The reform of Brazil’s transfer pricing regime has been a topic of discussion for some time, particularly since Brazil formally requested to join the OECD in 2017. Brazilian transfer pricing rules came into effect in 1997 under Law No. 9,430/96.
In summary, these rules aimed to prevent the shifting of taxable profits abroad in international transactions (importation and exportation of goods, services, and rights) conducted by Brazilian entities with foreign related parties (i.e., entities within the same economic group) or parties located in jurisdictions listed as tax havens by Brazilian tax law.
Although presumably inspired by the OECD Guidelines, Brazilian transfer pricing legislation was originally structured with significant deviations from the “arm’s length principle” consistently applied by OECD member countries.
Given the specific context of the Brazilian tax administration, the rules introduced by Law No. 9,430/96 historically supported a model focused on simplicity and efficiency, based on the so-called “cost plus” or “resale price” fixed margin methods. In cases where it was impossible or “inconvenient” to use a market-based method (“arm’s length methods”), the Brazilian system established predetermined fixed margins by law, based on cost amounts or resale amounts. The purpose of these rules was to determine the maximum deductible expense in the case of imports from related parties and the minimum taxable income in the case of exports to related parties. Thus, as long as intra-group transactions fell within the limits established by national transfer pricing rules, no adjustments were required even if the price differed from that applied in the controlled transaction (i.e., with an entity within the group).
On January 25, 2022, the OECD initiated the formal accession process for Brazil as a member country, and one of the specifically outlined conditions in the roadmap, “Roadmap for the OECD Accession Process of Brazil,” is the need to eliminate double taxation through the recognition of the arm’s length principle (as defined by the OECD Guidelines). Brazil responded to this requirement by publishing the Medida Provisória on December 28, 2022.
With the publication of Medida Provisória No. 1,152, Brazil introduced substantial changes to its transfer pricing regime, moving towards the “best method approach.” The proposal would implement all OECD-recognized transfer pricing methods, including the transactional net margin method (TNMM) and the profit split method (PSM). Other methods would also be accepted for specific cases, such as valuation methods for intangible transactions.
The new transfer pricing system would cover all intercompany transactions, including those currently not covered by Brazilian transfer pricing rules, such as royalties and various types of financial transactions. It would also include a specific methodology for intangible assets. This broad approach can be considered one of the most significant changes.
While the new rules will not apply until 2024, it is possible to opt into these standards in 2023.
To date, Brazilian taxpayers are not familiar with the application of OECD standards. Therefore, it is important to consider not only the complexity and the number of necessary changes for their implementation but also the additional costs that these changes may entail. This is due to the lack of experience in using databases or specialized tools, considering that access to some of these resources can be quite expensive.
Although the pros and cons of Brazilian transfer pricing legislation have been known and discussed since its publication in 1996, Brazil’s commitment to joining the OECD has intensified the debate on the need for the country to depart from its current model and transition to an effective arm’s length principle model, as advocated by the OECD. The goal is to prevent the Brazilian legislation (when viewed from a global perspective) from causing harmful distortions to other OECD member countries.