New Transfer Pricing Framework Introduced in Brazil

| Photo: "Ministério da Fazenda no Rio de Janeiro" by Rodrigo_Soldon is licensed under CC BY-ND 2.0.

On June 15, 2023, a groundbreaking law was published in the Brazilian Federal Official Gazette (Diário Oficial da União - DOU). Law No. 14,596 of June 14, 2023 (Law 14,596/23), establishes a transfer pricing (TP) framework in Brazil aligned with the guidelines provided by the Organisation for Economic Co-operation and Development (OECD).

OBJECTIVES OF THE NEW TP MODEL

The primary aim of the new TP model is to integrate Brazil into the global value chains and mitigate both double taxation and double non-taxation scenarios. Additionally, this system is expected to resolve one of the main obstacles related to tax-credit recognition in the United States, specifically foreign tax credits resulting from income tax paid and/or withheld in cross-border transactions involving Brazil.

IMPLEMENTATION TIMELINE

Brazilian taxpayers were given the option to adopt the new TP system aligned with OECD guidelines in 2023. To do so, they had to inform the Brazilian Tax Authorities (RFB) between September 1 and September 30, 2023. The new TP system becomes mandatory for all taxpayers starting January 1, 2024.

MAIN TECHNICAL ASPECTS OF LAW 14,596/23

The new TP model incorporates several key elements:

• Effective Date: Becomes mandatory on January 1, 2024, with an option for early adoption from January 1, 2023.

• Arm's-Length Principle: Introduces the arm's-length principle and broadens the concept of related parties.

• Applicability: Applies to all cross-border intercompany transactions, including intangibles, cost-contribution agreements, and business restructuring.

• TP Methods: Implements all TP methods according to the OECD standard (PIC, PRL, MCL, MLT, MDL) and uses the best-method rule for intercompany transaction analysis.

• Functional and Economic Analysis: Introduces functional (functions, assets, and risks) and economic analysis for applying the new TP documentation rules.

• CUP Method: Applies the comparable uncontrolled price (CUP) method as the most appropriate method when reliable comparables are available for cross-border commodities transactions. Taxpayers may apply other methods based on appropriate facts and circumstances.

• Tested Party Selection: Selects the tested party based on the most reliable data and best-method rule.

• Financial Transactions: Includes all cross-border financial transactions, such as intercompany loans, guarantees, centralized treasury functions, and insurance transactions.

• Royalty Transactions: Eliminates the current royalty deductibility limitation and includes royalty transactions under the new TP system.

• Comparable Range: Introduces a comparable range (interquartile or complete) considering profit-level indicators.

• Adjustments and Simplifications: Introduces spontaneous, compensatory, and primary adjustments, as well as simplification measures and tax certainty instruments (mutual agreement procedures and advance pricing agreements).

NORMATIVE INSTRUCTIONS ON TRANSFER PRICING 

On September 29, 2023, Brazil’s Federal Revenue (Receita Federal do Brasil or RFB) released Normative Instruction Nº 2,161 (IN 2,161/23). This instruction provides new transfer pricing (TP) rules under Law Nº 14,596/23, aligning Brazil's TP law with the 2022 OECD Guidelines.

BACKGROUND AND PUBLIC CONSULTATION PROCESS

IN 2,161/23 emerged from a public consultation process, the first of its kind in Brazil, allowing stakeholders to comment on the RFB’s draft TP regime. The instruction's most significant aspect is its guidance regarding the election period for adopting the new TP system.

ELECTION PERIOD AND ADOPTION OPTIONS

Taxpayers have the option to adopt the new TP system retroactively from January 1, 2023, or phase it in mandatorily by January 1, 2024. Initially, the election period was set for September 2023 (as per IN 2,132 from February 2023). However, the public consultation process anticipated a postponement to November 2023. Taxpayers could elect early adoption through the RFB’s online portal, eCAC, by December 31, 2023. This extension was aimed at allowing taxpayers more time to analyze the impact of early adoption.

DOCUMENTATION/ COMPLIANCE REQUIREMENTS

The final version of IN 2,161/23 introduces considerable improvements in documentation requirements, categorizing taxpayers based on the volume of intercompany transactions:

1. Large Taxpayers: Those with intercompany transactions exceeding BRL 500 million (approximately USD 100 million) must provide a complete Master file and Local file. These documents are now more closely aligned with OECD models. The RFB will accept the Master file in English and Spanish but may request translations.

2. Medium Taxpayers: Those with transactions exceeding BRL 15 million (approximately USD 3 million) but below BRL 500 million must provide a Local file "light," containing basic transfer pricing information.

3. Small Taxpayers: Those with transactions below BRL 15 million are exempt from providing transfer pricing documentation but must adhere to the arm’s length principle.

Additionally, Art. 56 requires certain transfer pricing information to be included in the electronic corporate income tax return (ECF). Transfer pricing documentation for early adopters is due by December 31, 2024, and for regular adopters by December 31, 2025.

TRANSFER OF INTANGIBLES

A unique one-time requirement applies to large taxpayers who transferred intangibles under the old rules. These taxpayers must provide information on such transfers in the Local file for the calendar year 2024, although the old rules apply. The RFB may use this information to confirm DEMPE functions (Development, Enhancement, Maintenance, Protection, and Exploitation) within the group.

COMPARABLE COMPANY/TRANSACTION BENCHMARKS

IN 2,161/23 clarifies expectations for comparable company/transaction benchmarks. If fewer than four comparables are identified, the RFB will accept a less rigid independence filter to increase reliability. While local comparables are preferred, non-domestic comparables are allowed if differences in comparability can be accounted for. The RFB also permits the use of multiple-year data and weighted averages and provides examples for calculating interquartile ranges.

TRANSFER PRICING METHODS

The RFB’s interpretation of TP methods aligns closely with OECD Guidelines. Other methods are allowed, particularly for intangible assets, provided they deliver an arm’s length outcome. This flexibility benefits taxpayers with non-standard business models or complex transactions.

ARM'S LENGTH PRINCIPLE INTERPRETATION

IN 2,161/23 reflects a holistic, substance-over-form approach to the arm's length principle, replacing the previous formulaic, transaction-based view. Recurring losses in a generally profitable group may indicate non-compliance with the arm's length principle.

COMPENSATORY ADJUSTMENT UNCERTAINTY

Uncertainty remains regarding the impact of compensatory adjustments on other taxes. A compensatory adjustment aligns the value of a controlled transaction with the arm's length principle. The final version of IN 2,161/23 does not clarify if such adjustments will automatically trigger adjustments to other taxes, increasing uncertainty for taxpayers relying on imports and applying the transactional net margin method (TNMM).

SOURCES/RECOMMENDED READ:

1. IN RFB nº 2161/2023 (fazenda.gov.br)
   This regulation (IN RFB nº 2161/2023) outlines updated guidelines by the Brazilian Federal Revenue Service on tax compliance and reporting for businesses operating in Brazil.

2. Brazil: New Transfer Pricing Rules Published (KPMG)
   A comprehensive overview of Brazil's newly published transfer pricing rules, addressing alignment with international standards and the impact on multinational companies.

3. Brazil Transfer Pricing Law Enforceable Beginning 1 January 2024 (EY)
   A detailed analysis of Brazil's transfer pricing law, set to take effect from January 2024, and its implications for global businesses operating in Brazil.