After intense discussions, the Brazilian Federal Revenue Service (RFB) published RFB Normative Instruction No. 2,161/2023 on September 29, 2023, which regulates the new Transfer Pricing rules in Brazil.

Originating from Law No. 14,596/2023, this regulation aligns Brazil with the guidelines of the Organization for Economic Cooperation and Development (OECD). The main focus is price control in controlled international transactions that affect the IRPJ and CSLL calculation basis of Brazilian companies. The regulations encompass entities described in Law No. 9,430/1996 and taxpayers of IN RFB No. 1,700/2017, including subsidiaries and branches.

The OECD guidelines, as presented in the report “OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration 2022”, are adopted as a reference, except when they are in disagreement with Law No. 14,596/2023. Furthermore, the “arm’s length” principle is highlighted, ensuring parity in controlled transactions with those made between independent entities, and any deviations will result in adjustments.

Let's see below the main IN topics that from now on will significantly impact the commercial relationship between Brazilian companies and their related parties abroad:  

What has been regulated?

1. Controlled Transaction:

RFB Normative Instruction No. 2,161/2023 expressly defined what constitutes a “controlled transaction”, “series of transactions” and arrangement”.

The following transactions are subject to the new Transfer Pricing rules:

  • Transactions with tangible or intangible assets.
  • Services provision.
  • Cost sharing contracts.
  • Business restructuring.
  • Financial operations.
  • Dispositions or transfers of assets, such as shares.
  • Sales, loans, licensing, among others.

2. Related parties:

The Normative Instruction defines when two parties are considered related. They are considered as such when one of them can be influenced by another in order to establish terms different from those that would be agreed between unrelated parties. There are several situations where parties are considered related, including situations where:

  • One controls the other.
  • Head office and branches.
  • Entities that share the same controller.
  • Entities in which the same partners or shareholders hold a significant interest.
  • Relationships with advisors, directors or controllers.
  • And other hypotheses mentioned in law.

The "entity" can be any person or arrangement, even without legal personality. And the tax authority may determine other situations where parties are considered related.

The text also clarifies what constitutes a control relationship. One entity controls another when:

  • Holds rights that give him power in deliberations.
  • Participates with more than 50% of the share capital.
  • Has power over the administration or management of the other.

Furthermore, it addresses the definition of related entities, which is when one entity has significant influence over another, even without controlling it. Significant influence is considered when one entity has a 20% or more stake in another.

3. Application of the Arm’s Length principle:

Procedures:

I - Outline of the controlled transaction.

II - Comparability analysis of the controlled transaction, as outlined  

3.1 Controlled Transaction Design:

 Based on the analysis of facts, circumstances, and evidence of effective conduct to identify commercial and financial relationships between related parties.

Need:

  • Understanding of the economic sector of the multinational group.
  • Knowledge of the group's organizational structure.
  • Recognition of the group's functions, assets, and risks.
  • Understanding the supply chain and adding value.
  • Recurrent losses may indicate non-observance of the Arm’s Length principle
3.2. Realistically Available Options

Considers options available to both parties in controlled transactions, evaluating whether more advantageous options would be adopted between unrelated parties.

3.3. Comparability Factors

Factors include contractual terms, functions performed, characteristics of goods/rights/services, economic circumstances, business strategies, and other relevant characteristics.

Evidence of effective conduct is important for outlining the transaction.

3.4 Contractual Terms

Reference to the attribution of rights and obligations between the parties, which may be derived from documents, facts, and evidence of effective conduct.

Elements of the contractual terms listed (deadlines, quantities, guarantees, etc.).

3.5 Functional analysis

Identification of functions through functional analysis, considering activities, group structure, and rights/obligations.

Examples of roles include research, production, sales, marketing, among others.

3.6. Characteristics of Goods, Rights and Services

Considers characteristics that influence value, such as physical characteristics and quality of tangible assets and types of intangibles.

3.7. Economic Circumstances

Circumstances may include geographic location, market size, competitiveness, availability of substitutes, among others.

3.8. Business Strategies

Strategies may include innovation, diversification, adaptation to changes, contract duration, among others.

3.9. Other Economically Relevant Characteristics

Other characteristics, including group synergies, should be outlined.

3.10. Recognition of Controlled Transaction

Transaction may be disregarded or replaced if unrelated parties would not have carried out the same under similar conditions.
Commercial rationality is essential and cannot be justified solely by tax advantages.

4. Comparability analyses:

The comparability analysis, as established in the legislation, aims to ensure that the terms and conditions of a controlled transaction are in accordance with those established between unrelated parties in similar transactions. This analysis considers relevant economic characteristics, transaction dates, availability of information, selection of the appropriate method, uncertainties in pricing, synergy effects and other elements.

The analysis follows typical steps: determination of the analysis period, verification of internal and external comparables, selection of the most appropriate method, identification of potential comparables, comparability adjustments and interpretation of the collected data.

Comparables, whether internal (transactions where one of the parties is also part of the controlled transaction) or external (transactions between independent parties unrelated to the controlled transaction), are used according to their relevance and reliability.

The legislation also highlights that certain transactions are not considered comparable, such as those that are not carried out in the ordinary course of business or that are intended to establish a comparable transaction. There is an emphasis on evaluating combined transactions, non-transactional data, intentional offsets, and timing issues.

The effects of synergies, whether deliberate or incidental, must be accounted for and, if appropriate, compensated between the parties involved. The legislation also provides guidance on comparability adjustments, highlighting the importance of ensuring that the transactions analyzed are truly comparable. Specific adjustments, such as accounting standards and product characteristics, are mentioned as examples.

5. Methods:

This normative instruction addresses the selection and application of methods for determining transfer prices in controlled transactions. Six methods are outlined: Comparable Independent Price (PIC), Resale Price minus Profit (PRL), Cost Plus Profit (MCL), Net Transaction Margin (MLT), Profit Sharing (MDL) and other alternative methods.

The choice of the most appropriate method is based on its ability to provide the most reliable determination of the terms that would be established between unrelated parties in a comparable transaction. Each method has its specificities and application scenarios.

The methods are as follows:

PIC
  • PIC: Compares prices in controlled and uncontrolled transactions.
    • The text of the Normative Instruction also defines the PIC Method as the most appropriate for determining the value of commodities.
PRL
  • PRL: Based on the gross margin obtained from resales to unrelated parties.
    • More suitable for commercialization. Reliability can be influenced by the degree of value addition or involvement with intangibles.
MCL
  • MCL: Analyzes the gross profit margin over costs in comparable transactions.
    • Most suitable for supplying semi-finished products or providing services.
MLT
  • MLT: Compares net margins on controlled and uncontrolled transactions.
    • Considers net margin calculated based on a profitability indicator. Factors include competitive position, management efficiency and business experience.
CDM
  • CDM: Divides profits or losses based on the contributions of the parties involved.
    • Most appropriate when parties make unique and valuable contributions, have highly integrated operations, or share significant risks.
alternative Methods

 Allow different approaches, as long as they result in prices consistent with unrelated transactions.  

Choosing the most appropriate method considers:

  • Nature of the transaction.
  • Availability of comparable transaction information.
  • Degree of comparability between transactions.

The Comparability criteria are:

  • Characteristics of goods/services.
  • Contractual terms.
  • Market level.
  • Date and time of transactions.
  • Price differences in geographic markets.

Other important considerations about methods:

Application of the methods requires careful consideration of accounting differences and apportionment criteria.

As for alternative methods, they can be selected in the following circumstances:

  • If the alternative methodology provides a result in line with comparable transactions between unrelated parties.
  • If traditional methods are not suitable for the transaction in question or do not produce reliable results, and the alternative methodology is more appropriate.

Characteristics of these alternative methods:

a) Assessment Techniques or Models:

  • Involves accepted techniques of economic valuation, in particular income-based methods.
  • The discounted cash flow method is an example and is often used to value hard-to-value intangibles or equity interests without clear comparables.

b) Taxpayer Obligations:

Taxpayers who opt for alternative methods must:

  • Justify the choice through transfer pricing documentation, demonstrating compliance with the above guidelines.
  • Use reasonable and reliable evaluation criteria and assumptions, including financial projections, growth and discount rates, useful life and other factors used in the analysis.
  • Detail in the transfer pricing documentation the criteria used, assumptions about risks of the chosen evaluation technique and other elements relevant to the analysis.

Essentially, when traditional transfer pricing methods are not applicable or reliable, taxpayers have the option to use alternative methods, but they must justify this choice and use reliable assumptions and criteria in the assessment.

6. Selection of the Tested Party in the Controlled Transaction:

The tested party is selected based on the most appropriate applicability of the method and the availability of reliable data from comparable transactions between unrelated parties.

6.1. Characteristics:
  • Methods that require selection of a tested part include: PRL, MCL, MLT and the first step of MDL residual analysis.
  • Generally, the tested part has a less complex functional profile.
  • In the CDM residual analysis, other parts can be tested if they have less complex contributions.
  • The tested part can be located in Brazil or abroad.
  • The taxpayer must provide detailed information to justify the selection of the tested party.
6.2. Range of Comparables:
  • A range of observations is used to determine whether a controlled transaction complies with certain principles.
6.3. Range Criteria
  • It must be composed of observations of comparables.
  • Less comparable or unreliable observations are eliminated.
  • If there are uncertainties, the interquartile range is considered appropriate.
  • Without uncertainties, the complete range is considered.
  • Reliability is determined by access to information about comparability factors.
  • Assessment of uncertainties considers the completeness and precision of information, the probability of identifying differences, the nature and number of comparability adjustments, among other criteria.
  • The controlled transaction is compliant if the financial indicator is within the appropriate range.
  • If the financial indicator is not in the range, the median value is assigned to the controlled transaction.

7. Adjustments to the calculation base and effect on other taxes:

In controlled transactions, certain adjustments can be made to ensure that the tax calculation basis is aligned with what would be established between unrelated parties.

  • Spontaneous adjustment: carried out by the company in Brazil when calculating taxes, aiming to align the results with what would have been obtained following the established principles.
  • Compensatory adjustment: carried out by the parties to the controlled transaction to adjust the value of the transaction, in order to reflect what would have been obtained between unrelated parties.
  • Primary adjustment: carried out by the tax authority to adjust the tax calculation basis based on established principles.

When the terms and conditions of controlled transactions do not follow those of transactions between unrelated parties, adjustments are made to reflect the appropriate terms. The tax authority may make the primary adjustment in case of non-compliance. Certain adjustments to reduce the tax base or increase the tax loss are prohibited unless they fall into specific exceptions.

The compensatory adjustment has specific guidelines, such as the need to reflect the adjustment in accounting records and the issuance of debit or credit notes. Carrying out this adjustment does not require prior authorization but can be verified later.

Finally, the adjustments made do not automatically imply changes in the calculation basis of other taxes.

8. Simplification measures:

The RFB may establish rules to simplify and guide the application of the principles of controlled transactions. In certain cases, a simplified approach may be permitted, especially in transactions involving low value-added services.

RFB Specific Rules:

  • Simplify comparability analysis.
  • Guide specific transactions, such as treasury management agreements.
  • Establish treatment when there is limited information about controlled transactions.
8.1. Low Added Value Intragroup Services (SBVA)

The remuneration for these services will have a gross profit margin of 5% on direct and indirect costs. These services are:

  • Nature of support.
  • They are not the main activities of the related party.
  • Do not require the use of unique intangible assets.
  • They do not involve significant risks.
  • They do not contribute significantly to the value of the multinational group.

Examples of SBVA are: human resources management, accounting, auditing, legal and IT services.

Not included as SBVA: R&D, manufacturing services, raw material purchasing activities, sales, marketing, financial transactions, among others.

Payments are only deductible if the activity offers reasonable economic value to the taxpayer.

9. Documentation:

The text of the Normative Instruction details the documentary obligations and necessary requirements that taxpayers must follow in relation to their transactions subject to transfer pricing control. In summary, taxpayers must present documentation and information demonstrating compliance with the IRPJ and CSLL calculation bases relating to such transactions.

There are three main types of documents:

  • Country-by-Country Declaration: Information on global allocation of income, assets and taxes.
  • Global File (Master File): Details about the structure and activities of the multinational group.

It must be designed to provide information regarding the structure and activities of the multinational group to which the taxpayer belongs and the other entities that make up that group.

It will be waived if the total value of the taxpayer's controlled transactions, before transfer pricing adjustments, in the previous calendar year is less than R$15,000,000.00.

It must contain specific information such as:

  • Organizational chart of the multinational group.
  • General description of the group's activities.
  • Information about the group's intangibles.
  • Information on the group's financial operations.
  • List and description of prior transfer pricing agreements.
  • The group's most recent consolidated financial statements.

If written in a foreign language, it must be accompanied by a simple translation into Portuguese, with exceptions for documents in English or Spanish.

  • Local File: Information about controlled transactions and parties involved.

It must be prepared whether the total value of the taxpayer's controlled transactions, before transfer pricing adjustments, in the previous calendar year:

  • Is greater than or equal to R$500,000,000.00 (based on articles 59 and 60).
  • Is greater than or equal to R$15,000,000.00 and less than R$500,000,000.00.

It will be waived if the total value of the taxpayer's controlled transactions, before transfer pricing adjustments, in the previous calendar year is less than R$15,000,000.00.

You should consider specific controlled transactions, such as:

  • Import and export of goods and services (80% of total value).
  • Transactions with commodities.
  • Rights, business restructuring, cost sharing, financial operations and transactions involving intangibles.

It must be presented digitally through the RFB's e-CAC within 3 months after the deadline set for transmission of the ECF for the corresponding calendar year. The same procedure must be applied to the Global Archive.

10. Fines:

If the taxpayer does not provide adequate information about controlled transactions, the tax authority can allocate functions, risks and assets to the Brazilian entity and also use estimates to outline the transaction. If the taxpayer does not comply with certain requirements related to Global and Local Files, he is subject to the following fines:

10.1. Global file and Local file
  • Lack of timely presentation:
    • Fine of 0.2% per calendar month (or fraction) of the value of the taxpayer's gross income for the relevant period.
  • Presentation without meeting the requirements:
    • Fine of 3% on the value of the taxpayer's gross income for the relevant period.
  • Global Archive Only:
    • Presentation with inaccurate, incomplete or omitted information:
    • Fine of 0.2% on the value of the multinational group's consolidated revenue for the year prior to the information.
  • During tax proceedings or other supervisory measures:
    • Lack of timely presentation of information or documentation or conduct that causes embarrassment to inspections:
    • Fine of 5% on the value of the corresponding transaction, as defined by the tax authority.
  • Values of fines:
  • Minimum: R$ 20,000.00
  • Maximum: R$5,000,000.00
  • Specific cases for the Global Archive fine:

The maximum fine may be applied in the following cases:

  • The taxpayer does not report the value of the multinational group's consolidated revenue from the previous year.
  • The information provided is not adequately substantiated.
  • Fine for failure to submit in a timely manner:
    • The Calculation begins on the day following the end of the original deadline until the date of compliance or date of notification/registration of infraction.
  • Exemptions from the Global Archive fine:
    • Does not apply in case of proven formal errors or immaterial information.
    • Immaterial information: information that does not affect the reliability of the results.
  • Regularization:
    • If the tax authority disagrees with the IRPJ and CSLL calculation basis, the taxpayer will have 30 days to rectify the ECF and DCTF.
  • Requirements for rectification:
    • Compliance with tax regulations.
    • Cooperation with the RFB.
    • Efforts to comply with the Normative Instruction.
    • Adoption of justifiable criteria for determining the calculation basis.

11. Early Option for 2023:

Taxpayers can choose to apply articles 1 to 44 of Law No. 14,596/2023 in advance to 2023.

  • Formalization of the option (from September 1st to December 31st, 2023):
    • Opening of digital process through the e-CAC Portal.
    • Attachment of the option term in Annex VI.
  • In case of extinction of the legal entity:
    • The option must be made in the month of termination.
  • Consequences of the option:
    • The decision is final.
    • Obligation to follow articles 1 to 44 from January 1, 2023.
    • Consider the effects of art. 46 of Law No. 14,596 of 2023.
    • Taxpayers not required to follow transfer pricing rules for IRPJ and CSLL:
    • They can apply art. 78 for 2023 if they choose according to art. 69.

12. Mandatory application of the new Rules:

The new Transfer Pricing legislation must be implemented:

  • January 1, 2023 for opt-ins.
  • January 1, 2024 for non-opters.
  • It will be applicable even for contracts/operations from previous periods.

There is emphasis on non-deductibility in certain circumstances of payments, such as royalties and technical assistance to related parties.

13. Attachments

The text of the Normative Instruction provides a list of annexes related to specific topics in financial and tax transactions. These annexes cover topics such as indirect transactions, comparability adjustments considering country-specific risks, use of data from multiple years, netback adjustment, the use of median and interquartile range, and an option term.

  • ANNEX I: Deals with Indirect Transactions and Series of Transactions.
  • ANNEX II: Addresses the Comparability Adjustment for Country Risk.
  • ANNEX III: Focuses on Multiple Year Data – MLT.
  • ANNEX IV: Details the Adjustment by Netback.
  • ANNEX V: Describes the use of the Median and Interquartile Range in analyses.
  • ANNEX VI: Provides an Option Term.

 

What still depends on regulation?

Several operations related to Transfer Pricing, as established in Law No. 14,596/2023, are still pending regulation. These include:

  • Transactions with commodities.
  • Transactions with intangibles,
  • Intragroup services
  • Cost sharing.
  • Corporate reorganization.
  • Financial operations.
  • Specific transfer pricing consultation process (“APA”).

The adoption of recent transfer pricing rules in the tax landscape represents a significant transformation, the impacts of which can be profound for taxpayers. In this context, it is imperative that companies anticipate, proactively evaluating how these changes may affect their business models. Therefore, carrying out a transfer pricing diagnosis not only demonstrates a proactive stance, but also helps to identify potential vulnerabilities and opportunities in the new regulatory environment.

With this analysis in hand, taxpayers will be better prepared to structure their pricing policies in line with the new principles, optimizing tax compliance and avoiding possible contingencies. This is a crucial step to ensure a smooth transition while exploring potential benefits under the new regime.

Grant Thronton, recognizing the complexity and importance of this change, is committed to serving as a compass in this evolving landscape. Our team of experts is constantly monitoring the nuances associated with this matter, ensuring that our clients and the market at large are  

Authors

  • Authors

    David Benevides

    Tax Leader at Grant Thornton Brasil

  • Authors

    Daniel Souza

    Partner | Direct Tax at Grant Thornton Brasil 

  • Authors

    Josdemar Beni

    Transfer Pricing Leader at Grant Thornton Brazil