In Brazil, transfer pricing rules are regulated by Federal Law No 14,596/2023, whose application is mandatory from the year 2024, and in Normative Instruction No 2,161/2023, published by the Federal Revenue Service, to better regulate the application of transfer pricing rules.

Brazilian legislation also provides for the possibility of formalising a consultation with the Federal Revenue Service, with the aim of clarifying doubts regarding the application of the rules. Such consultations, when publicly answered by the Federal Revenue Service, are inserted into the national legal system, notably as an instrument for interpreting tax rules and making mandatory that any tax authorities obey the parameters established in the response to the consultation.

The first regulation of transfer prices in Brazil occurred in 1996, through the enactment of Law No 9,430/1996. The model then adopted provided for the application of transfer pricing methods, whenever transactions with goods, services and rights were verified, as well as the payment or receipt of interest from related parties.

Although there was a provision for the levy of transfer pricing rules on transactions involving “rights” (intangibles), none of the methods provided for in the governing legislation were sufficient to test transactions of this nature, which made compliance with this obligation impossible, which is why it was not possible to apply transfer pricing rules to this asset class. The concept of related parties was, primarily, based on the corporate link, direct or indirect, and the concept of significant influence was not adopted.

The methods provided for by the original wording of Law No 9,430/1996 allow them to be divided into two groups: (i) those whose essence is price comparison; and (ii) those that are limited to data collection and application of fixed margins. In the first, we have independent prices compared in imports, and sales prices in exports. In the second, we have the resale price minus profit, acquisition, or production cost plus profit, etc, in which there are margins set for profit, cost and transaction value. Those methods were criticised by the OECD, as will be pointed out below, especially when adopting fixed presumption margins.

In 2012, in a first attempt to bring the Brazilian model closer to OECD standards, Law No 12,715 was enacted, which created two new methods, PCI, for imports, and PECEX, for exports. Such methods were closer to the arm’s length principle, as they determined that the parameter prices would be obtained based on market quotations. It was an exclusive application model for commodities. Although it represented an improvement and modernisation of Brazilian standards, the model had flaws, notably with regard to the concept of commodities, the comparability criteria and the regulation of adjustments to be made in comparable operations.

The obligation to adopt the two new methods (PCI for imports, and PECEX for exports of commodities) – to the detriment of the possibility of opting for the most favourable method, which existed until then – was justified in the explanatory memorandum of Provisional Measure No 563/2012, later converted into Law No 12,715, “in order to prevent manipulation of values in import operations or exports”.

Parallel to the enactment of Law No 12,715/2012, discussions on transfer pricing between the Brazilian Federal Revenue Service (RFB) and the OECD intensified amid the OECD/G20 BEPS Project, with two dialogue events held in 2014 and 2015. In 2017, at the invitation of Brazilian authorities, the OECD, with support from the European Commission, held a technical event in Brazil, the aim of which was to provide a reciprocal understanding of transfer pricing systems. Still in 2017, the RFB highlighted a team of auditors to conduct technical studies with the aim of identifying similarities and differences between Brazilian practices and those adopted by the OECD.

The following year, a group of technical studies was officially launched to examine the similarities and divergences, including gaps, between Brazil and the OECD Transfer Pricing Guidelines. The group had members from the RFB and the OECD.

In conclusion, it was pointed out that, combined with other unique features of the system, such as the rigid fixed margin approach and the freedom to select the transfer pricing method, the transfer pricing system in Brazil led to negative results in the form of:

• Base Erosion and Profit Shifting (BEPS), often combined with double non-taxation – profits that by international standards would be allocated to Brazil end up transferred to entities established in low or no taxation jurisdictions. This prevents Brazil from collecting tax revenue in relation to profits from economic activities carried out in the country.
• Double taxation – there are documented cases where the same profits were allocated to a Brazilian entity due to rigidity of prescribed profit margins on inbound and outbound transactions and, at the same time, allocated to the related foreign party in a jurisdiction where the arm’s length principle is used. This results in economic double taxation, in which both legal entities are taxed on the same amount of profit. This double taxation places a higher cost on trade and investment in Brazil when compared to other countries, which discourages the expansion of existing foreign investment, as well as new investments, and harms Brazil’s integration into global value chains.
• Unequal conditions of competition – as it tends to favour some multinational companies by enabling reduced taxation, which benefit from situations for erosion of the tax base and transfer of profits (BEPS), and in other situations causing excess taxation due to double taxation caused due to the gaps and divergences between the Brazilian transfer pricing system and the international standards.

In view of the conclusions highlighted in the study, technical, legislative and taxpayer debates began, so that a new transfer pricing system could be implemented in Brazil.

As a result, on 14 June 2023, Law No 14,596 was published, revoking the transfer pricing standards then in force and establishing a new methodology in alignment with OECD Guidelines, adopting the arm’s length principle as a parameter for adjusting prices charged in controlled transactions, replacing the fixed margin system.

Such is the alignment of the OECD with the new Brazilian model, that Normative Instruction No 2,161/2023, published by the Federal Revenue Service to regulate the matter, expressly determines that the guidelines embodied in the report “OECD Transfer Pricing Guidelines for Multinationals Enterprises and Tax Administration 2022”, as well as its future amendments, are subsidiary sources for the interpretation and integration of transfer pricing control standards.

Controlled Transactions

Before the enactment of Law No 14,596/2023, transfer pricing rules applied only to transactions (i) carried out between related parties, and (ii) involving goods, services or rights as well as the payment and remittance of interest, excluding the payment of royalties that had a specific limitation.

Law No 14,596/2023 expanded the spectrum of application of transfer pricing rules, which are now mandatory for “any commercial or financial relationship between two or more related parties, established or carried out directly or indirectly, including contracts or arrangements in any form and series of transactions.”

This concept includes, for example:

• transactions with tangible goods, including commodities;
• transactions involving intangibles;
• services of any kind;
• cost-sharing contracts;
• business restructuring, including the termination or renegotiation of commercial or financial relationships;
• financial operations, including debt operations, intra-group guarantees, centralised treasury management agreements and insurance contracts;
• transactions that have as their object the disposal or transfer of assets, including shares and other interests, even if they occur in capital return or subscription operations; and
• any sale, assignment, loan, rental, licensing, advance and contribution.

It is concluded that any economic interaction existing between related parties is subject to verification of adequacy through the transfer price. The concept of the standard is so comprehensive that even omissions found in the course of commercial relations can be subject to adequacy analysis for transfer pricing. In other words, if one of the related parties remains inactive, when a certain active conduct is expected from them, in compliance with common market practice, this omission may be subject to transfer pricing rules.

Related Parties

The rule taken from Law No 14,596/2023 and Normative Instruction No 2161/2023 also innovates in the concept of related parties. The previous regulations adopted a criterion in which the verification of corporate ties (direct or indirect) predominated for the purposes of classifying the parties as “related”.

Under the primacy of economic substance, the influence of one party over the other, exercised directly or indirectly, is considered as related whenever the influence of one party over the other is verified, and which may cause the transaction carried out not to occur under market conditions. The influence must be verified based on the characteristics of the transaction and the commercial and economic ties between the parties. Whenever business and economic circumstances demonstrate the existence of significant influence of one party over the other, the application of transfer pricing rules becomes mandatory, even if there is no corporate link between the parties. In addition to related parties, transfer pricing rules are also mandatory for transactions carried out with an individual or legal entity resident or domiciled in a country that does not tax income or that taxes it at a rate lower than 17%, or that is a beneficiary privileged tax regime.

In view of the alignment with the OECD Transfer Pricing Guidelines for Multinational Companies and Tax Administrations, the methods adopted by Brazilian legislation are the same as those regulated by the OECD. The methods are described in this section. However, first the authors present the practices that must precede the choice and application of methods.

Delineation of the Controlled Operation

Once the controlled transaction has been identified, its real economic content must be extracted from it (delineation). This task requires knowledge and analysis of:

• the economic sector in which the taxpayer operates and the elements that affect the performance of a company’s commercial operation in that economic sector;
• the taxpayer’s organisational structure;
• the functions, assets and relevant risks assumed by the entities that are part of the group in which the taxpayer is included; and
• the production chain and its added value.

The delineation of the economic content of the transaction must be done based on the analysis of the factual and circumstantial elements of the transaction, and it is recommended to check the economically relevant characteristics listed below, always seeking the options realistically available for the transaction.

• Contractual terms of the transaction – the attribution of rights and obligations between the parties, written or unwritten, the analysis of facts and circumstances and evidence of the effective conduct of the parties, which will supplement or, in the event of a divergence, take precedence over written documents (primacy of economic substance over legal form).
• Of the functions performed by the parties to the transaction (functional analysis), considering the assets used, which can be known from the analysis.
• Of the economically significant risks assumed (risk assessment), a task that requires the following analyses:
1. the specific identification of economically significant risks for the transaction;
2. the identification of how economically significant risks are contractually assumed by the parties to the controlled transaction;
3. the identification of how related parties operate in relation to the assumption and management of economically significant risks; and
4. the specific characteristics of the goods, rights or services that are the subject of the controlled transaction and in the comparability analysis are those that may lead to differences in their value.
• The economic circumstances of the parties and the market in which they operate:
1. the geographic location and the existence of regional markets;
2. the size of markets and other characteristics, including those that give rise to locational advantages or disadvantages (location savings) and potential cost savings;
3. competitiveness in markets and the relative position of buyers and sellers;
4. the availability of substitute goods and services;
5. the levels of supply and demand in the market as a whole and in particular regions;
6. the purchasing power of consumers;
7. the nature and extent of government regulation of the market, including government policies;
8. production costs, including land, labour and capital costs;
9. transport costs;
10. the market level (retail or wholesale); and
11. the existence of an economic, business or production cycle.
• The business strategies pursued by the parties to achieve their commercial objectives that may be considered relevant may include, as appropriate and by way of example:
1. innovation and development of new products;
2. degree of diversification and risk aversion;
3. adaptation to political and economic changes; and
4. duration of contracts and other factors that influence the daily condition of the business.

In the process of outlining the economic content of transactions, which must be based on the criteria described above, the options realistically available to each party to the controlled transaction must be considered.

This task aims to assess whether in a market transaction there would be more advantageous conditions for one of the contracting parties, which would show that the arm’s length principle was despised.

When analysis of the transaction leads to the conclusion that unrelated parties, acting in comparable circumstances and behaving in a commercially rational manner, considering the options realistically available to each party, would not have realised controlled transaction as outlined, the transaction may be disregarded or replaced with an alternative transaction for the purpose of determining the terms and conditions that would be established by unrelated parties in comparable circumstances and acting in a commercially rational manner.

It should be noted that the new legislation is guided by the primacy of the economic substance over the legal form, in such a way that for the purposes of applying the transfer pricing rules, the real economic content intended must be found, even if contrary to the legal form adopted by the parties to regulate the transaction.

Once the content and economic objective of the transaction are known, it is verified whether the interactions between the parties adapt to the conduct usually observed in market transactions. If there are deviations in the interaction between the related parties, there is a need to make adjustments, as will be the case explained in the following paragraphs.

Comparability Analysis Procedures

The comparability analysis must be carried out for the purpose of comparing the terms and conditions of the controlled transaction, with the conditions that would be established in market operations, considering for this purpose:

• (1) the economic delineation of the operation;
• (2) determining the period to be covered in the analysis;
• (3) verification of the existence of comparable operations (carried out with unrelated parties);
• (4) the selection of the most appropriate method and, depending on the method, the choice of the profitability indicator and the tested party;
• (5) the identification of potential comparables, including the determination of the essential characteristics that must be present in any transaction between unrelated parties so that it can be considered potentially comparable, taking into account the design of the controlled transaction and the comparability factors;
• (6) identifying and making reasonably accurate comparability adjustments when appropriate; and
• (7) the interpretation and use of the data collected with the determination of appropriate remuneration in accordance with the arm’s length principle.

Application of Methods

Once the economic content has been outlined and the comparable operation has been identified, proof of suitability of the tested transaction must occur by using the most appropriate method among those provided for in the governing legislation.

There is another relevant innovation: the previous rule allowed taxpayers to adopt the method of their preference. The new legislation determines the choice of the most appropriate method among the following.

• Comparable Independent Price (PIC) – which consists of comparing the price or consideration value of the controlled transaction with the prices or consideration values of comparable transactions carried out between unrelated parties.
• Resale Price minus Profit (PRL) – which consists of comparing the gross margin that an acquirer of a controlled transaction obtains in the subsequent resale carried out to unrelated parties with the gross margins obtained in comparable transactions carried out between unrelated parties.
• Cost Plus Profit (MCL) – which consists of comparing the gross profit margin obtained over the supplier’s costs in a controlled transaction with the gross profit margins obtained over the costs in comparable transactions carried out between unrelated parties.
• Transaction Net Margin (MLT) – which consists of comparing the net margin of the controlled transaction with the net margins of comparable transactions carried out between unrelated parties, both calculated based on an appropriate profitability indicator.
• Profit Sharing (MDL) – which consists of the division of profits or losses, or part thereof, in a controlled transaction in accordance with what would be established between unrelated parties in a comparable transaction, considering the relevant contributions provided in the form of functions performed, assets used and risks assumed by the parties involved in the transaction.

The most appropriate method is that which provides the most reliable determination of the terms and conditions that would be established between unrelated parties in a comparable transaction, including the following aspects.

The PIC method will be considered the most appropriate when there is reliable information on prices or consideration amounts arising from comparable transactions carried out between unrelated parties, unless it can be established that another method is more appropriately applicable. The legislation under discussion determines that this is the preferred method adopted for transactions with commodities.

Tested Party

Another innovation to be highlighted is the concept of “tested party”.

Unlike the provisions then in force in Law No 9,430/1996, which determined that the transfer pricing test be carried out from the perspective of the Brazilian taxpayer, Law No 14,596/2023 brings the possibility that the tested party is the entity abroad, when the method can be applied more appropriately and for which more reliable data from comparable transactions carried out between unrelated parties is available.

It should be noted the alignment of this new rule with the OECD Guidelines, which define tested party as “that to which a transfer pricing method can be applied in the most reliable way and for which the most reliable comparable can be found, that is, most of the time it will be the one that has the least complex functional analysis.”

The functions performed, the assets used and the risks assumed by the parties to the controlled transaction may influence the definition of the tested party.

The following methods require the selection of one of the parties to the controlled transaction, whose respective financial indicator will be examined:

• PRL;
• MCL;
• MLT; and
• the first stage of the CDM residual analysis (CDM is the method in which profits and losses are divided on the basis of the contributions made by the relevant parties).

The CUP method (known as PIC in Brazil) involves a two-sided analysis where the price is negotiated between two parties participating in the transaction. By using this method, the need to determine which of the related parties should be the tested party for transfer pricing purposes is eliminated. This issue may arise when employing the other two traditional transaction methods. These methods establish a transfer price based on the viewpoint of the tested party in the analysis. For instance, in the resale price method, the tested party in the transfer pricing analysis is the related party sales company. Conversely, in the cost plus method, the tested party is the related party manufacturer.

The Brazilian standards authorise the use of another method, other than those described in the governing law, as long as the alternative methodology produces a result consistent with that which would be achieved in comparable transactions carried out between unrelated parties.

The use of other methods comprises generally accepted economic asset valuation techniques or models, in particular income-based valuation methods, such as the discounted cash flow methodology which, in general, is more appropriate in the case of transactions that have as their intangible objects that are difficult to value or corporate interests for which it is not possible to identify reliable comparables at the time of their transfer between related parties.

For this hypothesis, the taxpayer must maintain documents and records that demonstrate the calculation methodology applied in the adopted method, the established parameters and criteria, as well as proof that it is the most appropriate method.

The PIC method (CUP in OECD Guidelines) is presumably the most appropriate whenever there is reliable information on prices or consideration amounts arising from comparable transactions carried out between unrelated parties.

As this is a presumption, the taxpayer can use another method, even if there is reliable information about prices and values of the transaction (which would give rise to the application of the PIC), as long as he proves that in view of the facts and circumstances of the transaction The chosen method must be the most appropriate for the operation being evaluated.

When there is reliable information on comparable independent prices for a traded commodity, including quotation prices or prices practised with unrelated parties (internal comparables), the PIC method will be considered the most appropriate to determine the value of the commodity transferred in the controlled transaction, unless it can be established, according to the facts and circumstances of the transaction and the functions, assets and risks of each entity in the value chain, that another method is applicable more appropriately, with a view to observing the arm’s length principle.

The limitations of the PIC method are as follows.

• Finding closely comparable uncontrolled transactions can be challenging due to the strict comparability standard required, especially regarding product comparability.
• External comparable uncontrolled transactions are typically hard to come by in practical applications.

Aside from that, one should always seek which method is most appropriate for implementing the arm’s length principle.

The new transfer pricing rules in Brazil introduce the concept of “Comparable Range”.

The Comparables Range should be used when the application of the most appropriate method leads to a range of observations of financial indicators of comparable transactions carried out between unrelated parties, the appropriate range will be used to determine whether the terms and conditions of the controlled transaction are in accordance with the arm’s length principle.

When regulating the matter, the Normative Instruction establishes that the determination of the Interval of Comparables will be carried out by adopting the following procedures:

• the range must be composed of observations obtained from comparable operations;
• selected observations that have a lower degree of comparability in relation to the controlled transaction or that are not sufficiently reliable must be eliminated;
• after the elimination of these transactions, if uncertainties remain regarding the degree of comparability of the comparable transactions with respect to the controlled transaction that have not been precisely identified or quantified and adjusted or if any uncertainty regarding reliability remains, the interquartile range will be considered as the range appropriate; and
• if there are no uncertainties about the degree of comparability of the comparable transactions in relation to the controlled transaction, nor about their reliability, the complete range will be considered the appropriate range.

In summary, there are two hypotheses for using the Comparables Interval:

• in cases where the controlled transaction indicator is within the comparable range, the principle of arm’s length is applied; and
• in cases where the controlled transaction indicator is not included in the comparable range, the controlled transaction will be assigned the value of the average of the values identified in the appropriate range.

Law No 14,596/2023 determines the performance of comparability adjustments, as long as they are reasonably precise, to eliminate the material effects of differences in relation to the controlled transaction or the tested party, observing that:

• comparability adjustments to eliminate materially relevant differences should be made if, and only if, they are expected to increase the reliability of the results;
• comparability adjustments must be made after applying consistent criteria to transactions between unrelated parties that reveal the highest degree of comparability;
• the same difference must not be adjusted more than once using the same comparability adjustment, or different adjustments, so that the effect of the adjustment that eliminates the same difference multiple times is not computed;
• the need to make numerous or substantial comparability adjustments may indicate that transactions between unrelated parties are not sufficiently comparable; and
• each adjustment must be duly justified and documented, including the provision of information that demonstrates the need for each of the adjustments with reference to the differences, with demonstrations of the basis for making the adjustments, the procedures adopted and the calculations carried out, with details of all steps followed, variables used and results obtained in comparables.

Examples of comparability adjustments are:

• adjustments to accounting standards and consistency, including exchange rate adjustments;
• adjustments for differences in functions, risk assumption, assets and capital, including working capital; and
• adjustments to contractual terms, including, for example, sales conditions (volume, payment term and International Commercial Terms – Incoterm ), conditions for amortisation or early settlement of debt and contractual options.

Although Law No 14,596 dedicates a specific section to deal with transfer pricing on intangibles, the matter still pending detailed regulation by the Federal Revenue Service.

Therefore, controlled operations with this asset class are subject to the general rules for transfer pricing.

Law No 14,596 dedicates a specific section to deal with transfer pricing on intangibles, however the matter still pending detailed regulation by the Federal Revenue Service.

Under the terms of the Law, in controlled transactions involving intangibles that are difficult to value, the following must be considered for the purpose of valuing the transaction:

• uncertainties in pricing or valuation existing at the time of the transaction; and
• the reflections of these uncertainties in the formatting of the contract between the parties, especially with regard to the adoption of short-term contracts, the inclusion of price adjustment clauses or the establishment of contingent payments, as well as unrelated parties would have done in comparable circumstances.

Information available in periods after the controlled transaction was carried out can be used by tax authorities to verify the correct use of the criteria listed above.

Once these criteria are not met, the governing legislation determines that the value of the transaction be adjusted for Income Tax and Social Contribution purposes, and the adjustment must be measured based on annual contingent payments that reflect the uncertainties arising from pricing or evaluation of the intangible assets involved in the controlled transaction.

By regulating the possibility of using another method, other than those listed in the legislation, the standard points out that the use of alternative methods, especially those based on income, such as the discounted cash flow methodology will, in general, be more appropriate in the event of transactions involving intangibles that are difficult to value or corporate interests for which it is not possible to identify reliable comparables at the time of their transfer between related parties.

However, this is a mere recommendation, and it is not mandatory that taxpayers follow this criterion for the purposes of testing transactions involving intangibles that are difficult to value.

Law No 14,596/2023 defines cost sharing as contracts in which two or more related parties agree to share the contributions and risks related to the acquisition, production or joint development of services, intangibles or of tangible assets, based on the proportion of benefits that each party expects to obtain from the contract.

Those who, in relation to it, exercise control over economically significant risks and have the financial capacity to assume them and who have the reasonable expectation of obtaining the benefits, are qualified as participants in the expense sharing contract:

• services developed or obtained; or
• of intangibles or tangible assets, through the attribution of participation or rights over such assets and that are capable of exploiting them in their activities.

Although transfer pricing legislation expressly determines the levy of its rules on expense sharing contracts between companies in the same group, the Normative Instruction published by the Federal Revenue Service does not dedicate any specific regulations, nor does it determine the use of specific methods for the calculation of the transfer price on such transactional modality.

Adjustments can be made by the parties to the controlled transaction until the end of the calendar year with a view to adjusting the value of the transaction, adapting it to the arm’s length principle.

Adjustments of this nature must be reflected in the accounting records of the Brazilian taxpayer, as well as the other parties to the controlled transaction.

Furthermore, the compensatory adjustment must be supported by the issuance of an appropriate tax document.

This adjustment can be made after the end of the year but must occur before the date of sending the Tax Accounting Bookkeeping (Brazilian Tax Return).

In recent decades, Brazil has signed a series of treaties and joined mutual co-operation programmes for sharing tax information. Among the most relevant expedients, the authors list the following:

• Brazil has been a member of the OECD Global Forum on Transparency and Information Exchange for Tax Purposes since 2010.
• Double taxation agreements, as a rule, include devices that allow the exchange of information between contracting states. Currently, Brazil has agreements in force with the following jurisdictions:
1. South Africa;
2. Germany;
3. Argentina;
4. Austria;
5. Belgium;
6. Canada;
7. Chile;
8. China;
9. South Korea;
10. Denmark;
11. United Arab Emirates;
12. Ecuador;
13. Slovakia;
14. Spain;
15. Philippines;
16. Finland;
17. France;
18. Hungary;
19. India;
20. Israel;
21. Italy;
22. Japan;
23. Luxembourg;
24. Mexico;
25. Norway;
26. Netherlands;
27. Peru;
28. Portugal;
29. Czech Republic;
30. Russia;
31. Singapore;
32. Sweden;
33. Switzerland;
34. Trinidad and Tobago;
35. Türkiye;
36. Uruguay;
37. Ukraine; and
38. Venezuela.
• Tax Information Exchange Agreement – TIEA, developed by the OECD Global Forum in 2002 and deals with the exchange of tax information.
• Convention on Mutual Administrative Assistance in Tax Matters, signed by the Member States of the Council of Europe and the member countries of the OECD, promulgated through Decree No 8,842/2016.
• FACTA – Foreign Account Tax Compliance Act , Agreement signed between Brazil and the USA, promulgated through Decree No 8,506/2015, which provides for the regulation of tax accounts and investments that are outside the United States, but that belong to North American citizens (US persons).
• Argentina – Agreement on the Exchange of Information for Tax Purposes Relating to Previous Periods.
• United Kingdom – Agreement for the Exchange of Information Relating to Taxes.
• Switzerland – Agreement for the Exchange of Information Relating to Taxes.

Finally, customs co-operation agreements must also be mentioned – mutual recognition agreements and technical co-operation agreements, through which there is mutual dialogue and collaboration between Brazilian tax authorities and other jurisdictions.

Law No 14,596/2023 implemented the procedures for Simplification Measures and Other Measures and the Specific Consultation Process in Matters of Transfer Pricing. In summary, these mechanisms may resemble APA. Although they are pending regulation by the Federal Revenue Service, the governing law establishes the following definitions.

Simplification Measures and Other Measures

The Special Secretariat of the Federal Revenue Service of Brazil may establish specific rules to regulate the application of the arm’s length principle to certain situations, especially for:

• simplify the application of the comparability analysis steps, including to waive or simplify the presentation of documentation;
• provide additional guidance in relation to specific transactions, including intangible transactions, cost-sharing agreements, business restructuring, centralised treasury management arrangements and other financial transactions; and
• provide for the treatment of situations in which the information available regarding the controlled transaction, the related party or comparables is limited, in order to ensure the adequate application of the provisions of this law.

Specific Consultation Process Regarding Transfer Pricing

The Federal Revenue Service of Brazil may establish a specific consultation process regarding the methodology to be used by the taxpayer to comply with the arm’s length principle in relation to future controlled transactions and establish the requirements necessary for the request and fulfilment of the query.

Aspects such as:

• selection and application of the most appropriate method and financial indicator examined;
• selection of comparable transactions and appropriate comparability adjustments;
• determination of comparability factors considered significant for the circumstances of the case; and
• determination of critical assumptions regarding future transactions.

Submission of a consultation request will be subject to a fee in the amounts of:

• BRL80,000; and
• BRL20,000, in the case of a request to extend the period of validity of the response to the consultation.

It should be emphasised that the procedure for presenting a consultation, as well as for the materialisation of Simplified Measures and Other Measures, has not yet been regulated by the Federal Revenue Service.

The administration of the APA will be the responsibility of the Special Secretary of the Federal Revenue Service, linked to the Ministry of Finance.

This matter has not yet been regulated.

This has not yet been regulated in Brazil.

APA application deadlines is a topic that has not yet been regulated in this jurisdiction.

This topic has not yet been regulated in this jurisdiction.

APA cover has not yet been regulated in Brazil.

The matter of retroactive effect for APAs has not yet been regulated in this jurisdiction.

The Brazilian taxpayer must present the documentation and provide information necessary to demonstrate its transactions subject to transfer pricing control, including that necessary for the design of the transaction and the comparability analysis.

In this context, the following documents must be presented.

• Country-by-Country Declaration – containing information relating to the global allocation of revenues and assets and income tax paid by the multinational group to which it belongs, together with indicators related to the global economic activity of the multinational group, in line with the Action 13 of BEPS.
• Global File – containing information relating to the structure and activities of the multinational group to which it belongs and the other entities that are part of the multinational group, in line with Actions 8 and 9 of the BEPS.
• Local File – containing information relating to controlled transactions and the parties involved in controlled transactions, in line with BEPS Actions 8 and 9.

The Global File and the Local File must be presented in electronic format and deposited in the Federal Revenue Service’s own environment (RFB’s Virtual Service Center – e-CAC ), within three months after the deadline set for transmission of the ECF of the corresponding calendar year.

Exceptionally for the 2024 financial year, these declarations may be sent up to the last business day, respectively, of the 2025 and 2024 calendar years.

The Country-to-Country Declaration must be presented by filling out a specific section of the ECF (Brazilian Tax Return).

The taxpayer is exempt from sending the Local File in cases where the value of the controlled transactions is less than BRL15 million.

For transactions between BRL15 million and BRL500 million a simplified shipping method is defined.

For controlled transactions exceeding BRL500 million, the Local File must be sent in its entirety, as regulated by Normative Instruction No 2,161/2023.

Sending the Global File is also waived in cases where the total controlled operations are less than BRL15 million.

In the event that the taxpayer fails to provide the information necessary for the precise delineation of the controlled transaction or for carrying out the comparability analysis, the tax authority will be required to adopt the following measures:

• allocate, to the Brazilian entity, the functions, risks and assets attributed to another party of the controlled transaction that do not have reliable evidence of having been effectively performed, assumed or used by it; and
• adopt reasonable estimates and assumptions to carry out the transaction design and comparability analysis.

In addition, the following specific penalties apply.

• Regarding the Global Archive and the Local Archive:
1. fine equivalent to 0.2%, per calendar month or fraction thereof, on the value of the taxpayer’s gross income for the period to which the obligation refers, in the event of failure to submit it in a timely manner; or
2. fine equivalent to 3% of the value of the taxpayer’s gross income for the period to which the obligation refers, in the event of presentation without meeting the requirements for its presentation.
• As for the Global File, a fine of 0.2% on the value of the consolidated revenue of the multinational group for the year prior to which the information refers, in the event of presentation with inaccurate, incomplete or omitted information.
• Regarding the lack of timely presentation of information or documentation required by the tax authority during a tax procedure or other prior inspection measure, or for other conduct that entails embarrassment to the inspection during the tax procedure, a fine equivalent to 5% of the value of the corresponding transaction, as priced by the tax authority.

The fines applied will not be less than BRL20,000 and may not exceed the amount of BRL5 million.

Taxpayers will always be guaranteed the right to contradictory and full defence, being able to present the reasons why they do not agree with the tax authority’s understanding.

The declarations required by Brazilian legislation are in line with those provided for in the OECD Transfer Pricing Guidelines.

Therefore, the Brazilian taxpayer must deliver the following documents to the Brazilian authorities.

• Country-by-Country Declaration, containing information relating to the global allocation of revenues and assets and income tax paid by the multinational group to which it belongs, together with indicators related to the global economic activity of the multinational group.
• Global Archive, containing information relating to the structure and activities of the multinational group to which it belongs and the other entities forming part of the multinational group.
• Local File, containing information relating to controlled transactions and the parties involved in controlled transactions.

Brazilian legislation for transfer pricing was significantly modified in 2023 through the enactment of Law No 14,596, the application of which is mandatory for the year 2024.

The changes brought about by the legislation under discussion aimed to fully align Brazilian practices with the OECD Guidelines.

The need for such alignment was described in the document “The New Price System for Transfer: Improvement of the Brazilian Tax System and Promotion of Trade and Investment”, signed jointly by the Federal Revenue Service and the OECD:

“Recognizing that the current Brazilian system weakens the country’s tax and development interests, it was concluded that alignment with the international standard would be the best option for Brazil. Full alignment was considered necessary, as, otherwise, significant gaps would remain in the system, with negative effects on legal certainty in tax matters, the cost of compliance, as well as the risks of persistent double taxation and loss of revenue taxes. Full alignment is defined as the adoption of and commitment to the international transfer pricing standard, including the arm’s length principle and the guidelines for its application contained in the OECD Guidelines.

Total alignment does not imply completely abandoning the objectives of simplicity, ease of administration and tax compliance and legal certainty in tax matters. These objectives can be achieved through the introduction of safe harbors designed in accordance with the arm’s length principle, including carefully considered input criteria, to ensure that transfer pricing results are broadly consistent with the results produced by the full comparability analysis in accordance with the OECD Transfer Pricing Guidelines.

The OECD Secretariat has analyzed the final version of Provisional Measure 1,152/2022 and considers that the Provisional Measure incorporates fundamental principles and concepts covered by the OECD instruments on transfer pricing and contained in the OECD Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administrations (2022) and reflected in the United Nations Practical Manual on Transfer Pricing for Developing Countries (2021). There are some provisions that, while still aligned with international standards, adopt a more prescriptive approach due to the traditions of the Brazilian tax system. These devices aim to reduce the burden of complying with tax obligations and provide legal certainty in tax matters for taxpayers and also improve the efficiency of tax administration. However, such provisions, even following such an approach, offer taxpayers the possibility of determining results based on analysis of facts and circumstances in a manner consistent with the international standard.”

Therefore, it is possible to state that the current Brazilian rules are very close to the standards required by the OECD of its signatories, so that it can be concluded that there is full alignment with the body’s Guidelines.

From the publication of Law No 14,596/2023, the arm’s length principle started to be adopted as an adequacy paradigm for controlled transactions.

With the publication of the aforementioned standard, every transaction subject to transfer pricing calculation must, by applying the most appropriate method, demonstrate that its pricing occurred under circumstances and conditions consistent with market practices, in compliance with the arm’s length principle.

This principle replaces the fixed margin model previously adopted by Brazilian legislation for the purpose of verifying the adequacy of controlled operations.

Since the first decades of the millennium, Brazil, as a member of the G20, has been at the forefront of important agendas relating to projects that shape the rules of international taxation, such as Transparency and Exchange of Information for Tax Purposes, the OECD BEPS Project/G20 and the Two-Pillar Solution to Address Fiscal Challenges Arising from the Digitalization of the Economy.

From this perspective, the influence of BEPS actions on Brazilian fiscal policy is undeniable, notably with regard to transfer pricing and information sharing rules.

The main influences of BEPS on Brazilian legislation are:

• Law No 12,973/2014 – update of taxation rules on a universal basis (CFC Rules ) – BEPS Action 3;
• Normative Instruction No 1,571/2015 and Normative Instruction No 1863/2018 – provide for mandatory provision of information regarding financial operations of interest to the Brazilian Federal Revenue Service and on the final beneficiary of legal entities (UBO) – Action 12 of BEPS;
• Normative Instruction No 1,681/2016 – Country-by-Country Declaration – BEPS Action 13;
• Normative Instruction No 1,689/2017 – later replaced by Normative Instruction No 2,058/2021 – deals with the consultation process – Action 5 of the BEPS; and
• Normative Instruction No 1,846/2018 – MAPA – BEPS Action 14.

Parallel to this, Brazil advanced in studies to align Brazilian transfer pricing practices with OECD guidelines, which culminated in the issuance of Law No 14,596/2023, which, as already pointed out in this document, represents total alignment with the standard of the OECD, consequently, with great influences from BEPS.

As transfer pricing rules in Brazil fully adhere to OECD Guidelines, it is a logical consequence that the policies implemented by that body to combat tax avoidance and evasion are reflected in the Brazilian rules, notably the policies arising from BEPS.

Given this context, it is undeniable that the influence of BEPS 2.0 could positively affect Brazilian tax revenue, particularly with regard to activities developed by the “digital economy”.

However, as this is still an incipient topic in Brazil, it is not possible to predict, with a certain degree of security, the future effects and their possible deviations.

At the moment, there are no relevant initiatives in the government or in the National Congress to approve laws to implement Pillars 1 and 2 of BEPS 2.0.

To the extent that transfer pricing legislation values the functions performed by the parties, the assets used and the risks assumed in the operation as elements of the economic delineation of the controlled transaction, such criteria being fundamental for its comparability with market operations, the assumption of risks by another entity can significantly influence the calculation of the transfer price.

More than that, given the need to determine the tested party in specific cases, the “risk” element may be relevant to shift the perspective of the tested party from one jurisdiction to another.

In any case, such elements must be the subject of a case-by-case analysis, in which, in addition to the risk, other transactional elements must be weighed.

Unlike what happens with the “OECD Transfer Pricing Guidelines for Multinationals Enterprises and Tax Administration 2022”, to which Brazilian legislation assigns the status of subsidiary sources for the interpretation and integration of transfer pricing control standards, the UN Practical Manual on Transfer Pricing is not elevated to the same level, which is why it does not have any normative force in Brazil.

However, the document can serve as a consultation instrument for applicators of Brazilian transfer pricing rules, when involving situations similar to those under analysis by the consultant.

In the event of a controlled transaction consisting of the provision of services with low added value, the taxpayer may opt for a simplified approach to applying the transfer pricing rules, according to which the remuneration for said services must have a gross profit margin, calculated on all direct and indirect costs related to the transaction, of:

• at least 5%, in cases where the service provider is a legal entity domiciled in Brazil;
• a maximum of 5%, in cases where the provider is a related party abroad;
• for the purposes of applying this simplified rule, only those services that:

1. have a supportive nature;
2. are not part of the main activities of the related party or multinational group;
3. do not require the use of unique and valuable intangible assets and do not contribute to their creation;
4. do not imply the assumption or control of economically significant risks by the service provider and do not lead to the creation of such a significant risk for him; and
5. do not contribute significantly to the creation, increase or maintenance of value in the multinational group, to the essential capabilities or to the chances of success of the multinational group’s business.

Services that the multinational group also provides to unrelated parties cannot be considered low-value-added services.

If necessary, an appropriate allocation method or apportionment criterion must be used to determine the cost of low-value-added intragroup services among group members in proportion to the benefits or benefits expected for each group member.

Brazil does not adopt policies of this nature.

As Brazilian practices are fully aligned with OECD guidelines, there is no rule that can be highlighted as exclusive to Brazilian practice.

Considering that the anti-avoidance function present in the transfer pricing control rules also manifests itself in the rules that determine customs valuation, reflections naturally arise about the possible effects of the transfer pricing rules on typical customs taxes. After all, both normative frameworks intend to compare transactions carried out with the parameters that would be verified for these same transactions if carried out without any favouritism by the contracting parties.

At this point, it should be noted that the RFB categorically intended to separate the two institutes in Law No 14,596/2023, the content of which is clear regarding its applicability only to income taxes: “This Law provides for transfer pricing rules relating to Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL).”

If it is true, therefore, that Law No 14,596/2023 does not produce automatic effects on the customs valuation procedure, the new set of transfer pricing rules in Brazil, especially as it is based in the best implementation of the arm’s length principle, can be used as a reference for the customs valuation procedure, under the terms and limits imposed by the rules relating to customs law.

Transfer pricing rules can be taken into account by the applicator of customs value rules, as evidenced by Comment No 23.1 of the WCO Customs Valuation Technical Committee, which allows the customs authority to use information found in price studies of transfers prepared by the importer to assess the circumstances of the sale. This guideline was incorporated in several passages of Normative Instruction No 2,090/2022, namely in the part where it reproduces the aforementioned Comment 23.1: “a study on transfer prices can constitute a good source of information, if it contains relevant information about the circumstances of the sale. On the other hand, a study on transfer pricing may not be relevant or appropriate due to the substantial and significant differences that exist between the Agreement’s methods for determining the value of imported goods and those of the OECD Transfer Pricing Guidelines.”

The application of transfer pricing rules follows the same procedure as the administrative and judicial process of tax claims.

The process can be summarised as follows.

Administrative phase:

• Tax assessment – it is the administrative act by which the tax authority determines the taxpayer’s tax obligation, identifying the amount to be paid.
• Assessment notification – the taxpayer is notified of the tax collection through an official document sent by the tax authority.
• Challenge or administrative appeal – the taxpayer has the right to challenge the tax assessment by filing a challenge or administrative appeal, demonstrating any errors in the charge or legal reasons for the challenge.
• Administrative decision – the tax authority analyses the objection or appeal and issues an administrative decision, whether or not it accepts the arguments presented by the taxpayer.
• Payment or registration in active debt – if the administrative decision is unfavourable to the taxpayer and there is no longer any possibility of appeal, he/she must pay the tax or the tax authority may register the debt in active debt for judicial collection.

Judicial phase:

• Lawsuit – if the taxpayer disagrees with the administrative decision, he/she can appeal to the judiciary, filing a lawsuit to contest the collection of the tax.
• Tax foreclosure – if the court decision is unfavourable to the taxpayer, the Public Treasury may initiate the tax execution process to collect the tax, if the taxpayer does not make the spontaneous payment.

There is no administrative or judicial case law on the new criteria defined by Law No 14,596/2023.

Regarding previous practice, there are a number of disputes and controversies. However, given that this document focuses on the year 2024, the authors will not delve into the existing disputes regarding the repealed legislation.

There is no administrative or judicial case law on the new criteria defined by Law No 14,596/2023.

Before the enactment of Law No 14,596/2023, royalties could only be deducted in the amount of 5% of the expense incurred, as determined by Law No 3,470/1958.

With the publication of the new transfer pricing rules, the limitation on the deductibility of royalties was revoked, with such expenses being fully deductible if it is an uncontrolled operation.

With the exception of royalty operations, there are no limitations on capital remittances abroad.

Before the enactment of Law No 14,596/2023, royalties could only be deducted in the amount of 5% of the expense incurred, as determined by Law No 3,470/1958.

With the publication of the new transfer pricing rules, the limitation on the deductibility of royalties was revoked, however, the transaction must be subject to analysis of adequacy to the arm’s length principle if it is a controlled transaction.

With the exception of royalty operations, there are no limitations on capital remittances abroad.

There are no policies of this nature in Brazil.

As a general rule, inspection processes are confidential, with publicity only given to the parties involved.

Regarding APA, the matter, although provided for in Law No 14,596/2023, is still pending regulation by the Federal Revenue Service.

There are no policies regarding secret comparables in Brazil.