Bloomberg Tax
Nov. 10, 2022, 9:45 AM

Possible Post-Election Paths for Transfer Pricing in Brazil

Fabian Alfonso
Fabian Alfonso
Igor Scarano
Igor Scarano

Brazil’s decision to align its transfer pricing regulations with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations has been years in the making. The Organization for Economic Cooperation and Development and Brazil’s Receita Federal held a joint event on April 12 to present the key features of Brazil’s proposed new transfer pricing system, which fully aligns with the OECD guidelines.

Despite strong indications of its implementation, Brazil’s current administration did not enact the new transfer pricing rules prior to the election. Given the outcome of the election, we thought it would be useful to go through what we think are three possible major paths for the new regulation to move forward, either in the end of 2022 or during 2023.

The first path is based on the current government implementing the new transfer pricing system through a potential medida provisória (presidential decree, or MP for its initials in Portuguese) which has been used in the past to institute transfer pricing regulatory changes by the Brazilian government (for example, MP 563/2012). MPs are valid for 60 days and are renewable for an equal period. If Congress does not review it and ratifies it during this period, the new regulation may become ineffective.

The two remaining paths would be left to the new government, which either could issue its own MP or send the changes in a new bill to Congress.

We think that the new government has relevant positive arguments to implement the new transfer pricing system, as Brazil’s Receita Federal is fully on board with the project and there are major international forces pushing for a local change.

On one hand, the final US foreign tax credit regulations, published in January 2022, change the determination of creditable foreign income taxes, including a provision where foreign taxes may not be creditable in the US if such taxes are levied in jurisdictions that do not follow the arm’s length principle (as is the Brazilian case).

This change affects all US corporations operating in Brazil. As it is currently interpreted, Brazilian income taxes are poised to not be creditable in the US, and Brazil’s adoption of the arm’s length principle is a relevant topic in this discussion. Not adopting the new transfer pricing system could jeopardize investment in Brazil by US corporations.

On the other hand, the international discussion and implementation of the OECD Pillar One and Pillar Two system adds pressure to execute the new transfer pricing system. Without a system based on the arm’s length standard, the implementation of the two pillars could be much more difficult in Brazil.

We think that with so little time left for the current administration, it is more likely that the new government administration will be the one deciding the fate of the newly proposed Brazilian OECD-based transfer pricing system. By implementing the new transfer pricing system, the new government could obtain many of the benefits of its application, like more investment.

In the end, all Brazil’s major business partners—the US, Europe, and China—follow the arm’s length principle, and as such, it is likely that Brazil will see the benefits of changing its transfer pricing rules to fit the international standard.

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

Fabian Alfonso is a managing director in Kroll’s transfer pricing practice based in Miami. He has more than 18 years of experience advising on cross-border transactions for multinational companies in the US and Latin America.

Igor Scarano is a director in Kroll’s transfer pricing practice, based in São Paulo. He leverages more than 18 years of transfer pricing experience, including with a Big Four accounting firm in Zürich and Düsseldorf.

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