Brazil: Draft legislation to align transfer pricing rules with OECD Transfer Pricing Guidelines

Draft legislation to align Brazil’s unique transfer pricing system with the OECD Transfer Pricing Guidelines

Draft legislation to align transfer pricing system with OECD Transfer Pricing Guidelines

The Brazilian government today issued draft legislation to align Brazil’s unique transfer pricing system with the OECD Transfer Pricing Guidelines.

The single biggest change would be the introduction of the arm’s length principle which is absent from the current transfer pricing rules. In addition, the changes would include new transfer pricing methods and documentation requirements, and considerable changes to the treatment of intangible assets, financial transactions and business restructuring.

Next steps

The draft legislation must be transposed into law by the Brazilian parliament (congress and senate) with 120 days. Although it is not certain, it is expected that that the new government and newly elected parliament will support the bill.

For fiscal year 2023, Brazilian taxpayers can choose between the current transfer pricing rules and the new OECD-based rules, but beginning 1 January 2024, the application of the new OECD-based rules would be mandatory.

Overview of changes

The new OECD-based rules would have the following features:

  • Any type of financial or commercial transaction would be in scope (whereas the current transfer pricing rules focus on tangible goods, services and rights).
  • The OECD’s traditional transaction methods and transactional profit methods would replace the current transfer pricing methods (i.e., transactional net margin method (TNMM) and profit split methods would be available).
  • Comparability analysis, functional analysis and benchmarking would become part of the toolbox and would replace the current legally stipulated mark-ups and margins.
  • Transfer pricing documentation would replace the simple accounting logic which is currently part of the electronic corporate income tax return.
  • Transactions involving intangibles as well as financial transactions would become transfer pricings topics, instead of being treated from a pure tax deductibility perspective).
  • DEMPE functions and the concept of hard-to-value (HTV) intangibles would be introduced.
  • The services definition would be extended to better reflect the current state of the discussion. Low-value adding services, however, previously announced by the Brazilian Federal Revenue Service (RFB) during a joint press-conference with the OECD, are not addressed in the draft legislation and thus may be addressed in future legislation.
  • Business restructuring would be in the sphere of transfer pricing rules.
  • More types of transfer pricing adjustments would become available (e.g., “compensatory” or “year-end” adjustments commonly associated with the transactional profit methods). In addition, in the case of a transfer pricing adjustment by tax authorities, a secondary adjustment in the form of a deemed loan would be introduced.
  • Rulings, advance pricing agreements (APAs) and mutual agreement procedure (MAP) would become available.
  • Penalties for the non-presentation or presentation of incomplete transfer pricing documentation would be introduced.

However, there would be some ways in which Brazil’s new transfer pricing rules would not be consistent with the OECD Transfer Pricing Guidelines:

  • Commodities play an important role for the Brazilian economy, and it is only natural that they receive a specific treatment. In general, the definition of commodities would be broadened, and the rigid application of specifically designed methods would be abandoned. Nevertheless, a clear preference for the comparable uncontrolled price (CUP), specific rules regarding the timing of the transactions and the requirement for commodity importer and exporter to register transactional transfer pricing information with the tax authorities would appear to increase complexity in this key area.
  • Complementary adjustments would only be allowed as long as the Brazilian company is not incurring losses. This might render the application of a loss split as part of a residual profit split unfeasible and might lead to controversies.
  • In the case of HVT, the RFB has specific ideas on how to deal with uncertainty. One approach is contingent payments (e.g., in the form of licenses) and/or price adjustment clauses which would trigger automatic adjustments if certain parameter were triggered.
  • Intercompany loans would appear to be capped at an interest rate which corresponds to the risk-free rate of a government bond in the lenders currency plus a spread to account for risks.
  • Financial guarantees would also be allowed only for 50% of the amount that exceeds the implicit support and only if the guarantee is not deemed a shareholder activity.
  • Documentation requirements would exceed the OECD’s Local file concept, including information on the group’s global tax position and profitability.

Many parts of the draft legislation will need interpretation, and as already mentioned by the RFB, specific guidance through the administrative principles.

For more information, contact a KPMG tax professional in Brazil:

Ericson Amaral |

Edson Costa |

Henrique De Conti |

Sebastian Hoffmann |


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