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Brazil Aligns Transfer Pricing Rules with OECD Guidelines

20th April 2022

Nothing could deviate more from OECD recommendations than Brazil’s transfer pricing legislation, which includes its own definition of the arm’s length principle, omits the concept of a functional and risk analysis, and forbids the use of profit-based methods. Until now. For the past few years, Brazil has been working with the OECD to reinvent its unique transfer pricing system, and on April 12, the Federal Service of Brazil, in collaboration with the OECD and the UK, presented some key features that will anchor the country’s new transfer pricing system. So, what are these features? Building from the ground up, Brazil has built a new foundation with a commitment to the arm’s length principle and a firm definition of related parties—essentials for transfer pricing legislation. Next, while Brazil’s current rules apply to imports, exports, and loans, the new legislation will apply to all types of related-party transactions, and a functional analysis will now play a role in determining value creation and anchoring comparability. Brazil has always conformed to its own transfer pricing methods, but now it will follow the OECD’s most appropriate method rule and it will embrace the transactional net margin method as well as the profit-split method. An arm’s length transaction will be based on a comparability analysis and, of course, the Brazilian tax authorities will be able to make adjustments as necessary. Transactions involving intangibles will be based on DEMPE functions and preparing the master and local file will now be required. (The country-by-country report is already mandatory.) And if all of this sounds more familiar than earth-shattering, it should—because Brazil isn’t reinventing the wheel, it’s just aligning transfer pricing legislation with tried-and-true OECD guidelines.