In recent years, many countries have released new transfer pricing reporting requirements. In 2022, the Organisation for Economic Cooperation and Development (OECD) released updated profiles for 28 jurisdictions that had changed their transfer pricing regulations and practices, including China, Greece, Canada, the UK and the US.
Brazil recently proposed a measure that seeks to align its transfer pricing rules with OECD guidelines. The rules will have significant compliance and financial implications for companies that do business in the country. Here's what you need to know about the proposed legislation and how to prepare.
Brazil’s longstanding transfer pricing rules
Brazil's transfer pricing regulations have historically diverged from OECD practices in ways that have resulted in double taxation or under-taxation, loss of revenue for the country and greater tax complexities for multinationals.
In a departure from OECD guidelines, Brazil does not abide by the arm’s length principle, which, the OECD explains, "represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises." Essentially, pricing between associated enterprises should be set as though the enterprises were not affiliated with each other. For example, a company that makes microchips should pay the same price to a silicon manufacturer that is a subsidiary it owns as it does to a non-affiliated silicon manufacturer in another country.
Brazil's transfer pricing methodology also differs from the OECD's in terms of its transaction methods. The country uses traditional transaction methods, including the comparable uncontrolled price method, the cost-plus method and the resale price method. Only the first method aligns with OECD guidelines, while the others rely on a fixed-margin approach that is often considered a simpler, but less accurate, method that may not reflect current market realities.
Brazil’s safe harbour regimes also diverge from OECD standards. Brazil's approach encompasses a transaction-by-transaction test based on comparing domestic market prices in the country and export prices for the same goods and products in foreign markets, which often differ significantly. Calculating net profit margin using Brazil's safe harbour provision can also result in under-taxation in certain cases.
Most tax professionals agree that changing Brazil’s transfer pricing rules is long overdue, in large part because of their complexity and the burdens they place on Brazil's trading partners. Both OECD and Brazilian officials acknowledged these issues when they began a joint alignment project in 2018. The project identified key areas where Brazil's transfer pricing rules diverged from OECD guidelines.
In December 2022, Brazil released Provisional Measure No. 1,152 to better align with OECD guidelines and promote ease of doing business in the country.
Brazil’s new rules
Brazil’s transfer pricing rules have been in place since 1996. December’s provisional measure will implement several key changes to these longstanding rules, including:
- Expanding the types of transactions to which Brazil’s transfer pricing rules apply.
- Introducing new transaction methods and an advance transfer pricing agreement that will help taxpayers determine in advance how they will apply transfer pricing.
- Maintaining some traditional transaction methods but abandoning the fixed-margin approach for cost-plus and resale price methods. The measure will introduce new methods such as the profit-split, transactional net margin and alternative methods, where applicable.
- Introducing the best-method rule, thereby eliminating taxpayers’ ability to select their choice of transaction method. Taxpayers will have to choose the most appropriate method for their case from the new methods provided and whether comparables are available.
The new rules go into effect in January 2024, but taxpayers can choose to begin following them now. It should be emphasised that the provisional measure is still subject to Congressional approval in Brazil, which means the specifics of the legislation could change considerably by the time it is codified into law. Brazilian lawmakers are considering more than 100 new amendments to the provisional measure, one of which proposes a one-year delay for enactment of the law. If this amendment passes, it will mean changes wouldn't begin to apply until 2025.
With all these considerations, the legislation as it exists today likely will look different in the future. However, multinationals currently paying higher taxes under the fixed-margin approach may benefit from following the new rules this year even as officials sort out a final transfer pricing framework. Under the new rules, multinationals that pay royalties to parties in low-tax jurisdictions or under certain tax regimes also may benefit from additional deductions if the royalty payments are in accordance with Brazil’s new adoption of the arm’s length principle.
Strengthening tax administration
Even companies adopting a wait-and-see approach should be proactive and prepare for Brazil’s coming transfer pricing changes. It's a good idea for teams involved in cross-border transactions to familiarise themselves with the directional changes reflected in the new rules, especially regarding new transaction methods and the arm's length principle. Companies should also assess whether they would reap a tax advantage from applying the new rules this year, even though they will need time to fully understand and prepare new transfer pricing documentation to comply with the new regulations.
Brazil is one of many countries considering or in the process of changing their transfer pricing rules. Companies that want to mitigate their risks should keep track of these changes using the OECD country profiles resource and create a plan for how their organisation will respond when new regulations do emerge.
In today’s evolving global economy, changes in transfer pricing regimes and stepped-up enforcement have become inevitable as market conditions change and jurisdictions attempt to encourage inward investment while collecting revenue. In this challenging environment, well-prepared, nimble organisations will be in the best position to continue their operations with minimal risk.
Hanna Mialik, senior manager, corporate and international tax at Vistra, contributed to this article.
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