The current Brazilian Transfer Pricing ("TP") rules were first enacted in 1996 with the primary goal of preserving the national tax base against harmful shifts of profits through the manipulation of prices in transactions between Brazilian and foreign related parties.
Although, the explanatory statement of the relevant legislation indicates that the rules were inspired by the international standards, in practice, the Brazilian TP system was unique and presented distinctive features that departed from the Organization for Economic Cooperation and Development Transfer Pricing Guidelines ("OECD TPG") and the arm's length principle ("ALP").
In summary, the current Brazilian TP system grants freedom to taxpayers to elect the method to be applied (i.e., no "best method approach"), provided such election is restricted to one of the specific methodologies set forth by the current law (i.e., no use of "other methods"). Brazilian methods generally established fixed pre-determined markups that apply to all taxpayers in general (i.e., without regard to peculiarities of specific sectors and segments).
Other distinctive features of the Brazilian system include: (i) its personal, material and territorial scopes, (ii) strict "item-per-item approach", (iii) rejection of corresponding adjustments to avoid economic double taxation, (iv) lack of profit attribution rules to permanent establishment, (v) absence of advance pricing agreements; and (vi) very little experience with mutual agreement procedures in transfer pricing.
Historically, Brazil has reaffirmed its TP approach in the international context1. In 2018 - 2019, however, Brazil drastically changed its position resulting in several developments and policy discussions around the design of new Brazilian TP rules that would align with international standards.
The following aspects influenced such TP alignment process:
Brazil and the OECD
- In the context of Brazil potentially joining the OECD, the
current transfer pricing rules were identified,
among other issues, as one of the key areas where
alignment with the OECD standards was necessary in order to align
with a core aspect of the OECD's international tax
- As a response, the Brazilian Federal Revenue Office ("RFB") and the OECD jointly launched a TP Project and released a joint report on December 18, 2019, identifying a large number of gaps and divergences between the Brazilian TP system and the international TP standards, and pointing out convergence options. Later, on April 12, 2022, RFB and OECD held a public joint meeting and presented the main features of the policy decision to achieve a full alignment with the OECD standards.
US Regulation on Foreign Tax Credits
- Another aspect that brought a sense of urgency to the TP
discussions was the revamped US foreign tax credit
regulations (TD 9959) (the "US FTC Final
Regulations"), which provide that a foreign tax will be
creditable in the US only if any allocation of income, gain,
deduction or loss between a resident taxpayer and a related or
controlled entity under the foreign country's transfer pricing
rules follows the arm's length principles (the
"attribution requirement"), among other
- In this context, the proposed changes in the Brazilian TP
system have also become of great relevance for companies
that have counterparties / or are part of multinational enterprises
("MNE") with US operations. In fact, this was
one of the aspects mentioned in the explanatory statement of PM
1,152/2022 to justify its relevance and urgency.
- The changes to the Brazilian TP rules may allow US taxpayers to support a position that the Brazilian Corporate Income Tax ("CIT") meets the "attribution requirement" under the US FTC Final Regulations. However, we understand that the possibility of claiming foreign tax credits for Brazilian taxes in the United States must be evaluated on a case-by-case basis, as the US FTC Final Regulations include other requirements that need to be observed. Mayer Brown's Global Tax Teams, from the Brazilian and the US offices, are at your disposal to address any additional questions and provide assistance in relation to these rules.
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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.