Transfer pricing - Brazil

• Brazilian Transfer Pricing (TP) rules were significantly updated by Law No. 14,596/2023, which was regulated by Normative Instruction RFB No. 2,161/2023 issued by the Brazilian Federal Revenue Service (RFB). The new framework aligns the Brazilian transfer pricing regime with the OECD standards. The scope of the Brazilian TP rules also covers branches and permanent establishments.
• Effective from the 2024 calendar year onward, the new rules are mandatory for all taxpayers. effective January 1, 2024. For the 2023 calendar year, taxpayers had the option to adopt the new rules early, contingent upon notifying the Brazilian IRS (Receita Federal do Brasil) within the specified time frame. Taxpayers who did not elect to the early adoption continued to adhere to the previous regulations for calendar year 2023.
• The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022) are adopted as a reference, except where their provisions are inconsistent with Law No. 14,596/2023 and Normative Instruction RFB No. 2,161/2023. Furthermore, the regulation expressly incorporates the arm’s length principle, requiring that the terms and conditions of controlled transactions be consistent with those that would have been agreed upon between independent parties under comparable circumstances. Any deviation from this principle is subject to corresponding transfer pricing adjustments.
• The Brazilian Tax Authorities provide binding decisions, instructions, and general guidance on their interpretation of transfer pricing matters, and this content is publicly available.

IN 2,161/2023 establishes five main methods: the Comparable Uncontrolled Price (CUP) Method, the Resale Price Method (RPM), the Cost Plus Method (CPM), the Transactional Net Margin Method (TNMM), and the Profit Split Method (PSM). In addition, other methods may also be applied, provided that the alternative methodology adopted produces a result consistent with that which would be achieved in comparable transactions carried out between independent parties.

The selection of the most appropriate transfer pricing method, which will provide the most reliable result, considers the nature of the transaction, the availability of reliable information on comparable transactions, and the degree of comparability between the transactions under analysis.

The comparability criteria include: the characteristics of the goods or services; the contractual terms; the level of the market; the date and timing of the transactions; and price differences across geographic markets. In addition, the application of the selected method requires careful consideration of accounting differences and allocative criteria, where applicable.

With respect to alternative methods, their use may be justified under the following circumstances:

• Where the alternative methodology yields a result that is consistent with those observed in comparable transactions between independent parties; or
• Where the traditional transfer pricing methods are not suitable for the transaction under review or do not produce reliable results, and the alternative methodology is considered more appropriate given the specific facts and circumstances.

Brazil has fully implemented transfer pricing documentation requirements aligned with the BEPS Action 13 framework, with the Country-by-Country Report (CbCR) in place since 2016 and, as from calendar year 2024, the introduction of Local File and Master File obligations.

There are specific requirements regarding the presentation and format of the Local File and the Master File, depending on the total amount of controlled transactions reported in the preceding calendar year:

• Transactions up to R$ 15 million: exemption from both Local File and Master File.
• Transactions between R$ 15 million and R$ 500 million: mandatory submission of a simplified Local File and a complete Master File.
• Transactions equal to or exceeding R$ 500 million: mandatory submission of the complete Local File and complete Master File. The TP return and CbCR submission deadline is the last business day of July of the following year, as part of the Corporate Income Tax Return.

The TP return and the CbCR must be submitted by the last business day of July of the following year, as part of the Corporate Income Tax Return (ECF). In addition to the TP documentation mentioned above, the electronic income tax return contains various specific forms, known as Block X, which require taxpayers to disclose detailed information regarding their main intercompany transactions and the corresponding local TP calculations.

The Master File and the Local File must be submitted electronically through the Virtual Service Centre (e‑CAC) of the Brazilian Federal Revenue Service within three months after the deadline for filing the ECF for the corresponding calendar year. Historically, the Brazilian tax authorities have set July 31 as the final deadline for filing the ECF. Therefore, unless this deadline is exceptionally modified, the due date for submitting the Local File and the Master File will be the last business day of October. For calendar year 2024, an exception was granted, and the submission of the Master File and the Local File was due by December 31, 2025. It is important to note that access to the Local File and Master File submission via e‑CAC is restricted to the entity’s legal representative or a third party holding an electronic power of attorney.

The Master File provides details on the structure and activities of the multinational group and its entities, including the organizational structure, the countries in which the group operates, a description of activities and the value chain, the group’s corporate financing policies, and other relevant information. Brazilian legislation follows exactly the requirements set out in the OECD Transfer Pricing Guidelines.

If prepared in a foreign language, it must be accompanied by a simple Portuguese translation, except when written in English or Spanish, in which case translation is only required upon request by the Tax Authorities.

The Local File contains detailed information on intercompany transactions subject to transfer pricing rules. It must clearly demonstrate compliance with Law No. 14,596/2023, covering all stages of control, from transaction definition to potential tax adjustments.

Requirements vary according to the total amount of controlled transactions in the previous year:

• Full Local File: Total ≥ R$ 500,000,000.00;
• Simplified Local File: Total ≥ R$ 15,000,000.00 and < R$ 500,000,000.00;
• Exemption: Total < R$ 15,000,000.00.

This report provides information on global allocation of revenues, profits, assets, number of employees, income tax paid and accrued by the multinational group, and other indicators of global economic activity.

Exemption applies to Brazilian entities when the group’s consolidated revenue in the previous fiscal year, as shown in the ultimate parent’s consolidated financial statements, is:

• Less than R$ 2,260,000,000.00, if the ultimate parent is a tax resident in Brazil; or
• Less than € 750,000,000.00 (or equivalent in local currency using the January 31, 2015 exchange rate), if the ultimate parent is a tax resident abroad.

According to article 35 of Law 14,596 of 2023, non-compliance with transfer pricing obligations may result in the following fines:

• Late submission: 0.2% per month or fraction on gross revenue.
• Incorrect, incomplete, or omitted information: 5% of the corresponding transaction value; or 0.2% of the group’s consolidated revenue from the previous year (for data on structure, global allocation, and activities).
• Submission without meeting requirements: 3% on gross revenue for the period.
• Failure to provide requested information or documentation during audit: 5% of the corresponding transaction value.
• Obstruction of audit: 5% of the corresponding transaction value.

Under the new Brazilian transfer pricing rules, taxpayers are required to perform a robust and comprehensive economic analysis of their controlled transactions in order to demonstrate compliance with the arm’s length principle. This analysis should be grounded in a detailed understanding of the taxpayer’s business operations and value drivers and must be supported by appropriate documentation. In this context, the economic analysis typically encompasses, among other elements:

• a detailed understanding of the taxpayer’s activities and operational characteristics;
• an assessment of the business structure and the delineation of controlled transactions;
• a review of intercompany agreements and the evaluation of the parties’ actual conduct;
• the identification and assessment of transfer pricing and tax risks;
• an analysis of existing supporting documentation and internal information;
• a review of pricing policies and transfer pricing strategies;
• the performance of benchmarking studies;
• the selection and application of the most appropriate transfer pricing method; and
• the preparation of additional supporting documentation, as required.

Benchmarking analysis: The benchmarking analysis involves identifying and selecting comparable transactions between independent parties to support the arm’s length nature of the controlled transactions under review. In line with Brazilian legislation and OECD guidance, comparability must be assessed by considering, among other factors, the similarity of products or services, the functions performed, assets employed, risks assumed, and the relevant economic circumstances. It is important to pay attention to specific requirements established in the current Brazilian legislation, such as independence criteria, the treatment of loss‑making comparables, among other particularities.

Arm´s length range: The results of the benchmarking analysis are typically expressed through an arm’s length range, with the interquartile range being applied where appropriate in order to enhance the reliability of the analysis. Where the price or financial indicator of the controlled transaction falls within the interquartile range, it is generally presumed to be consistent with the arm’s length principle.

Transfer pricing adjustments: Brazilian legislation provides for three types of transfer pricing adjustments aimed at ensuring that the values practiced in controlled transactions are aligned with market conditions:

• Spontaneous adjustment: Carried out directly by the Brazilian taxpayer at the time of calculating the Corporate Income Tax (IRPJ) and the Social Contribution on Net Profit (CSLL), without any accounting or commercial reflection. This adjustment is intended to correct the values prior to the filing of the relevant tax return.
• Compensatory adjustment: Performed by the end of the calendar year and supported by appropriate accounting and documentary evidence (such as debit or credit notes). This adjustment seeks to align the values of controlled transactions with those that would have been agreed between independent parties and must be symmetrical, being reflected both in the Brazilian entity and in the foreign counterparty. The local legislation also establishes a series of requirements regarding the documentation that must support this adjustment.
• Primary adjustment: Imposed by the Brazilian Federal Revenue Service (RFB) in the context of a tax audit where it is determined that the prices applied do not comply with the arm’s length principle. This adjustment directly affects the taxable base of the relevant taxes due in Brazil.

Normative Instruction RFB No. 2,161/2023 provides, in Article 51, that the performance of spontaneous or compensatory adjustments does not automatically result in adjustments to the tax bases of other taxes, including those levied on the importation of goods and services. Any such taxes must be assessed in accordance with the specific legislation applicable to each tax.

With respect to low value-adding intra-group services, the Brazilian TP rules implemented a simplified approach based on a cost plus basis with a mark-up of 5% as “safe-harbour rule” in order to reduce the compliance cost for such transactions, as long as the services do not relate to the core business, no intangibles assets, no risk, etc., in line with the OECD Transfer Pricing Guidelines.

• Alternative approach to the Transfer Pricing enforcement process in which an entity presents complete or partial information regarding their intercompany transactions to its fiscal authority, to negotiate their TP positioning regarding future transactions.
• APAs may be entered into unilaterally, between a taxpayer and its local tax authority, or bilaterally or multilaterally, involving two or more related parties and their respective competent tax authorities, typically through the mutual agreement procedure (MAP) framework.
• Although recently introduced into Brazilian legislation and therefore still in the initial stages of implementation, APAs may represent an attractive mechanism for taxpayers. When duly negotiated and complied with, APAs provide prospective certainty regarding transfer pricing treatment, mitigate the risk of double taxation, and reduce uncertainty related to tax positions and transfer pricing strategies, provided that the taxpayer adheres to the terms and conditions established in the agreement.

• All entities located in Brazil that engage in intercompany transactions, regardless of their tax regime, are required to prepare Transfer Pricing documentation. The exceptions relate only to what must be submitted to the tax authorities, as outlined below.
• The taxpayer is exempted from submitting the Master File and Local File if the amount related to the controlled transactions reported in the year prior to analysis is up to BRL 15 million.
• A simplified version of the Local File can be submitted in case the amount of the controlled transactions reported in the year prior to analysis is between R$ 15 million and R$ 500 million.