New Transfer Pricing Regulation in Brazil Receives Mixed Response from Tax Experts

A recent normative ruling in Brazil aimed at regulating the country's new transfer pricing (TP) system has elicited a mixed response from tax experts. The ruling, which became legally binding upon its publication on September 29, addresses concerns about the lack of detailed regulation in Brazil's TP law, which was enacted earlier in the year. It aims to bring Brazil closer to the OECD's TP standards by incorporating the arm's-length principle.

Carlos Eduardo Orsolon, a partner at Demarest Advogados in São Paulo, has expressed a positive view of the normative ruling's regulation of TP, which he considers "very positive." He pointed out that the new TP legislation in Brazil contained more principles than objective rules, leaving taxpayers in need of practical guidance on how these principles would be applied.

Flavia Cavalcanti, a partner at Tauil & Chequer (Mayer Brown) in Rio de Janeiro, mentioned that the new regulation has largely remained committed to the goal of aligning with international standards, particularly those advocated by the OECD.

The newly released ruling goes further by introducing secondary adjustments to prevent double taxation, emphasizing the need for comprehensive documentation to support transaction design and comparability analysis, according to Ana Carolina Fernandes Carpinetti, a partner at Pinheiro Neto Advogados in São Paulo.

Stephanie Makin, an international taxation partner at Machado Associados in São Paulo, emphasized the significance of this development for multinational groups, stating that it will help them structure their businesses uniformly across the globe without making concessions for the unique challenges posed by Brazil.

However, concerns persist among local experts about how Brazilian tax authorities will interpret and apply the TP regime now that the normative ruling is in effect. The new norms introduce an element of subjectivity, which could lead to uncertainties in Brazil's legal system, often reliant on literal interpretations, as pointed out by Carpinetti.

Makin also highlighted potential issues on the horizon, including how tax authorities will practically approach TP audits and manage TP controversies in the country.

The new TP law officially comes into effect on January 1, 2024, but the Brazilian government has encouraged voluntary compliance. Taxpayers had the option to adopt the rules early, applying them retroactively from January 1, 2023, during a specific period between September 1 and 31 this year.

The normative ruling also allows for the possibility of combining TP methods when control based on using a single method is unfeasible. It offers greater detail on the non-recognition of controlled transactions and excludes compensatory adjustments in transactions involving parties in favored jurisdictions or privileged tax regimes.

Thaís de Branco Valério Martins, a senior tax lawyer at PepsiCo based in São Paulo, emphasized the importance of Article 9, paragraph 2, which addresses Brazilian companies recording recurring losses while the multinational group operates profitably. This inclusion represents a significant paradigm shift, suggesting that Brazilian firms linked to foreign companies controlling inventory risk in Brazil will not be able to present recurring losses.

Bruna Marrara, a partner at Machado Meyer Advogados, pointed out the clarification provided by the normative ruling regarding TP control transactions involving commodities.

Carlos Eduardo Orsolon has suggested that additional regulations are expected in the near future to address aspects of the new Brazilian TP legislation that are still pending, such as intangibles and financial transactions.

By fLEXI tEAM