On 12 April 2022, the Brazilian Tax Authority (Receita Federal in Portuguese) and the OECD Transfer Pricing Unit jointly revealed the policy guidelines and key features Brazil’s proposed new transfer pricing legislation.

The changes stem from Brazil’s aim to join the OECD, as the country’s current transfer pricing system needs to be brought in line with OECD recommendations before the country can become a full member. Receita Federal and the OECD’s taxing unit have been working on refining Brazil’s transfer pricing policy since 2017.

The policy announcement was attended by many officials, including Brazil’s Economy Minister Paulo Guedes and OECD Tax Policy Director Pascal Saint-Amans, both of whom expressed their support for the proposal. Though Brazilian Presidential elections will be held in October 2022, OECD membership efforts will continue if this government remains in power.

Tax policy design, capacity building, and safe harbor provisions were considered during the design stage of the proposal, undertaken in 2020 and 2021. 2022 and 2023 aim for system adoption and implementation.

This post includes our initial thoughts and analyses on the proposal, including the information provided by the authorities. We begin with a broad overview of the proposal, followed by an explanation of the policy features stated, and what to expect in the coming months.

The actual presentation can be viewed here (in Portuguese): A New Transfer Pricing System (12/04/2022).

The changes stem from Brazil’s aim to join the OECD, as the country’s current transfer pricing system needs to be brought in line with OECD recommendations before the country can become a full member

Specifics of the new transfer pricing legislation

A key feature of the new legislation is the application of the arm’s length principle—the foundation of the new system, in line with OECD standards, which treats both parties in the transaction as completely independent, with neither party influencing the decisions of the other.  One of the most challenging issues was striking a compromise between the legal certainty concept inherent in Brazil’s constitution and the OECD’s principle-based system. The presentation includes a section that details different kinds of transaction and their recommended treatment.

A list of scenarios where the concept of related parties would apply, if established to provide additional legal certainty, was highlighted in the presentation. Legal certainty is supplied through explicit and direct definitions, which is entirely new ground for Brazilian legislation. Contractual terms, functions, assets, and risks, product or service characteristics, economic factors influencing the parties, and market and commercial plans are all to be taken into account.

While such lists are often exhaustive (i.e., if a circumstance isn’t mentioned, it won’t be considered) but, in this case, applying the arm’s length principle to a situation that isn’t listed may result in a related-party transaction. Many firms may need additional guidance here, though clarification could yet come. The courts may be utilized for this clarification, at least in the initial years of the legislation’s enforcement.

Transactional profit mechanisms, such as the TNMM and profit split, will be permitted. There will also be provision for the use of other approaches (for example, the presentation mentions valuation methods for intangibles). However, the “best practice” approach will be followed, as well as the determination of the tested party based on the material available.

It makes sense to include transactional profit techniques. Brazil was a strong supporter of the two-pillar solution that resulted in the global tax agreement (GloBE), but Pillar One could not be implemented in Brazil due to its current transactional legislation—which makes the division of profits into amounts A, B, and C impossible. The precaution for intangibles makes sense as well, because IP can still be transferred overseas using only the cost plus 15% method. The best practice approach is also worth highlighting, since taxpayers may choose the option that results in the smallest modification. Under the best practice approach, there would be a contradiction between constitutional rights and a technique “better suited” for the transaction.

A pillar of the new system is comparability

The new system will be built on the foundation of comparability, which should be clarified by the new legislation. In recent years, many issues have arisen from a disregard for documents presented by the taxpayers, resulting in a loss of confidence between the tax authorities and the taxpayers. It will be critical for the incoming regime to strengthen this connection.

Correlative adjustments, spontaneous adjustments, and conforming adjustments will all be available as new features (under a MAP, for instance), but also primary adjustments if the arm’s length principle is not used. This is significant. Brazil has never permitted such modifications and has always reserved the ability to exclude paragraph 2 of Article 9 of the OECD Model Tax Convention from its treaties.

Commodities transactions will also be subject to OECD scrutiny, with the goal of capturing the true market value of the item by expanding the comparability adjustments.

Another major source of concern is intangibles. There will be a DEMPE analysis (development, enhancement, maintenance, protection, exploitation) for revenue and expenditure allocation, a definition of intangible for transfer pricing purposes, valuation methodologies, and assistance on coping with uncertainties. Further, the present deductibility constraints will be examined, since they serve as an anti-abuse mechanism that interacts with the arm’s length principle.

Intragroup services are a major step forward

Intragroup services will also be examined, and they constitute a significant advancement in our perspective. The new legislation will look at when a service fee is appropriate and when it isn’t. Those that aren’t acceptable typically have to do with shareholder actions or a duplicate service (which is normally not deductible in Brazil, outside of the necessary expense concept). It is possible to employ direct or indirect allocation keys, though the safe harbor for low-value-added services must also be addressed (the 5% mark-up was not mentioned). Cost Contribution Agreements for research, development and services will also be given specific attention, with sufficient remuneration to be determined.

It’s important to note that every imported service is subject to a 40% tax assessment. Although not connected to transfer pricing, it is necessary to recognize intragroup collaboration (rather than servicing) in order to avoid this extra charge.

Regulations on business restructuring will be established, primarily to provide sufficient remuneration in the transfer of profit-generating operations.

Financial transactions are significant and will be taken into account. Interest is now deducted according to a fundamental rule—in most situations, LIBOR + 3.5%. Debt placement guidance, cash pooling, guarantee fees, and captive insurance must all be examined, since they are now unavailable. Another significant point was noted, namely that other interest deductibility restrictions, such as Brazil’s current thin-capitalization requirement, will continue to apply.


It’s important to note that every imported service is subject to a 40% tax assessment

The Receita Federal will be permitted to celebrate advanced price agreements and, to prevent conflicts, continued work on establishing Amount B under Pillar One has been suggested.

Brazil does not require a master file or a local file at this time. The data may be found in the SPED file (corresponding to the tax return). These files will still be required, as well as the present country-by-country report. Penalties and presumptions will be given specific consideration as a general policy problem. This is significant because the tax authorities are required by law to impose fines in each tax assessment, with discussion only taking place in limited circumstances and within legal limitations.

Next steps

Both Receita Federal and the OECD have expressed a wish to continue working with interested parties. The legislation package must still be prepared before being forwarded to Congress for approval, and the format was not specified. It remains to be seen whether the proposal proceeds via a temporary measure (which may be changed into law within 120 days or formally rejected), or official draft legislation (which would need a longer in-depth discussion but likely allows for more amendments to be made—thus departing from the arm’s length approach).

Given the need for approval on legislation as close to the OECD’s transfer pricing guidelines as possible—as well as the recent rush caused by the implementation of TD 9959 from the Internal Revenue Service of the United States which disallows the foreign tax credit paid to Brazil due to the country’s failure to follow the arm’s length principle—this author believes the Brazilian president could submit a provisional measure before the end of 2022. However, this remains speculative and hard to anticipate in the near future.

We will, of course, keep you updated on developments—but, if you have any queries on this or any other aspect of Brazil’s transfer pricing or tax legislation, our expert team in São Paulo are here to help.

Do you need more information?

André Ricardo Dannemann
Country Manager Brazil

Thiago De Freitas

Local Knowledge – International Coverage

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