BRAZIL Law and Practice Contributed by: Paulo Honório de Castro Júnior, Bruno Marques Feitosa, Matheus Di Felippo and Urick Soares, William Freire Advogados
In conclusion, it was pointed out that, combined with other unique features of the system, such as the rigid fixed margin approach and the freedom to select the transfer pricing method, the transfer pricing system in Brazil led to negative results in the following forms. • Base Erosion and Profit Shifting (BEPS), often combined with double non-taxation – profits that by international standards would be allocated to Brazil end up transferred to entities established in low or no taxation jurisdictions. This prevents Brazil from collecting tax revenue in relation to profits from economic activities carried out in the country. • Double taxation – there are documented cases where the same profits were allocated to a Brazil - ian entity due to rigidity of prescribed profit mar - gins on inbound and outbound transactions and, at the same time, allocated to the related foreign party in a jurisdiction where the arm’s length princi - ple is used. This results in economic double taxa - tion, in which both legal entities are taxed on the same amount of profit. This double taxation places a higher cost on trade and investment in Brazil when compared to other countries, which discour - ages the expansion of existing foreign investment, as well as new investments, and harms Brazil’s integration into global value chains. • Unequal conditions of competition – as it tends to favour some multinational companies by enabling reduced taxation, which benefit from situations for erosion of the tax base and transfer of profits (BEPS), and in other situations causing excess taxation due to double taxation caused due to the gaps and divergences between the Brazilian trans - fer pricing system and the international standards. In view of the conclusions highlighted in the study, technical, legislative and taxpayer debates began, so that a new transfer pricing system could be imple - mented in Brazil. As a result, on 14 June 2023, Law No 14,596 was published, revoking the transfer pricing standards then in force and establishing a new methodology in alignment with OECD Guidelines, adopting the arm’s length principle as a parameter for adjusting prices charged in controlled transactions, replacing the fixed margin system.
Such is the alignment of the OECD with the new Brazil - ian model, that Normative Instruction No 2,161/2023, published by the Federal Revenue Service to regulate the matter, expressly determines that the guidelines embodied in the report “OECD Transfer Pricing Guide - lines for Multinationals Enterprises and Tax Adminis - tration 2022”, as well as its future amendments, are subsidiary sources for the interpretation and integra - tion of transfer pricing control standards. 2. Definition of Control/Related Parties 2.1 Application of Transfer Pricing Rules Controlled Transactions Before the enactment of Law No 14,596/2023, trans - fer pricing rules applied only to transactions (i) carried out between related parties, and (ii) involving goods, services or rights as well as the payment and remit - tance of interest, excluding the payment of royalties that had a specific limitation. Law No 14,596/2023 expanded the spectrum of appli - cation of transfer pricing rules, which are now man - datory for “any commercial or financial relationship between two or more related parties, established or carried out directly or indirectly, including contracts or arrangements in any form and series of transactions.” This concept includes, for example: • transactions with tangible goods, including com - modities; • transactions involving intangibles; • services of any kind; • cost-sharing contracts; • business restructuring, including the termination or renegotiation of commercial or financial relation - ships; • financial operations, including debt operations, intra-group guarantees, centralised treasury man - agement agreements and insurance contracts; • transactions that have as their object the disposal or transfer of assets, including shares and other interests, even if they occur in capital return or subscription operations; and • any sale, assignment, loan, rental, licensing, advance and contribution.
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