On 28 December 2022, the Brazilian Government issued the draft legislation, Provisional Measure No. 1152, of 2022 with the aim of changing the corporate income tax legislation (IRPJ) by revoking the current provisions on transfer pricing contained in arts. 18 to 23 of Law No. 9,430, of 27 December 1996 and introducing a new legal framework aligned with the OECD guidelines. The motivations for the Provisional Measure are the improvement of the business environment, the insertion of the country in the chains global values, legal certainty as well as the increase in the tax revenue collection.
What is the current Brazilian Transfer Pricing framework?
The existing legislation does not make reference to the arm‘s length principle. The Cost Plus and Resale Price Methods rely on a formulaic approach that incorporates pre-set fixed margins, which eliminates most of the comparability analysis. In addition, there are specific methods for export and import of commodities and interest on intra-group loans. The Transactional net margin method (TNMM) and Profit Split Method are not incorporated into the domestic legislation.
What are the main changes with the implementation of Brazil‘s OECD Transfer Pricing framework?
- All types of commercial or financial transaction would be under the Transfer Pricing scope
- The OECD traditional transaction and transactional profit methods would replace the current Transfer Pricing methods.
- Comparability and functional analysis is required.
- Intercompany transactions must be supported with a benchmark
- Transactions involving intangibles, financial transactions and business restructuring would become under the TP scope.
- Hard-to-value (HTV) intangibles as well as DEMPE functions concepts are incorporated in the Brazilian TP system.
- Rulings, APAs and mutual agreement procedure would become part of the Brazilian system.
- Penalties for the non-compliance with the Transfer Pricing documentation would be introduced.
When does Brazil‘s Transfer Pricing legislation enter into force?
The Brazilian Parliament has 120 days after the publication of the Provisional Measure (29 December 2022) to transformed it into law. If the PM is supported, the taxpayers can choose between the existing and the new OECD rules for the FY 2023. The new legislation would be mandatory for all taxpayers from 1st January FY 2024.
How does the new Transfer Pricing legislation impact MNEs operating in Brazil?
MNEs must assess and update their current Transfer Pricing policies applicable to intercompany transactions involving their Brazilian affiliates to be consistent with the OECD Guidelines. This involves:
- Analysis of the role of the Brazilian affiliates within the MNE‘s supply chain
- Determination of the key value drivers of the Brazilian entity within the value chain of the MNE
- Identification of economic and legal ownership of relevant intangibles
- Determination of the risk profile of the Brazilian affiliates
- Design of the TP policy applicable based in the entity‘s characterization
- Preparation of the TP documentation consistent with the new transfer pricing legislation and harmonized with all entities operating in OECD framework countries
- Benchmarks for all relevant transactions should be performed for price-setting purposes
How can TaxModel help Brazilian affiliates in their Transfer Pricing compliance?
TaxModel‘s TPdoc solution supports MNEs operating worldwide with their Transfer Pricing compliance under the OECD standards. TPdoc can be adapted to various languages (currently in English and Spanish) and it offers an automated OECD compliant template for local file and Master file tailored for Brazilian compliance.
Benchmarks for all goods and services transactions can be performed with our TPbenchmark solution. TPbenchmark analyzes company information from databases such as BvD and Capital IQ.
Both, TPdoc and TPbenchmark are interlinked for a higher compliance and consistency.