BRAZIL Law and Practice Contributed by: Paulo Honório de Castro Júnior, Bruno Marques Feitosa, Matheus Di Felippo and Urick Soares, William Freire Advogados
in relation to the assumption and management of economically significant risks; and (d) the specific characteristics of the goods, rights or services that are the subject of the controlled transaction and in the comparability analysis are those that may lead to differences in their value. • The economic circumstances of the parties and the market in which they operate: (a) the geographic location and the existence of regional markets; (b) the size of markets and other characteristics, including those that give rise to locational advantages or disadvantages (location savings) and potential cost savings; (c) competitiveness in markets and the relative position of buyers and sellers; (d) the availability of substitute goods and ser - vices; (e) the levels of supply and demand in the market as a whole and in particular regions; (f) the purchasing power of consumers; (g) the nature and extent of government regulation of the market, including government policies; (h) production costs, including land, labour and capital costs; (i) transport costs; (j) the market level (retail or wholesale); and (k) the existence of an economic, business or production cycle. • The business strategies pursued by the parties to achieve their commercial objectives that may be considered relevant may include, as appropriate and by way of example: (a) innovation and development of new products; (b) degree of diversification and risk aversion; (c) adaptation to political and economic changes; and (d) duration of contracts and other factors that influence the daily condition of the business. In the process of outlining the economic content of transactions, which must be based on the criteria described above, the options realistically available to each party to the controlled transaction must be considered.
This task aims to assess whether in a market transac - tion there would be more advantageous conditions for one of the contracting parties, which would show that the arm’s length principle was despised. When analysis of the transaction leads to the conclu - sion that unrelated parties, acting in comparable cir - cumstances and behaving in a commercially rational manner, considering the options realistically available to each party, would not have realised controlled transaction as outlined, the transaction may be disre - garded or replaced with an alternative transaction for the purpose of determining the terms and conditions that would be established by unrelated parties in com - parable circumstances and acting in a commercially rational manner. It should be noted that the new legislation is guided by the primacy of the economic substance over the legal form, in such a way that for the purposes of applying the transfer pricing rules, the real economic content intended must be found, even if contrary to the legal form adopted by the parties to regulate the transac - tion. Once the content and economic objective of the transaction are known, it is verified whether the inter - actions between the parties adapt to the conduct usually observed in market transactions. If there are deviations in the interaction between the related par - ties, there is a need to make adjustments, as will be the case explained in the following paragraphs. Comparability Analysis Procedures The comparability analysis must be carried out for the purpose of comparing the terms and conditions of the controlled transaction, with the conditions that would be established in market operations, considering for this purpose: • the economic delineation of the operation; • determining the period to be covered in the analy - sis; • verification of the existence of comparable opera - tions (carried out with unrelated parties); • the selection of the most appropriate method and, depending on the method, the choice of the profit - ability indicator and the tested party;
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