Thu, Apr 28, 2022

Brazil Announces Reforms to Transfer Pricing Regulations

Brazil’s decision to align its transfer pricing regulations with the Organization for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) has been years in the making. Ever since Brazil began pursuing OECD membership in 2017, Brazil’s tax authority, the Receita Federal do Brasil (RFB), has been engaged in a joint project with the OECD to evaluate the Brazilian transfer pricing (TP) framework and identify possible reforms and implement necessary changes. The outcome of the joint project is expected to be a complete alignment with the OECD Guidelines.

Before 2018, most observers would have thought this outcome to be unlikely. Brazil’s TP regulations have remained essentially unchanged (fixed margins and traditional methods) since their introduction in 1996. The RFB has steadfastly defended its system as simple for the tax collector and the taxpayer. Furthermore, the RFB believed the Brazilian system was best suited to protect the country’s tax base. However, this joint project has shown that the Brazilian TP system is challenging to navigate, and many companies have been subject to double taxation as a result. Other companies have taken advantage of the system and have achieved double non-taxation and, consequently, the RFB lost revenue. Brazil has recognized these limitations in its quest for economic growth and OECD membership and intends to implement the following reforms.

Arm’s Length Principle

Historically, Brazil has depended on the objectivity of its TP framework, which, in contrast to the subjective nature of the arm’s length principle (ALP), provided for certainty in collections and penalties. 

The ALP, notably absent from Brazil’s current TP regulations, is expected to become the anchor of the new system. The ALP is an international standard, and Brazil’s adoption of this principle should play a large part in reducing the probability of double taxation and non-taxation moving forward. The change will have implications for the types of transactions covered by the regulations, the definition of related parties and the types of methods allowed.

Transactions Analyzed

Currently, the Brazilian system does not offer guidance on all possible types of transactions that multinationals undertake, leaving profit-shifting opportunities. Presently, certain transactions are inadequately tested and produce poor outcomes for the tax collector or the taxpayer. The guidance on the following transaction types is expected to change.


Commodities have always played a critical role in Brazil’s economy, and they will continue to receive special attention under the new TP regulations. Currently, commodities are subject to a unique mandatory method based on exchange prices, and there’s no fixed margin for this type of transaction. The new TP regulations will not feature this type of compulsory method and opt for a method that better captures the market value of commodities, which is a flexible strategy and tethered to the ALP.


Intangibles have grown in relevance since the original system was crafted in 1996 and consequently represent a substantial gap in the current TP framework. The new regulations are expected to define intangibles for TP purposes and apply fundamental principles from the OECD. These principles should include the concept of DEMPE (development, enhancement, maintenance, protection, and exploitation) functions. Legal guidance for cases with a lack of comparables or hard-to-value intangibles is expected.

The current deductibility rules for intangibles are still expected to apply only for specific cases and as an anti-avoidance rule.

Intra-Group Services

The new TP regulations are expected to include certain safe harbors, address the appropriateness of charges for intercompany services and introduce direct and indirect charge methods. A secondary law can be expected to manage and regulate low-value-adding services as a safe harbor.

Cost Contribution Arrangements

The new TP regulations will recognize cost contribution agreements (CCAs), including CCAs for both development and services. Existing CCAs will need updates such that each entity’s compensation is commensurate with its contributions.

Business Restructurings

Business restructurings are expected to be addressed in the new TP regulations and ALP-based guidance to determine appropriate compensation for situations in which transfers carry a profit potential. Business restructurings are complex, so aligning such a topic with Brazil’s general income tax law is expected to be a challenging task.

Financial Transactions

The new TP regulations are expected to include guidance on financial transactions in line with Chapter X of the OECD Guidelines, reversing the old system’s limited mention of financial transactions. The rules will not preclude other interest limitation rules, and the formulation of the guidance is also expected to be challenging and contested.

Other OECD Measures

As part of the alignment to the OECD framework, the new TP regulations are expected to include common aspects such as TP methods, related party definition, tested party selection, comparability analysis and documentation. In a departure from most jurisdictions in Latin America, it is expected that valuation methods will be allowed in cases of unique and valuable intangibles.

Tax Certainty

Brazil is expected to design a framework for safe harbors to prevent disputes and enhance tax certainty. This framework is expected to remain a work in progress and be introduced through secondary legislation due to its complexity. Having safe harbors in secondary legislation allows the RFB more time and flexibility and less legal scrutiny.

The RFB is expected to be allowed to enter into Advanced Pricing Agreements (APAs) with taxpayers in cases where safe harbors are unavailable.

What to do Next?

It is clear that the outcome of the cooperation between Brazil and the OECD should be a complete alignment of Brazil’s transfer pricing framework with the OECD Guidelines. This alignment will not happen overnight; the RFB will continue consultations with the OECD, and new laws must be written and sent to Congress for approval before incorporation into the regulatory regime.

However, taxpayers should initiate scenario analyses to evaluate how the change will impact their Brazilian strategy. Many taxpayers have been seriously affected by the current system (significant double taxation) or significantly benefited from it (effective non-double taxation). An ALP alignment will require introducing new intercompany transactional flows, drafting and redrafting of intercompany agreements and assessing the customs and the effective income and other indirect tax impacts. Taxpayers should have a clear roadmap of implementation before regulations are enacted. 

Fabian Alfonso, Managing Director, Transfer Pricing, Kroll
Elizabeth Phillips, Associate, Transfer Pricing, Kroll
Igor Scarano, Partner, Transfer Pricing LAB

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