Late last year, the Brazilian government published draft legislation to align Brazil’s transfer pricing rules with the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. (For prior coverage, see BDO Global Tax Alert | BRAZIL - New year, new transfer pricing rules - BDO).
The draft legislation -- Provisional Measure 1,152/2022 -- was in force awaiting congressional approval. The Provisional Measure was converted into Law 14,596/2023 in June 2023, and regulations, in the form of Normative Instruction 2,161/2023, were published on 29 September 2023. Now, Brazil’s adoption of the arm’s length standard is official, and the clock is ticking!
The alignment of the Brazilian transfer pricing rules with the international standard has been long-awaited by multinational groups and will be seen as a clear advance in facilitating international transactions involving Brazil. With this alignment, multinational groups should be able to avoid double taxation and other distortions caused by Brazil’s unique transfer pricing rules.
Brazil’s new transfer pricing regime will enter into force on 1 January 2024, and taxpayers will be required to follow the new transfer pricing legislation. However, taxpayers may opt to adopt the rules early for 2023, provided they notify the tax authorities by 31 December 2023.
Clear rules were created in relation to the transfer pricing of goods, the most relevant type of asset traded at that time, since the economy had been open. Local rules determined the maximum tax-deductible price for imports and the minimum taxable price for exports, both utilizing the fixed margin approach. In general, the same set of rules that applied to goods also applied to services and rights.
According to the Normative Instruction, the use of domestic or non-domestic comparables must be assessed on a case-by-case basis, considering the facts and circumstances of the transaction, the degree of comparability of the transactions in view of their economically relevant characteristics, and the reliability of the available information. Local comparables are preferred, but nonlocal comparables could be utilised provided that reasonably precise adjustments can be made to consider existing material differences.
Regarding transfer pricing documentation, taxpayers are required to present a local file and a master file in accordance with the volume of their intercompany transactions, as indicated in the table below:
It is important to emphasise that the information that must be provided in the local file differs depending on the amount of the taxpayer’s intercompany transactions. For taxpayers that fall under category #2, the local file will be simpler than for those classified as part of category #3. The complete local file will require, among others, a description of the taxpayer’s activities, the identification of the taxpayer’s principal competitors, information regarding controlled transactions, information on the application of the transfer pricing methods, and a determination of the transfer pricing and accounting information.
The tax authorities will accept master files in English and Spanish, but the same article in the Normative Instruction provides that a translation into Portuguese should be presented only if required by the tax authorities. Conversely, the local file must be prepared in Portuguese.
The corporate income tax return (ECF from its acronym in Portuguese) is generally filed in July of the year following the taxable year. The master file and local file must be submitted to the tax authorities up to three months after the filing of the ECF, that is, by October 2024 for early adopters or until October 2024 for regular taxpayers.
The new regime imposes penalties that range between BRL 20,000 and BRL 5,000,000 and the percentage is different according to the penalty, as follow:
According to the tax authorities, more Normative Instructions will be issued, possibly to provide additional guidance for transactions involving commodities, intragroup services, or intangibles.
The new Brazilian transfer pricing rules are aligned with international standards, but the Brazilian tax environment and the tax authorities are still unique. A famous Brazilian pianist and composer named Tom Jobim once said “Brazil is not for beginners.” In other words, the rules may be international, but only Brazilians know how the music is played and how local compliance works.
Hugo Amano
BDO in Brazil
The draft legislation -- Provisional Measure 1,152/2022 -- was in force awaiting congressional approval. The Provisional Measure was converted into Law 14,596/2023 in June 2023, and regulations, in the form of Normative Instruction 2,161/2023, were published on 29 September 2023. Now, Brazil’s adoption of the arm’s length standard is official, and the clock is ticking!
The alignment of the Brazilian transfer pricing rules with the international standard has been long-awaited by multinational groups and will be seen as a clear advance in facilitating international transactions involving Brazil. With this alignment, multinational groups should be able to avoid double taxation and other distortions caused by Brazil’s unique transfer pricing rules.
Brazil’s new transfer pricing regime will enter into force on 1 January 2024, and taxpayers will be required to follow the new transfer pricing legislation. However, taxpayers may opt to adopt the rules early for 2023, provided they notify the tax authorities by 31 December 2023.
Background
Brazil’s transfer pricing legislation was originally enacted in 1996. During the 1990s, the Brazilian government broke from decades of protectionism and decided to open the economy to imports and free trade. (For prior coverage, see BDO’s article BRAZIL - Transfer pricing in Brazil - Towards convergence with the OECD standard - BDO).Clear rules were created in relation to the transfer pricing of goods, the most relevant type of asset traded at that time, since the economy had been open. Local rules determined the maximum tax-deductible price for imports and the minimum taxable price for exports, both utilizing the fixed margin approach. In general, the same set of rules that applied to goods also applied to services and rights.
New rules
The new transfer pricing legislation is aligned with the OECD standards and indicates that the internationally accepted definition of the arm’s length principle will be at the core of of the new regime. The methods adopted under the new rules are the same as those sanctioned by the OECD: the comparable uncontrolled price (CUP) method, the resale minus profit method, the cost plus method, the transactional net margin method, and the transactional profit split method. There is also a provision for “other methods” applicable, for example, for intangibles, because it considers valuation methods such as discounted cash flow.According to the Normative Instruction, the use of domestic or non-domestic comparables must be assessed on a case-by-case basis, considering the facts and circumstances of the transaction, the degree of comparability of the transactions in view of their economically relevant characteristics, and the reliability of the available information. Local comparables are preferred, but nonlocal comparables could be utilised provided that reasonably precise adjustments can be made to consider existing material differences.
Regarding transfer pricing documentation, taxpayers are required to present a local file and a master file in accordance with the volume of their intercompany transactions, as indicated in the table below:
It is important to emphasise that the information that must be provided in the local file differs depending on the amount of the taxpayer’s intercompany transactions. For taxpayers that fall under category #2, the local file will be simpler than for those classified as part of category #3. The complete local file will require, among others, a description of the taxpayer’s activities, the identification of the taxpayer’s principal competitors, information regarding controlled transactions, information on the application of the transfer pricing methods, and a determination of the transfer pricing and accounting information.
The tax authorities will accept master files in English and Spanish, but the same article in the Normative Instruction provides that a translation into Portuguese should be presented only if required by the tax authorities. Conversely, the local file must be prepared in Portuguese.
The corporate income tax return (ECF from its acronym in Portuguese) is generally filed in July of the year following the taxable year. The master file and local file must be submitted to the tax authorities up to three months after the filing of the ECF, that is, by October 2024 for early adopters or until October 2024 for regular taxpayers.
The new regime imposes penalties that range between BRL 20,000 and BRL 5,000,000 and the percentage is different according to the penalty, as follow:
- For the master file and local file: (i) 0.2% per month on gross revenue in case of late filing; and (ii) 3% penalty on gross revenue in case of filing inaccurate or incomplete information.
- For the master file: 0.2% of the multinational group’s consolidated revenue in case of filing incorrect, incomplete, or omitted information.
- 5% of the intercompany transactions for failure to file timely information or documentation required by the tax authorities during a tax procedure or other prior inspection measure, or for other conduct that results in embarrassment to the inspection during the tax procedure.
Next steps
Among the more pressing questions facing taxpayers doing business in Brazil is whether to adopt the new transfer pricing rules for FY 2023. The answer is that it depends. There is no “one size fits all” answer to this question; however, taxpayers with a low probability of a transfer pricing adjustment may choose to continue complying with the existing rules, primarily due to lack of time to prepare and because of lingering uncertainty regarding the new rules.According to the tax authorities, more Normative Instructions will be issued, possibly to provide additional guidance for transactions involving commodities, intragroup services, or intangibles.
The new Brazilian transfer pricing rules are aligned with international standards, but the Brazilian tax environment and the tax authorities are still unique. A famous Brazilian pianist and composer named Tom Jobim once said “Brazil is not for beginners.” In other words, the rules may be international, but only Brazilians know how the music is played and how local compliance works.
Hugo Amano
BDO in Brazil