Brazil’s OECD Transfer Pricing Move Challenges Small Businesses

The introduction of OECD-aligned transfer pricing rules in Brazil marks an important shift toward a more economically suitable approach. The country’s transition period will require considerable energy and dedication.

These new rules also present significant opportunities for medium and long-term planning that can help companies correctly determine and allocate favorable results in the global transaction chain, thereby attracting more investments.

This approach minimizes the risks associated with transfer pricing and opens opportunities for companies to better plan their intercompany prices with less controversy risk. The new regulations can promote a more predictable and stable environment for financial planning and investment, making it favorable for companies to commit resources with confidence.

Companies can work to prevent litigation by applying for advance pricing agreements. These agreements can help align corporate pricing strategies with tax authorities and reduce the likelihood of costly disputes. The updated guidelines will better enable companies to stabilize and grow their international endeavors.

Avoiding Double Taxation

The historical disparity between Brazilian transfer pricing regulations and cases of double taxation has been a barrier to strategic investments by multinational conglomerates in Brazil.

The rigidity of fixed profit margins mandated by law, combined with changes in US tax legislation that disallow tax credits in jurisdictions not adopting the arm’s-length principle, have made it riskier to pull out investments. This inflexibility also has made Brazil less attractive to global investors.

Brazilian companies historically have used a transfer pricing methodology based on fixed margins for calculations, in accordance with the old legislation, including Law 9,430/96. This method often led to double taxation—meaning the same income was taxed twice.

The Organization for Economic Cooperation and Development identified this issue of double taxation during the development of its new transfer pricing framework. Brazil is now transitioning to the OECD guidelines—which encourage a more comprehensive approach that requires a deeper understanding of how different parts of a company work together and the actual economic conditions they face.

Then Versus Now

For more than two decades, managers and companies focused on collecting lots of data to prepare transfer pricing documentation. The old rules didn’t require looking closely at the actual business situations or the assets involved on those transactions. They also didn’t legally necessitate reviewing potential impacts from business restructuring, dealing with different kinds of debt, and other key factors that affect a company’s profitability.

For example, many Brazilian companies have many valuable intangible assets but often don’t get properly compensated by their related branches if these assets are used to create value abroad. If a Brazilian entity owns IP that is used by other entity abroad and it creates value, the Brazilian entity must receive compensation for that.

The move to OECD guidelines signifies a change to a more inclusive and comprehensive approach, focusing on the business interactions and economic conditions instead of just mathematical models.

This switch involves a thorough comparison analysis that emphasizes the understanding of the transactions, a detailed look at intangible assets, and the actual business conditions of companies. Many companies haven’t followed the guidelines properly, especially concerning the earnings from research and development in Brazil and how they handle intangibles.

Even though the laws for the new guidelines have been passed, Brazil’s taxing authorities still need to iron out details related to commodities, financial transactions, business restructuring, cost contribution agreements, intangibles, tax impacts on adjustments, and how these rules affect customs values.

SME Challenges

This situation has proven particularly tough for small and medium-sized enterprises, which are often less familiar with these new rules than bigger companies are. The risks for non-compliance range from penalties of 20,000 Brazilian real ($3,708) to 5,000,000 Brazilian real, making it essential for these businesses to follow the guidelines closely.

Large multinational corporations may find it easier to adapt because many have specialized transfer pricing departments that ensure global compliance and establish a more comprehensive level of governance. These practices have facilitated a smoother transition to the OECD approach in Brazilian operations.

For Brazilian companies in general, but especially for SMEs, training and support are vital for understanding and embracing the new mindset. These businesses will benefit from targeted help to comprehend and implement the new transfer pricing regulations during this transition period. Experts can provide such support to identify areas of improvement and address ways to minimize transfer pricing-related risks.

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

Josdemar Beni is transfer pricing partner for Grant Thornton in Brazil.

Rômulo Pedro Batista de Oliveira is senior manager at Grant Thornton in Brazil.

Luiz Felipe de Oliveira Mourão is transfer pricing manager at Grant Thornton in Brazil.

Rossana Pieringer, transfer pricing and international tax senior manager at Bernoni Grant Thornton in Italy, contributed to this article.

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