With the implementation of Law 14,596/2023 and Normative Instruction RFB 2,161/2023, Brazil has officially stepped into the OECD-aligned world of transfer pricing. While the shift brings several changes, one particularly practical development is the explicit recognition of country risk adjustments when using foreign comparables.
The Risk Differential Dilemma
The idea isn’t complicated: Businesses operating in different countries face different economic risks. Those differences affect profitability. If a company in Brazil is compared to one in a country with a significantly different economic environment, an adjustment may be needed to make the comparison fair.
As Annex II of RFB Instruction 2,161/2023 states: “Prices agreed between unrelated parties may vary if they operate in different markets, even for transactions involving the same goods or services.” It goes on to say: “It is essential to identify the market and geographical location of the parties in order to determine whether differences in economic circumstances affect prices or margins.”
“Direct comparison of the net margin of comparables without adjustment may result in an inappropriate result from the perspective of comparability,” the Annex II guidance warns.
In other words, just because a company looks like a good benchmark on paper doesn’t mean it operates under similar conditions. Country risk adjustments help close that gap.
How It Works
The adjustment is meant to reflect the additional return investors would demand for taking on more risk. To do this, taxpayers compare the country risk premium of Brazil with that of the country where the comparable operates. The difference is then multiplied by the capital employed by the comparable.
Formula:
Adjustment = (Brazil Risk Premium – Comparable Country Risk Premium) × Capital Employed
Where:
Capital Employed = Operating Fixed Assets + Working Capital
Working Capital = Current Assets – Current Liabilities
The instructions in Annex II give an example with a +3.73% differential. When this differential is multiplied by each comparable’s capital employed and added to the comparable’s operating profit, it results in an increase in the Return on Sales (“ROS”). This makes the comparison with a Brazilian tested party more accurate and economically grounded.
Example Calculations
The following tables demonstrate how the country risk differential is applied to adjust the financial metrics of foreign comparables. The first table shows unadjusted figures, while the second and third tables show the calculations of the country risk differential and the adjustments to operating profit and ROS based on the differential. Assume all the companies in the table are located in the same country outside of Brazil.
| Comparables ratios (without adjustments FY 20xx) | ||||
| Revenue | Operating Profit | Capital Employed | ROS | |
| A | 1,000 | 30 | 100 | 3.00% |
| B | 1,500 | 50 | 120 | 3.33% |
| C | 2,300 | 80 | 150 | 3.48% |
| D | 1,050 | 40 | 130 | 3.81% |
| E | 4,000 | 200 | 200 | 5.00% |
| F | 2,000 | 110 | 300 | 5.50% |
| G | 3,000 | 200 | 150 | 6.67% |
| Differential Calculation for FY 20xx* | |
| Brazil Country Risk Premium | 5.19% |
| Country Risk Premium of Comparable Country | 1.46% |
| Differential | 3.73% |
*Hypothetical risk premiums
| Comparables ratios (without adjustments FY 20xx) | ||||||
| Revenue | Operating Profit | Capital Employed | Differential x Capital Employed | Adjusted Operating Profit | Adjusted ROS | |
| A | 1,000 | 30 | 100 | 3.73 | 33.73 | 3.37% |
| B | 1,500 | 50 | 120 | 4.48 | 54.48 | 3.63% |
| C | 2,300 | 80 | 150 | 5.60 | 85.60 | 3.72% |
| D | 1,050 | 40 | 130 | 4.85 | 44.85 | 4.27% |
| E | 4,000 | 200 | 200 | 7.46 | 207.46 | 5.19% |
| F | 2,000 | 110 | 300 | 11.19 | 121.19 | 6.06% |
| G | 3,000 | 200 | 150 | 5.60 | 205.60 | 6.85% |
Implications for Taxpayers
- More Flexible Benchmarking: Makes it more viable to use foreign comparables when local options are limited.
- Stronger Position in Audits: The adjustment brings benchmarks more in line with economic reality.
- Heavier Workload: Requires access to risk premium data, careful analysis of balance sheet items, and thoughtful write-ups.
Conclusion: A Tool That Reflects the Real World
This country risk adjustment brings Brazilian transfer pricing standards closer to global norms. More importantly, it gives companies a way to explain and justify differences stemming from unique economic environments.
