Context
On June 15, 2023, Brazil enacted new transfer pricing (TP) legislation under Law 14,596/2023, aligning it with the arm’s length principle and OECD transfer pricing standards. The new legislation became mandatory on January 1, 2024. Previously, Brazil's TP rules were unique and misaligned with international standards, often leading to double taxation and distortions in multinational groups.
While the new TP rules bring anticipated benefits, their implementation presents challenges for both Brazilian companies and their foreign affiliates. Beyond a mere regulatory change, this shift marks a new era for intercompany transactions with Brazil. Historically, certain transactions lacked formality, and TP enforcement by Brazilian authorities was limited. This is expected to change significantly, requiring international groups in Brazil to prepare for increased tax risks.
Key Challenges and Concerns
The new legislation largely mirrors the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022), which serve as a subsidiary source for interpreting TP rules unless they conflict with Brazilian law.
Comparability Analysis: Identifying local comparables and indicators remains a challenge due to limited TP databases. The former TP framework did not require such analysis, and databases provided by Brazilian suppliers are not yet fully developed.
Customs Valuation Regulations: Differences between the new TP rules and Brazilian customs valuation regulations could lead to inconsistencies. However, ongoing tax reforms in Brazil may help address these issues.
Tax Implications of Adjustments: The tax impact of spontaneous, compensatory, or year-end adjustments remains unclear. Normative Instruction 2,161/2023 states that such adjustments do not automatically affect the tax base of other taxes, such as those on imports of goods and services. However, further guidance from the Brazilian tax authorities (RFB) is still needed.
Heavy Taxation on Imported Services and Intangibles: The high taxation of imported services and intangibles is a significant concern, particularly regarding international cost-sharing arrangements. These are expected to fall under the low-value-added services safe harbor provided by the new TP regulations.
Potential Increase in TP Litigation: Previously, Brazil's fixed margins and objective TP rules resulted in minimal judicial and administrative disputes. The new TP framework introduces subjectivity, likely leading to increased audit activity and litigation by the RFB.
Final Considerations
Despite these challenges, Brazil’s alignment with OECD standards represents a crucial step toward facilitating international transactions. InterGest Brazil and its competent team are always ready to support you and your company in navigating these regulatory changes effectively.
