Brazil’s transfer pricing rules have long vexed multinational enterprises (MNEs) with cross-border intercompany transactions. Finally, Brazil is recognizing and welcoming the arm’s-length standard. The Brazilian Congress recently approved new transfer pricing rules that align with the Organisation for Economic Co-operation and Development’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines). On May 10, 2023, the Brazilian Federal Senate approved Bill of Law No. 8/2023, which originated from Provisional Measure 1,152/2022 published on December 29, 2022. The text of the bill is identical to the bill previously approved by the Chamber of Representatives. The final step in implementing the new transfer pricing framework is for the bill to receive presidential approval.
The new legislation is a significant departure from Brazil’s historical transfer pricing rules, which relied on a formulaic approach that incorporated fixed margins tied to the nature of the intercompany transaction and/or industry, rather than the arm’s-length principle. The arm’s-length principle determines a transfer price based on fair market prices, i.e., transactions between third parties or market-based prices. In certain instances, Brazil did not have methods for certain types of intercompany transactions, such as intercompany royalties or services, or capped their payments. The result of this transfer pricing misalignment is potential double taxation for companies and lost tax revenue for Brazil.
In addition to adopting the arm’s-length principle, the new transfer pricing rules implement the transfer pricing methods outlined in the OECD Guidelines, i.e., traditional transaction-based methods and transactional profits methods; implement the best-method rule; broaden the definition of related parties; expand the transfer pricing system to include all cross-border related party transactions; introduce functional, risk, and asset analysis; introduce the selection of a tested party; introduce a comparable range and the consideration of profit level indicators; introduce mutual agreement procedures and advance pricing agreements; and establish new documentation requirements. The new rules now include sections on intangibles, intercompany services, cost contribution arrangements, business restructurings, and financial transactions that reflect the OECD Guidelines. The new rules also would end the deductibility cap for royalty and technical assistance payments. The Brazilian Revenue Service is expected to issue rulings to provide guidance related to comparables searches, use of internal comparables, selection of methods, adjustments, documentation submission requirements, and other procedures.
Brazil’s intention with the changes is to align its transfer pricing rules with international standards to make Brazil more attractive to foreign investment, increase integration with the global economy, expand and protect its tax base, and avoid double taxation and double non-taxation.
Bill of Law No. 8/2023 is effective for tax years beginning on or after January 1, 2024, with optional adoption for calendar year 2023. Taxpayers that choose to adopt the new transfer pricing system for 2023 must inform the Brazilian Revenue Service between September 1, 2023 and September 30, 2023. Under the legislation, transfer pricing documentation would be required for penalty protection. MNEs with operations in Brazil should carefully consider and prepare for the changes to the transfer pricing rules, which will likely result in an increased compliance burden for companies. MNEs will need to be attentive to reviewing and modifying existing transfer pricing policies to align with the new transfer pricing framework and consider other potential impacts, including foreign tax credits, customs valuation, income taxes, and increased transfer pricing scrutiny.
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