Publish Date

Jun 28, 2023

Time is Ticking to Comply with the New Brazilian Transfer Pricing Rules – A Risk or Opportunity?

Industry Insights

In what is a significant move towards having Brazil at long last join the global mainstream position in following the arm’s length standard, President Luiz Inácio Lula da Silva sanctioned, without vetoes, the new Brazilian transfer pricing legislation. The law enacted under 14.596/23 was published in the Official Gazette on June 15, 2023. The new law will be effective from January 1, 2024, but taxpayers may choose to apply its effects as of January 1, 2023.

The adoption of this new standard will require that Brazilian taxpayers consider taking immediate action, not only for electing the retroactive application for fiscal year 2023, but for correctly implementing the operational changes required for its compliance.

It is important to highlight that this will be the first time in which a country will move from specific local regulations based on a formulistic approach to a globally accepted arm’s length principle that is heavily weighted on facts and circumstances surrounding intercompany any transactions. This will require a new perspective from management teams of companies operating in Brazil on their approach to transfer pricing.  The new law requires an interdisciplinary approach for analyzing and assessing a company’s business model of related party transaction, with a focus on contractual terms and risk allocation, supply chain activities, and the development and exploitation of intangible assets. During this transition, the technical knowledge of how to apply the OECD transfer pricing methodologies based on a procedural comparability analysis will carry added importance.

Understanding that this new law will be generally effective from January 1, 2024, companies will effectively need to implement an amended transfer pricing policy by December 31st of 2023, leaving just 6 months for its implementation. This also assumes there is not a strategic advantage to adopting the new measures already as of January 1, 2023, in which case immediate attention is warranted. Below are some first steps to be considered:

  1. Review existing transfer pricing policy under new regulations
  2. Tax Modeling of the impact of the new regulation (including income tax, indirect taxes and custom duties)
  3. Supply Chain Analysis including a risk and intangible assessment
  4. Identification and implementation of changes in the supply chain
  5. Benchmark and Comparability Analysis
  6. Drafting the new transfer pricing policy
  7. Drafting of intercompany agreements
  8. Operational and accounting implementation of the new policy

Each taxpayer will have their own fact pattern impacting the complexity and steps required for effectively implementing the transfer pricing policy. Any delay could generate potential risks and tax consequences as the new law is equipped for assessing adjustments and penalties based on the taxpayer’s facts, circumstances, and changes in the business model.

Now is the time for setting the strategy and implementing a game plan, as the clock has already started ticking.

The A&M Global Tax team is primed to assist in understanding the operation of the new law and to conduct a strategic review of the intercompany transactions to efficiently analyze whether adoption should take place effective in tax year 2023 or 2024.