Transfer pricing rules in Brazil: what changes in 2024

Transfer pricing rules are an international trade pillar firstly created back in the mid-1950s. In Brazil, the federal government has just taken an important step: the rules have just been updated and will follow a global standard that facilitates international transactions.

There are significant details about transfer pricing rules in Brazil that must be considered; which is why Europartner has put together all the information you need to have in order to adapt your investments and your companies in Brazil – and make them profitable.

This article also draws on the expertise of Felipe Schaukoski, a very special guest with 11 years of experience on Transfer Pricing.

What is transfer pricing?

In a nutshell, we can say that “Transfer Pricing” refers to the price established in commercial transactions between companies of the same economic group, especially when they are located in different countries. 

Transfer pricing requirements were firstly introduced in a comprehensive manner back in the 1950s, in the United States, when multinational companies began to expand globally.

The main goal of transfer pricing regulations is to prevent the allocation of profits through price manipulation in transactions involving goods, services, or rights between companies that are part of the same economic group (i.e. intercompany transactions). 

In most countries, including Brazil, there are specific rules to ensure that intercompany transactions are not used to shift profits to low-tax jurisdictions and thus reduce the taxes due in the country of origin. 

For example, a company could sell products or services at below-market prices to its subsidiary located in a low-tax country. This would reduce the company’s taxable income in the high-tax country where its headquarters are located.

Some of the main reasons why transfer pricing rules were created include:

• Combating tax evasion: transfer pricing rules help prevent multinational companies from reducing their tax burden by manipulating the prices of their intercompany transactions, as well as promoting international cooperation.

• Promoting competition: pricing rules help ensure that multinational companies with subsidiaries located in different countries compete on a level playing field.
  

To combat possible problems, the OECD published the first transfer pricing guidelines in 1995. These guidelines established principles and methods for determining appropriate prices for transactions between related parties.

The OECD guidelines have been revised several times over the years as international business practices have evolved. The most recent version of the guidelines was published in 2022.

In Brazil, transfer pricing rules were introduced by Law No. 9,430 of 1996. The law established that multinational companies must adopt appropriate prices for transactions between their subsidiaries located in Brazil and its related parties abroad.

Let’s take a closer look at the Brazilian case and its updates.

Transfer Pricing Rules in Brazil

In 2023, Brazil published new transfer pricing legislation, which is in line with OECD guidelines. The new legislation came into force on January 1, 2024.

Before that, Brazil had a specific, simplified model: virtually all transactions were analyzed using fixed profit margins. According to the new regulations, effective as of 2024, the economic reality of the parties of the transactions must be considered, and the choice of the TP methodology will depend on several factors, including market practices and benchmarks.

The previous model was considered simplified, but contained several problems that resulted in double taxation or even double non-taxation. 

The 1996’s rules were created at a moment when Brazil was industrializing its economy, and therefore the regulations had a strong focus toward transactions involving trade of goods. 

The applicability of the Brazilian old TP rules for transactions involving services or rights, specially intangibles, remained challenging and very often couldn’t be applied by taxpayers and tax authorities.  

The new model fully adopts the international standard, which is more complex and demands more effort and attention from companies and their respective accounting and tax departments.

In the new TP rules, any commercial or financial relationship, conducted between related parties, directly or indirectly, is now subject to transfer pricing controls in Brazil. 

The new rules have a much broader scope than the previous legislation and include, among others, transactions such as cost contribution agreements, business restructurings, hard-to-value intangibles, financial transactions including guarantees, insurance contracts, cash pooling etc.

Let’s now take a closer look at one of the guiding principles for the new rule.

Arm’s Length Principle (“ALP”)

This principle is the cornerstone of the transfer pricing rules. In essence, the arm’s length principle requires that the prices charged for goods, services, or intellectual property transferred between related entities should be comparable to prices that would be charged between unrelated entities under similar circumstances. It aims to:

• Ensure a correct determination of the tax base in the different countries

• Avoiding double taxation or double non-taxation in different countries

• Minimize conflicts between tax administrations
  

Imagine a multinational company, XPTO Corp, located in Country A. XPTO Corp also has a subsidiary in Country B. XPTO Corp sells a product to its subsidiary in Country B for a very high price. Country B, upon realizing this, may challenge the transfer pricing and try to tax the profits based on a fair market value of the product (Arm’s Length Principle). However, if there are no clear or aligned transfer pricing regulations in Country A, Country B may issue a transfer pricing adjustment, effectively resulting in double taxation of the same income in both countries.

On the other hand, double non-taxation can also occur when income or profits are not taxed in any jurisdiction due to gaps or inconsistencies in tax regulations. Lack of transfer pricing regulations can create opportunities for multinational corporations to exploit differences in tax rules between jurisdictions to avoid taxation altogether. Here’s an example:

Continuing with the example of XPTO Corp, suppose it has subsidiaries in Country C and Country D. Country C has very limited transfer pricing regulations, while Country D has no transfer pricing regulations at all. XPTO Corp manipulates transfer prices to shift profits to Country D, where they are taxed at very low rates or not taxed at all. Meanwhile, Country C, despite having regulations in place, may not have the necessary enforcement mechanisms or resources to challenge XPTO Corp’s transfer pricing practices effectively. As a result, the profits end up escaping taxation in both countries, leading to double non-taxation.

In both scenarios, the absence or inadequacy of transfer pricing regulations can lead to distortions in the allocation of taxable income among jurisdictions, creating challenges for tax authorities in ensuring fairness and preventing both double taxation and double non-taxation.

In Brazil, after the publication of the new transfer pricing rules, through Law 14.596/23, further regulated by the Normative Ruling (“IN”) 2.161/23, the Arm’s Length principle was finally inserted in Article 2 of the mentioned Law, with the following words: “For the purposes of determining the IRPJ and CSLL (Brazilian Corporate Income Tax – CIT) tax base, the terms and conditions of a controlled transaction will be established in accordance with those that would be established between unrelated parties in comparable transactions”.