New Brazilian Transfer Pricing Regulations
Over the course of this year, Brazil revised its transfer pricing (“TP”) regulations fundamentally. The country promulgated a new legal base (Law No. 14,596/23) in June and issued new administrative regulations (Normative Instructions No. 2,161/23) in September. With this, Brazil concludes a long-time project to align itself with the international standard. The project had been ongoing since February 2018 with the goal to adopt the OECD TP Guidelines (“TPG”) domestically. The new regulations are compulsory Brazilian taxpayers from 1 January 2024.
Significant Contents
The new regulations will no longer allow discretionary selection of the TP method. Rather, taxpayers now require a detailed functional analysis and selection of the most appropriate TP method. On the one hand, this increases the effort for managing controlled cross-border transactions. On the other hand, flexibility is increased, as the new regulations recognize more methods than before. Especially transactional profit methods and economic valuation methods – such as discounted cash-flows – allow now for more consistent TP.
In many aspects, the Brazilian regulations are more fleshed-out than the TPG. An example of this is benchmark studies of comparable companies. Under the new regulations, they require stricter independence than internationally typical. In similar fashion, they include a mandatory range narrowing requirement with the interquartile range. While this is arguably not consistent with the OECD guidance, it reflects practices in several other jurisdictions.
The OECD Guidelines retain a subsidiary function where the Brazilian regulations do not yet provide guidance. This is relevant, for example, for financial transactions. In all conceivable situations, economic valuation skills will be indispensable for Brazilian TP purposes.
Documentation Requirements
The new regulations also compel specific TP reports, the Global File (“GF”) and the Local File (“LF”). Taxpayers must file these reports proactively via the web-portal of the tax administration within 3 months after the deadline for filing the respective year’s tax return. Furthermore, Country-by-Country Reporting (“CbCR”) is foreseen.
For the LF, a de minimis threshold exists. Proactive filing is only required, if the taxpayers controlled cross-border transactions reach an aggregated value of 15 million real (about 2.5 million euro). Where this value exceeds 500 million real, though, the required content increases substantially.
While the Brazilian reports are based on the Master- and Local-File of the TPG, they are noticeably more detailed. For example, the regulations include extensive items for intangibles as well as captive services. From a professional perspective, these are meaningful additions. However, they exceed the contents of typical “first-line-of-defense” documentation significantly.
Practical Aspects
With compulsory proactive filing of TP reports, Brazil follows the current global trend. Other jurisdictions already have introduced increased requirements to either file the complete TP documentation or core parts of it. Specific examples are Denmark and Belgium. In Italy, the TP report must be prepared with an electronic certificate, that evidences its timely preparation. Such requirements pressure taxpayers to prepare analyses and compliance reports timely.
For a time, Brazil should apply the new regulations consistent with the previous practices. Examiners would then prefer the resale price and the cost-plus methods. The TPG support this, as these foresee a certain precedence of traditional methods. Where they are applicable with the same reliability as profit-based methods they are preferable. Nevertheless, it contradicts the international practice which relies widely on the transactional net margin method.
Recommended Next Steps
Priority is now ensuring that detailed functional analyses are available in time. This helps avoiding penalties and TP estimates by the Brazilian tax administration. Even where reduced documentation requirements apply, it is advisable to conduct an extensive fact finding. The reason is that tax examiners can still request more detailed information during an audit. Collecting this already at the time of preparing the compliance reports ensures that it is complete and consistent with the filing.
Clean, consistent TP files and extensive supporting materials are valuable for evading aggressive positions of examiners. Only “checking the boxes” for minimal compliance with explicit documentation requirements is also important as cross-jurisdiction information exchanges are increasing. Accordingly, data that is only explicitly required in some jurisdictions may very well become available to the tax administration of other countries.