution arrangements, business restructurings, and financial transactions (including intercompany loans, guarantees, centralized treasury functions, and insurance transactions) that reflect updates introduced in the Organization for Economic Cooperation and Development transfer pricing guidelines over the years.

Another change is a sort of advance pricing agreement. The recently approved legislation provides that the tax administration may establish a procedure under which taxpayers may request a ruling regarding their transfer pricing methodology, including the most appropriate method, the appropriate adjustments, etc. A ruling request is subject to a user fee of approximately $15,000.

Brazil’s new transfer pricing legislation will be mandatory for taxpayers starting in 2024, but taxpayers can already opt for early adoption in 2023. During the discussions in Congress, there was talk of making the new regime mandatory only as from 2025. In the end, however, Congress kept the original timeline regarding the early and mandatory adoption.

What Next?

The new transfer pricing rules have been received with enthusiasm by taxpayers and tax practitioners as they align Brazil’s legislation with international practice, mitigate the problems of double taxation, and allow the country to integrate global value chains. Moreover, the new law is expected to remove the obstacles for income tax paid or withheld in Brazil to qualify as foreign tax credits in the US.

However, considering they introduce new concepts and require procedures to determine the arm’s-length principle that are subjective in nature—for example, delineating the transaction, which includes examining the “options realistically available”—this may give rise to disputes. For instance, the simple choice of the appropriate method may end in dispute in a country already characterized by a high level of tax litigation between taxpayers and tax authorities.

New regulation is expected in the near future to provide details on the implementation of the recently approved rules. Following Congress’s approval and the president’s signing the new rules into law, the Brazilian Revenue Services initiated a consultation process to allow taxpayers and other stakeholders to provide input regarding the proposed regulation, which details particular aspects of the new transfer pricing legislation. Initially open for comments until July 25, the deadline was later extended until August 3.

The proposed regulation provides taxpayers would be required to present a master file, a local file, and a country-by-country report including detailed information on the taxpayer’s group structure and transactions, to the Brazilian Revenue Service. It also indicates the government’s intention to extend the early adoption deadline from Sept. 30 to Nov. 30, allowing taxpayers more time to consider the implications of the new regime on their businesses.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Phelippe Toledo Pires de Oliveira is a tax attorney at the Office of the Attorney General for the National Treasury in Brazil (PGFN) and a lecturer at IBMEC-Brasília.

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