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Effective January 1, 2024, Brazil will adopt the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. This change offers companies with operations in Brazil a chance to simplify and align their Brazilian operations with global standards. Given the high cost of doing business in Brazil, this may be a unique tax planning opportunity.
The Brazilian Transfer Pricing framework was inspired by the early work of the OECD on transfer pricing (Transfer Pricing and Multinational Enterprises, also known as the “1979 Report”) but has remained relatively unchanged since it was enacted in 1996. This framework was not consistent with the OECD Guidelines, including global transfer pricing documentation rules. Brazil was completely different, and its current system is not adequate for the current realities of international business standards. It fails to ensure the proper determination of the tax base, giving rise to various situations of double taxation and double non-taxation and results in an inefficient tool to measure and tax the income in accordance with the ability to pay principle.
Pathway to changes
In 2018, the Receita Federal do Brasil (RFB) invited the OECD to embark on a journey to reflect on transfer pricing policy in Brazil jointly. This journey started with a careful analysis of the existing framework, which had been criticized by some observers and multinational enterprises (MNEs) for deviating from the international standard. The work that was spearheaded by RFB led to the publication of Provisional Measure No. 1,152 on December 29, 2022, unveiling the text of the new transfer pricing rules.
The Provisional Measure incorporates key principles and concepts of the international standard as provided by the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022), which are also reflected in the United Nations Practical Manual on Transfer Pricing for Developing Countries (2021).
The new transfer pricing rules will enter into force on January 1, 2024, except for taxpayers who made the irreversible choice of opting in as of January 1, 2023.
Applicable law for 2024
The OECD Guidelines include the Arm’s Length Principle, and the five OECD-recognized transfer pricing methods adopted by most countries around the world (OECD Members and Non-OECD Members). The new transfer pricing framework is intended to enhance Brazil’s tax systems while fostering trade and investment. Reforming its transfer pricing legislation to align with the standard has been in the works for over six years.
UHY can assist
The UHY Transfer Pricing division has already been approached by various Brazilian MNEs for OECD Transfer Pricing documentation and economic analyses, two transfer pricing concepts that we have over 25 years of experience with. This includes both new clients, as well as existing clients with enterprises or business activities in Brazil.
Brazilian MNEs should plan ahead and perform a transfer pricing benchmark now to be prepared for the massive legislative changes coming January 1, 2024.
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