Brazil: Public consultation on new transfer pricing rules

The Federal Revenue published a draft Normative Instruction for public consultation on new transfer pricing rules

Public consultation on new transfer pricing rules

The Federal Revenue of Brazil (RFB) on 3 July 2023 published a draft Normative Instruction (IN) for public consultation on the new transfer pricing rules under Law 14.596/23 (Public Consultation No. 1/2023).

Stakeholders are invited to comment via official channels from 07/03/2023 to 07/25/2023.

Key topics in the draft instruction include:

  • The election period of the new regime may be shifted from September to November which allows taxpayers more time for analysis and preparation. No change to the formal election process (e-CAC plus form) is proposed.
  • Transfer price adjustments (i.e., year-end adjustments or “compensatory adjustments” as stipulated in Law 14.596/23) can be made up to the moment of the filing of the electronic corporate tax return (ECF) as long as the adjustment has been booked for accounting purposes in the relevant calendar year. These rules apply to 2023 as well as subsequent periods. In addition, the RFB’s position remains that the compensatory adjustments will not trigger the automatic adjustment of the assessment basis for other taxes.
  • The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration 2022 and subsequent versions present subsidiary sources for the interpretation of the new transfer pricing rules. Given a higher degree of subjectivity of the new rules compared with Brazil’s former transfer pricing regime, the use of the OECD guidelines for the interpretation of the arm’s length principle is of utmost importance.
  • A non-conclusive list of controlled transactions was provided. The RFB made clear that the new transfer pricing rules apply not only to business restructurings (Chapter IX OECD Guidelines), but also to corporate restructurings (i.e., the transfer of shares etc. between related parties).
  • RFB also provides a non-conclusive list of examples for functions, economically significant risks, characteristics of transactions involving goods and services, economically relevant circumstances, business strategies, and comparability factors.
  • The RFB shows preferences for local comparables but allows, in the event local comparables cannot be identified, the use of comparables from other regions, provided that reasonably accurate adjustments can be made to consider existing material differences. Given that a specific example for a country-risk adjustment was provided, the RFB may be more likely to request adjustments if a local comparable cannot be provided.
  • In applying the Transactional Net Margin Method (TNMM), the taxpayer can evaluate data for the entity as a whole (referred to as "non-transactional data").
  • It will be possible to offset benefits through adjustments to different controlled transactions without, however, providing guidance on the treatment for purposes of other taxes (ICMS, ISS etc.).
  • In line with the OECD guidelines, the draft instruction establishes broader criteria for transactions between unrelated parties to be, in fact, comparable, for purposes of applying the Comparable Uncontrolled Price (CUP) method.
  • Some guidance is given on the concept of commodity and the application of transfer pricing methods to test controlled commodity transactions. This includes the new register for transfer prices for commodity exports and imports in the RFB system. Filing must be done by the tenth day following the conclusion of the contract or additive.
  • Comparability factors considered relevant from RFB’s point of view were listed for each of the traditional transaction methods (CUP, Resale Price Method (RPM) and Cost-Plus Method (CPM)). The practical application of the transactional profit methods (i.e., the TNMM and the Profit Split Metho (PSM)) are in line with the OECD guidelines. The possibility of applying “other” methods to test controlled transactions has been reinforced, provided that the OECD transfer pricing methods cannot be applied reliably.
  • The draft instruction enforces the view that the tested party will generally be the one with the less complex functional profile in a given transaction vis-à-vis its transaction partners.
  • The concept of low value-added services as outlined in the OECD guidelines is applicable, including the 5% mark-up, but without any comments on the simplified benefit test.
  • As expected, the transfer pricing documentation is broadly aligned with the OECD’s three-tiered documentation approach and will consist of:
    • Country-by-country reporting, which has already been implemented in Brazil since 2017.
    • Master file, containing information regarding the structure and activities of the multinational group to which it belongs and the other entities integrating the multinational group. There is no (revenue) threshold for the preparation/filing of the Master file,
    • Local file, containing information relative to the controlled transactions and the related parties involved in the controlled transactions and special guidance in case the CUP method has been used for commodities. As for the Master file, there is no (revenue) threshold for the preparation/filing.
    • The Master file and Local file, together with their supporting documentation, have the same deadline as the ECF but will be filed through a different process. If the taxpayer elects the early adoption of transfer pricing rules in 2023, and for all taxpayers in 2024, the deadline for the filing of Master file and Local file will be the last business day of the calendar years 2025 and 2024, respectively.
    • The documentation as well as supporting documents will need to be presented in Portuguese language.
    • The application of the penalties already stipulated in Law 14.596/23 to Master file and Local file is outlined.

The RFB further commits to providing future guidance on transactions involving intangibles, intra-group services, cost-sharing agreements, business restructuring, financial transactions. as well as to regulate the specific transfer pricing consultation process (i.e., advance pricing arrangements or APAs) and may introduce other simplification measures, such as for distributors.

KPMG observation

The involvement of stakeholders into the design of normative guidance by the RFB is a recent development and shows a new spirit in cooperating with taxpayers on key questions.

Public Consultation No. 1/2023 brought some much-needed clarifications regarding the RFB’s stance on the application of the arm’s length principle. The new transfer pricing rules and related guidance cannot be viewed or understood as a step-by-step, recipe-like to-do list for transfer pricing purposes but rather as guardrails for the taxpayer’s interpretation of the arm’s length principle. The legal certainty associated with Brazil’s older transfer pricing regime is gone for good.

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

Ericson Amaral |

Edson Costa |

Henrique De Conti |

Sebastian Hoffmann |


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