Background – current TP rules
Brazil’s current TP rules came into force in 1997 (law no. 9 – 430/96) and aimed to prevent profit shifting in international transactions carried out by Brazilian entities with their foreign related parties. In short, “related parties” are either group companies located in Brazil or parties based in jurisdictions that are blacklisted as tax havens. “International transactions” refer to the import/export of goods, services and rights.
Albeit inspired by the OECD TPG, Brazil’s TP rules deviate – if at least – from the arm’s length principle as described in said guidelines. In case arm’s length models are not possible/inconvenient to be used, minimum profits in intra-group international transactions that need to be submitted as tax income in Brazil are mainly based on the application of “fixed margin models”, i.e., the cost-plus model (fixed margin added to the costs incurred) and the resale-price less profit method (fixed margin reduced from local resales) with regard to imports of goods, services and rights, and the CAP-method (fixed margin added to the costs) or the PVA/PVV-method (fixed margin reduced from resales made by foreign importers) in case of exports.
On 15 June 2023, provisional measure n. 1152/22 was converted into law (federal law n. 14.596/23). Hereby, Brazil formally aligns its national TP rules with the OECD TPG. This new law is applicable on intra-group cross-border transactions as of 1 January 2024 – however, there is the possibility for Brazilian taxpayers to an early adoption of this new law as of January 2023.
Next to the alignment of the arm’s length principle with the OECD TPG, this new law also incorporates the OECD TPG’ guidance on TP methods, cost contribution arrangement, financial transactions, and BEPS 13 TP documentation requirements.
With this new law, Brazil departs from the fixed margin models and deviated approach of the arm’s length principle, and better aligns its domestic rules with the OECD TPG. However, given the application of fixed margin models (of which the margins were enshrined in the law) the question remains how the Brazilian Tax Authorities (Receita Federal do Brasil) will react on and – and if they would rather follow a more subjective approach – with TP under the new system. Furthermore, it is expected that they will publish more guidance on the application of this new law shortly.
It is important for companies conducting cross- border intragroup transactions with Brazilian companies to already reassess their business models given the important change in TP rules. An (early) assessment can mitigate any potential risk yet also embrace opportunities. It should also be borne in mind that this new law will not only impact transfer pricing, but will also be relevant for indirect- and transactions tax in Brazil.
Tine Slaedts – Partner, Tiberghien economics
Wouter Strijckers, Senior Associate, Tiberghien
Patrik Pashaj, Senior Associate, Tiberghien economics