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Transfer Pricing

Brazil’s Transition to OECD Transfer Pricing: Key Changes and Implications

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The long-awaited change from a proprietary Brazilian format transfer pricing report to an OECD format has been generally sought by companies for years.  As of the announcement on December 29, 2022, the Brazilian Parliament has a 120-day window to convert the draft legislation into law. Here’s what you need to know as Brazil embraces this transformation.

The Arms Length Principle Integration

One of the most impactful changes is introducing the arms-length principle into Brazilian transfer pricing reporting. This expansion brings forth new methods for taxpayers, incorporating concepts like comparability analysis, functional analysis, and benchmarking into Brazil’s transfer pricing compliance. Unlike the current system focused on tangible goods, services, and rights, the new regulations could cover any financial or commercial transaction.

Replacing Brazil’s Current System with OECD Recommendations

By incorporating the OECD’s recommended methods into law—along with the comparability analysis, functional analysis, and benchmarking—Brazil would replace its current system of legally stipulated markups and margins. The current system is dependent on the simple accounting logic inherent in the electronic corporate income tax return.  For the 2023 reporting year, taxpayers would have the option to apply either the current transfer pricing rules or the new OECD format reporting. The OECD format would be required for FY 2024. 

Embracing New Transfer Pricing Legislation Methods

Brazil’s draft transfer pricing legislation embraces new methods and transaction types, including those involving intangible assets. However, low-value services remain conspicuously absent, with expectations for future legislative coverage. This shift introduces a new level of subjectivity into Brazil’s transfer pricing compliance.

 While there are no real surprises regarding the new draft law—for years, companies have been adhering to these standards in many other countries—there will be a new level of subjectivity in Brazil’s transfer pricing compliance. Certain transactions, like those involving commodities, which would rely on the comparable uncontrolled price method (CUP) will be more immune than others, but multinational companies would be wise to gauge where issues may arise.  

For instance, if Brazil embraces the profit-split method, there could be a higher risk of double taxation if complementary adjustments fall short. And there could be tight restrictions—or increased scrutiny—on financial transactions, like intercompany loans and guarantees, as Brazil has always frowned upon hard currency leaving the country.  We may see Brazil add its requirements above the BEPS platform.  

Like any other paradigm shift, there will be a few bumps along the way, and companies should always consider where they are at risk. Still, assuming it passes, Brazil’s new transfer pricing regime will go a long way in providing consistency on the global transfer pricing front, and most taxpayers will find that a huge advantage. 

Explore More About Transfer Pricing with Exactera

In conclusion, this transition signifies a pivotal moment for businesses operating in Brazil. As the country aligns itself with international standards, Exactera is here to guide you through the nuances of the new transfer pricing landscape. Stay informed, stay compliant, and leverage the expertise of Exactera for a seamless transition.

Explore Transfer Pricing Reporting with Exactera

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White paper: How International Organizations Are Changing Transfer Pricing Compliance 

Brazil’s Convergence to OECD Guidelines—Wait or Go All-in?