Brazil And The International Transfer Pricing Standards: Provisional Measure 1,152/2022 – Transfer Pricing

Brief Background

The current Brazilian Transfer Pricing (“TP”) rules
were first enacted in 1996 with the primary goal of preserving the
national tax base against harmful shifts of profits through the
manipulation of prices in transactions between Brazilian and
foreign related parties.

Although, the explanatory statement of the relevant legislation
indicates that the rules were inspired by the international
standards, in practice, the Brazilian TP system was unique
and presented distinctive features that departed from the
Organization for Economic Cooperation and Development Transfer
Pricing Guidelines (“OECD TPG”) and the arm’s length
principle (“ALP”).

In summary, the current Brazilian TP system grants freedom to
taxpayers to elect the method to be applied (i.e., no
“best method approach“), provided such
election is restricted to one of the specific methodologies set
forth by the current law (i.e., no use of “other
methods”). Brazilian methods generally established
fixed pre-determined markups that apply to all
taxpayers in general (i.e., without regard to peculiarities of
specific sectors and segments).

Other distinctive features of the Brazilian system include: (i)
its personal, material and territorial scopes, (ii) strict
“item-per-item approach”, (iii) rejection of
corresponding adjustments to avoid economic double taxation, (iv)
lack of profit attribution rules to permanent establishment, (v)
absence of advance pricing agreements; and (vi) very little
experience with mutual agreement procedures in transfer
pricing.

Historically, Brazil has reaffirmed its TP approach in the
international context¹. In 2018 – 2019, however,
Brazil drastically changed its position resulting in several
developments and policy discussions around the design of new
Brazilian TP rules that would align with international
standards.

The following aspects influenced such TP alignment
process:

Brazil and the OECD

• In the context of Brazil potentially joining the OECD, the
  current transfer pricing rules were identified,
  among other issues, as one of the key areas where
  alignment with the OECD standards was necessary in order to align
  with a core aspect of the OECD’s international tax
  policy.




• As a response, the Brazilian Federal Revenue Office
  (“RFB”) and the OECD jointly launched a TP
  Project and released a joint report on December 18, 2019,
  identifying a large number of gaps and divergences between the
  Brazilian TP system and the international TP standards, and
  pointing out convergence options. Later, on April 12, 2022, RFB and
  OECD held a public joint meeting and presented the main features of
  the policy decision to achieve a full alignment with the OECD
  standards.

US Regulation on Foreign Tax Credits

• Another aspect that brought a sense of urgency to the TP
  discussions was the revamped US foreign tax credit
  regulations (TD 9959) (the “US FTC Final
  Regulations”), which provide that a foreign tax will be
  creditable in the US only if any allocation of income, gain,
  deduction or loss between a resident taxpayer and a related or
  controlled entity under the foreign country’s transfer pricing
  rules follows the arm’s length principles (the
  “attribution requirement”), among other
  requirements.




• In this context, the proposed changes in the Brazilian TP
  system have also become of great relevance for companies
  that have counterparties / or are part of multinational enterprises
  (“MNE”) with US operations. In fact, this was
  one of the aspects mentioned in the explanatory statement of PM
  1,152/2022 to justify its relevance and urgency.




• The changes to the Brazilian TP rules may allow US taxpayers to
  support a position that the Brazilian Corporate Income Tax
  (“CIT”) meets the “attribution requirement”
  under the US FTC Final Regulations. However, we understand that the
  possibility of claiming foreign tax credits for Brazilian taxes in
  the United States must be evaluated on a case-by-case basis, as the
  US FTC Final Regulations include other requirements that need to be
  observed. Mayer Brown’s Global Tax Teams, from the
  Brazilian and the US offices, are at your disposal to address any
  additional questions and provide assistance in relation to these
  rules.

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