According to an announcement on April 12th by the Brazilian tax authority during a joint event with members of the OECD, Brazil’s new transfer pricing system is in its final stages as legislation and regulations are being drafted for public consultation and approval by the National Congress.
The OECD-Brazil joint effort to align the country’s transfer pricing framework, which began in February 2018, culminated in a 2019 report that detailed the similarities and differences between Brazil’s transfer pricing and OECD guidance and described how Brazil would achieve alignment with the OECD standard. The assessment highlighted how Brazil’s current transfer pricing framework increases the risk of double taxation, base erosion, and profit shifting. Most notably, Brazil does not follow the arm’s length principle and its methods rely on fixed profit parameters (gross margin). Also, Brazil’s transfer pricing rules provide limited guidance for specific types of transactions.
Brazil’s new transfer pricing system includes the following features:
- Adopts a principle-based framework (arm’s length);
- Applies to all intercompany operations;
- Requires a complete comparability analysis for each type of intercompany transaction, including the contractual terms, functions, assets, risks, economic principles, and business strategies;
- Incorporates the OECD’s transactional profit methods (the transactional net margin method and the transactional profit split method);
- Requires identification of the best method, tested entity, and comparable for each type of transaction and the use of interquartile range; and
- Provides specific rules related to intangible assets, intra-group services, business restructuring, and financial transactions.
A&M Tax Says
With vast changes coming in Brazil’s transfer pricing rules, multinational groups operating in the country will have to revamp their current transfer pricing policies and models to align with the internationally accepted principles. Considering that tax authorities and lawmakers are evaluating a change in the Brazilian transfer pricing system from a strictly objective methodology to a more flexible and subjective approach, a diagnostic analysis of current transfer pricing systems will have to be performed in alignment with a broader supply chain analysis, the identification of value drivers or intangible assets, and determining the risk profile of each controlled entity, which are aspects that are not considered in the current transfer pricing systems. Brazilian taxpayers should also produce the necessary documentation to support the group’s economic and legal ownership of the intangible assets or value generators and the risk profile of each entity. Based on that characterization, the transfer pricing policy should be designed consistent with the new legislation and regulations and aligned with the business objectives of the multinational group. Now is the time to act to avoid potentially costly consequences for cross-border transactions from having to react or make decisions when the new transfer pricing legislation is enforced. A&M’s Latin America Complex Transaction Tax team is available to help companies evaluate and modify their transfer pricing practices and models to align with Brazil’s new framework.