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Conversion of the Brazilian transfer pricing rules into the OECD framework

Monday 27 March 2023

Jorge F Lopes
Pinheiro Neto Advogados, São Paulo


Felipe Cerrutti Balsimelli

Pinheiro Neto Advogados, São Paulo


Background – the original Brazilian TP rules

The reform of the Brazilian transfer pricing rules is a topic that has long been discussed, particularly since 2017 when Brazil submitted a formal application to join the Organisation for Economic Cooperation and Development (OECD).

The Brazilian transfer pricing rules came into force in 1997, with the enactment of Law No 9,430/96. In brief, those rules aimed to prevent the transfer abroad of taxable profits in international transactions (import and export of goods, services and rights) that are carried out by Brazilian entities with foreign related parties (ie, entities of the same economic group, or with parties based in jurisdictions blacklisted in the Brazilian tax regulations as tax havens).

Although allegedly inspired by the OECD’s guidelines model, Brazilian transfer pricing legislation was originally structured with significant deviations in relation to the ‘arm’s length principle’ (the core of the OECD guidelines), as applied consistently by the member countries of the OECD.

Given the specific context of the Brazilian tax administration, the rules brought about by Law No 9,430/96 have historically advocated a model focused on simplicity and efficiency, based on the so-called ‘fixed margins model’. When it is impossible or inconvenient to use a method based on market parameters (‘arm’s length methods’), the minimum profits in cross-border transactions between related parties to be submitted as income tax in Brazil are mostly based on the application of fixed margins predetermined by law, on the amounts of costs (cost plus methods) or the amounts of resales (resale price less profit methods).

In short, the current rules governing imports of goods, services, or rights determine that a fixed margin (from 20 per cent to 40 per cent) shall be added to the costs incurred by the foreign exporter (the ‘CPL method’) or reduced from the local resales made by the local importer (the ‘PRL method’). Both the CPL and PRL methods, as well as the arm’s length method (the 'PIC method'), are accepted to determine (without any benefit of order) the maximum amount of import costs to be deducted by the importer for corporate income tax (‘IRPJ/CSL’ – a local acronym for CIT) purposes.

In the case of exports, in turn, a fixed margin (from 15 per cent to 30 per cent) must be added to the local cost incurred by the exporter (the ‘CAP method’) or reduced from the resales made by the foreign importer (the ‘PVA/PVV methods’). Both the CAP and PVA/PVV methods, as well as the PVEx method (the arm’s length method), are accepted to determine (without benefit of order) the minimum taxable profit to be recognised by the Brazilian exporter for IRPJ/CSL purposes.

The methods described above are applicable except when it comes to cross-border transactions with commodities, which under the current rules are mandatorily subject to specific methodologies based on public quotations (the ‘PCI and PECEX methods’), provided that the imported/exported products meet the conditions foreseen by the tax regulations (normative instructions which set forth the concept of commodities) issued by the Brazilian tax authorities.

The interest on intercompany cross-border loans is also subject to the Brazilian transfer pricing rules (which apply in conjunction with the Brazilian thin capitalisation rules) based on the ‘public index plus a fixed spread’ methodology.

Over the last few decades, the Brazilian methodology summarised above has been subject to both praise and criticism.

On one hand, the Brazilian fixed margin methodology consists of an effective mechanism aimed at curbing abusive tax planning and guaranteeing the maintenance of a minimum margin of taxable profits in Brazil, while minimising not only the costs normally borne by OECD countries for calculating and auditing transfer pricing adjustments, but also aimed at avoiding disputes between taxpayers and the federal tax authorities, especially after the changes brought about by Law No 12,715/12. This law was enacted with the specific goal of mitigating the disputes over the illegality of infra-legal norms (in particular, the Normative Instruction No 243/02, which innovated in relation to the rules of Law No 9,430/96, imposing new criteria to calculate the PRL method, which resulted in an increase of IRPJ/CSL taxation).

On the other hand, however, one cannot disregard the fact that the fixed margin methodology gives rise to distortions, since, by establishing parameter prices based on predetermined benchmarks, which do not necessarily observe market conditions (arm's length conditions), the Brazilian transfer pricing legislation gives rise to situations of double taxation and double non-taxation, privileging taxpayers from certain segments to the detriment of others.

Although the pros and cons of the Brazilian transfer pricing legislation have been known and discussed since its publication (in 1996), Brazil's pledge to join the OECD has intensified the debate on the need for the country to depart from the fixed margins model to an actual arm’s length model, as advocated by the OECD, with the aim of preventing Brazilian legislation (when examined from a global perspective) from causing situations of harmful distortion to other member countries.

Under the OECD guidelines, unlike in Brazil, taxpayers and tax authorities have the clear possibility to discuss transfer pricing controls (covering the transaction specifics and potential detachment to the transfer pricing methodologies, taking in consideration all the relevant risks and functions) and taxpayers must test all possible methodologies, with the aim of selecting the one that best fits the arm's length standard (that is, the price that should be equivalent to the one practiced in market conditions, between non-related parties).

The debate leading to the conversion of the Brazilian TP rules into the OECD model

In order to reach a consensus on what the future transfer pricing legislation should look like, in 2018 Brazil’s Federal Government, the Federal Revenue Office (RFB), and the OECD, together with representatives from the Brazilian National Confederation of Industry (CNI), created a harmonisation project for the models, with the purpose of identifying the main differences, as well as the pros and cons of each of the models, so that a consensus could be reached on the need to adapt the Brazilian rules to the OECD model and how this would be accomplished in practice.

In 2019, after studies and debates had taken place, the RFB, OECD and CNI prepared a joint report, in which all the differences between the models were pointed out, and which concluded that the Brazilian legislation, by causing a series of distortions that has led to scenarios of double taxation and double non-taxation, represented a ‘selfish system’, intended only to guarantee a minimum taxable profitability to Brazil in cross-border transactions between related parties, for which reason a complete reform of the legislation would be necessary.

Although the possibilities of partial and gradual adhesion were also considered in the process, the report’s key conclusion was that the full convergence of the Brazilian rules into the OECD arm’s length standard would be necessary. That is, the authorities agreed that the OECD guidelines should be fully introduced into the Brazilian legal system and, to that end, the RFB and OECD held in 2020 a public consultation where taxpayers and interested organisations were given the opportunity to share their opinion on exceptional safe harbour mechanisms (waiver or relaxation of rules) and APAs (advance price agreements).

In spite of all that, with the onset of the pandemic and the apparent prioritisation by the government of other tax reform guidelines (VAT reform, recreation of the taxation on dividends - which are currently tax exempt in Brazil - among others), the reform of the Brazilian transfer pricing rules seemed doomed to follow a slower pace.

Nonetheless, in parallel, the specialised OECD forums intensified the debate on the international model of tax reform, especially in the context of the digitalisation of the economy (within the scope of the projects called Pillars 1 and 2, which are the result of discussions on the Base Erosion and Profit Shifting (BEPS) Project), with the creation of strict agendas for the implementation of reforms and alterations of the local laws of its member countries, to curb abusive tax planning and create fairer taxation rules.

Besides, in 2020 and 2021, Brazil participated in the international forums promoted by the OECD/G20, and the Brazilian government (at the time, led by the former president and minister of finance) announced on several occasions an interest in Brazil joining the OECD.

Moreover, in December 2021, the USA tax authorities issued new tax regulations on the ‘foreign tax credit’ regime (T.D. 9959), aimed at regulating legislative changes arising out of the 2017 US tax reform (the ‘Tax Cuts and Jobs Act’ (TCJA)), which introduced a new attribution criterion to allocate taxable profits among jurisdictions. In short, based upon the new US regulations, the income tax paid in a foreign state (for instance, withholding income tax deducted and paid on certain payments flowing from Brazil to the US) could only be considered a ‘foreign tax credit’ by the US taxpayer if, among other requirements, it was attributable to the foreign state in accordance with the ‘established principles of international taxation’, which includes the transfer pricing rules based on the arm’s length principle (as set forth in the OECD guidelines).

As a natural consequence, the new US regulations caused significant impacts for US multinationals with activities in jurisdictions without double taxation treaties signed with the US, Brazil included. Indeed, the new US rules could cause not only double taxation, but also indirect economic impacts, such as inhibiting cross-border transactions with Brazil, as well as the regular development of business activities between nationals of each affected country as well as the distortion of payment flows, among other issues.

At the end of 2022, the US proposed other new regulations (REG-112096-22) to ease certain requirements on the use of foreign tax credits, thus creating a safe harbour provision (the so-called ‘single country exception’) to the withholding income tax levied on royalties paid for intellectual property exclusively explored in the source jurisdiction. The new rules maintained, however, the requirement to attribute income to the foreign state in accordance with the arm's length standard.

The US tax reform (foreign tax regime), combined with the changing Brazilian electoral scenario (the election of a new president, from a different party, replacing the former president), resulted in massive pressure for the new transfer pricing rules to be published in 2022, which in fact ended up happening, via Provisional Measure (PM) No 1,152 of December 2022.

The new Brazilian transfer pricing rules – Provisional Measure No 1.152/22

Throughout 48 articles, with an election to be made for its application in 2023[1] and with its mandatory adoption for 2024 going forward, PM 1,152/22 seeks to fully revoke the current rules brought by Law 9,430/96 and introduce the OECD’s TP guidelines into the Brazilian legal system, focusing on the arm’s length principle at its core. Being a provisional measure, it must be approved in Congress and converted into law within a predetermined deadline (which will fall in June 2023), otherwise it will be cancelled without producing legal effects.

The new Brazilian transfer pricing rules abandon the free choice of traditional methods with predetermined margins (ie, the CPL, PRL, CAP and PVA/PVV), while migrating to the so-called ‘best method approach’ to determine the arm’s length parameters, taking into consideration the de-alignment of the controlled transaction and the comparability analysis with transactions contracted with unrelated parties.

Among the specific provisions set forth in PM 1,152/22, it is possible to highlight: (1) a broader concept for commodities and the elimination of mandatory methods (the PCI and PECEX), with express recommendation for the use of the CUP method based on quotation prices; (2) the delineation of transactions with intangibles difficult to value, for which purpose only the legal nature of the transactions shall be taken into account, not their bookkeeping classification; (3) the introduction of new transactional methods (the TNMM and PSM), in addition to the traditional CUP, cost plus and resale less profit methods; (4) specific provisions for intragroup cost sharing and service agreements; (5) the application of transfer pricing rules on business restructuring; (6) the application to financial transactions in general; (7) the application to intangibles in general; and (8) the creation of secondary adjustments to avoid double taxation; among others.

Regarding financial transactions, the scope is no longer restricted to intercompany loans, and seeks instead to also encompass guarantees (including insurance contracts), cash pooling, treasury, among others. For all these transactions, the transfer pricing control shall now take into consideration the arm’s length principle, thus eliminating the current ‘public index plus a fixed spread’ methodology. Interest and other financial expenses may be classified as capital and not as debt, depending on the functional analysis to be conducted in accordance with the arm’s length principle (it being irrelevant the contract wording for this purpose), restricting the deductibility for corporate income tax purposes.

It is also worth mentioning Brazilian international cost sharing structures, under which remittances are made abroad specifically to reimburse, without any profit margin, the cost incurred by foreign companies of the same economic group with back office activities that were performed on behalf of Brazilian legal entities as well. Those transactions should arguably not be subject to any transfer pricing controls, in that the absence of markup distinguishes such cross-border reimbursements from service provisions. Nonetheless, the Brazilian tax authorities have been pushing for the interpretation that international cost sharing remittances should qualify rather as ‘intragroup services’, which should then require a minimum markup as though they had been contracted between unrelated parties at arm’s length conditions. This approach should have an impact not only on the (withholding) income tax itself, but also on other taxes, such as the ISS[2], PIS/COFINS[3] and CIDE[4] (locally levied on services imports), thus triggering potential additional disputes.

Also, the present rules impose limitations on the tax deductibility of royalties (set forth by the combination of several federal laws)[5], including those applicable to technical, scientific, administrative, or similar assistance, all of which shall be revoked by PM 1,152/22. However, the new restrictions still prevent the tax deduction of amounts remitted abroad to residents in countries blacklisted as tax havens or treated as privileged tax regimes (ie, countries where the income tax rates are lower than 17 per cent), which tend to cause disputes, especially considering that 17 per cent is by no means an extremely low income tax rate. If the amounts remitted result in double non-taxation because they are tax deductible twice or not taxable by another related party, they will also be considered non-deductible. For some multinationals, the limitations imposed by PM 1,152/22 may result in a more restrictive scenario than the current situation.

In addition, the new rules seek to introduce so-called secondary adjustments, with the purpose of avoiding double taxation, by presuming voluntary and primary adjustments, which should not result in the reduction of the corporate income tax base, as intercompany loans, to be remunerated by a fixed predetermined margin of 12 per cent per year. The existence of predetermined fixed margins seems again to violate the arm’s length principle and will likely result in potential disputes.

Besides, in comparison with the current rules, taxpayers must submit exhaustive documentation to prove the design of the controlled transaction and the comparability analysis carried out, including extensive information on the multinational group's transactions (ie, country-by-country (CbC) reports, master and local files). High penalties apply in the case of non-compliance.

Finally, simplification measures (ie, safe harbours) are foreseen, as well as specific consultation processes and advanced price agreements (APA), subject to local fees with predetermined deadlines. These measures tend to increase the legal certainty and practicability of the arm's length principle, though their exact application and reach are still to be determined depending on the future tax regulations (normative instructions) to be issued on this matter by the Federal Revenue Office.


While it was long expected that Brazil would seek to adapt its transfer pricing legislation to the arm’s length principle and the criteria observed in most other jurisdictions, with more consistent criteria for profit allocation among them, the newly proposed transfer pricing rules tend also to give rise to complexities. One should note, in this sense, that Brazil has always been privileged with the practicality of a fixed margin regime, with simple rules clearly set forth in law, as compared to which the new rules would represent a true paradigm shift, in which not only the statutory legal rules will matter but also multiple economic aspects of each transaction.

Therefore, although the adoption of the arm’s length principle brings greater alignment with the OECD guidelines and even with the Brazilian constitutional principle of ‘contributory capacity’, it will also create greater uncertainties, since analysis by the Brazilian tax administration will become more subjective, in identifying in each transaction the economically relevant characteristics subject to comparison and pricing under the new system. This new paradigm has historically been subject to debate in Brazil, where the legal system tends to be more rigid, and principles and rules are only considered when clearly stated in the law and respective tax regulations. As a consequence, the future application of the new transfer pricing rules seems still somewhat uncertain and will require, first and foremost, a change in the mindset of the Brazilian tax administration that will be in charge of reviewing the transactions that are subject to them.

[1] A normative instruction (IN 2.132/23) was enacted to regulate the option for the new rules in 2023, through a formal option to be presented in September 2023.

[2] The ISS (imposto sobre serviços) is a municipal tax on services, levied at a maximum rate of five per cent.

[3] The PIS/COFINS are social contributions levied on service imports at a joint rate of 9.25 per cent.

[4] The CIDE is a federal contribution levied on the imports of technical services at a rate of ten per cent.

[5] The Brazilian legislation currently restricts the deductibility of royalties to the limit of five per cent of the local revenues of such exploitation.