Aspects of the first year of application of the new rules and the next regulations
Brazilian transfer pricing legislation underwent a significant change with the publication of Law 14.596/2023 on June 14, 2023. This new law repealed the previous regulations, in force since 1997, and aligned the internal rules with the guidelines of the Organisation for Economic Co-operation and Development (OECD), establishing the Arm´s Length Principle in the tax field. As a subsidiary law of the Income Tax regulations, its enforceability by the Receita Federal de Brasil (RFB) is only applicable from the year following its publication. However, Law 14.596/23 allowed early adoption, applying to operations carried out in 2023 for those taxpayers who decided to do so.
Among the new obligations is the transfer pricing form, which is part of the income tax return in Brazil (Accounting Tax Bookkeeping "ECF"). Similarly, taxpayers with more than fifteen million Brazilian Reals in transactions with related parties in the fiscal year prior to the one subject to assessment, will have the obligation to deliver the Local File and the Master File.
Those taxpayers who anticipated the application of the rules for 2023, had to submit the ECF transfer pricing sheets before July 31, 2024 and submit the Local File and Master File before December 31, 2024.
The RFB's most recent formalizations regarding transfer pricing rules include:
a) Public consultation on the new regulations: The process began in August 2024 and the suggestions from taxpayers were received in October 2024. The topics consulted included service operations and Advance Price Agreements (APAs), also allowing suggestions for the regulation published in 2023.
b) Presentation of the Local File: In October 2024, the RFB published the "Instructions for the submission of transfer pricing documentation", which details how Brazilian taxpayers should were to make the Local File and the Master File available, segmented by type of transaction such as importation of products, export of goods, payment of royalties, financial transactions, among others.
c) Commodity Transaction Information: Imports and exports of commodities must be submitted on a specific form available at the Virtual Center Taxpayer Service of the RFB (e-CAC). In January 2025, the RFB updated the form expanding the required information and including all transactions documented by any method, not just the PIC method.
The next RFB regulations will include royalty transactions, loans and other financial products, cost-sharing contracts, in addition to the formalization in the regulation of public consultations on services and APAs discussed in 2024.
Since transfer pricing legislation in Brazil is based on OECD guidelines and regulations from other countries, the RFB can use the knowledge generated over the years of practical application in various jurisdictions. As a result, both the law and the regulation published in 2023 cover several topics that facilitate discussion on the topic, among the most representative include:
1) Classification of tax havens as related parties.
2) Independence limit for comparables with a main shareholder with more than 20% of the stake, with possible expansion to 25% in the case of less than four comparables.
3) Tested party as the least complex in the transaction, which can be the entity in Brazil or abroad.
4) Possibility of either upward or downward adjustments in the profitability of the Brazilian entity (Compensatory Adjustment).
5) Preference for national comparables (although not mandatory).
6) Suggestion of comparability adjustments, such as the adjustment for country risk considering the country risk premium.
The first year of documentation for transactions subject to the new transfer pricing rules presented certain technical challenges for the few taxpayers who decided to anticipate, among which the following stand out:
- ECF transfer pricing sheets underwent several updates with varying degrees of complexity as all transactions must be submitted.
- Multinational groups were unable to document transactions with lower materiality.
- Segmenting the Local File by transaction type, rather than a single report.
While there are still certain issues that need to be confirmed with the RFB, such as the possibility of using public and private procurement goods, situations in which comparability adjustments are necessary, the taxation of remittances resulting from compensatory adjustments, and the definition of shared control, these and other confirmations are expected to be resolved in the coming years, many during inspection processes.
