Brazil Embraces New OECD-Based Transfer Pricing Rules: A Shift with Major Global Impact

Brazil officially transitioned from its previous transfer pricing legislation, embracing the internationally recognized OECD Transfer Pricing Guidelines. The legislation, Law No 14,596, signed on June 15, 2023, makes the adoption of the OECD based mandatory beginning on January 1, 2024. However, Brazilian taxpayers can opt to adopt them effective January 1, 2023.

This strategic shift towards OECD standards, a process that began years ago, stands to fundamentally transform the tax landscape of Latin America’s largest economy. Adopting these rules is anticipated to alleviate concerns over double taxation in cross-border intercompany transactions involving Brazilian entities. It also boosts Brazil’s integration into the global value chains, enhancing trade and encouraging investment.

At the heart of the new OECD rules is the Arm’s Length Principle (ALP), which replaces Brazil’s old fixed-margins system. This new framework, which includes comparability analysis, specified methodologies, documentation requisites, and other technical facets, is largely in sync with the OECD standard. However, there are some nuances, particularly concerning specific types of transactions. The regulation also integrates departures from the preliminary measure issued in October 2022, notably concerning intercompany royalty disbursements and commodities transactions.

The Brazilian Tax Authority has issued supplementary guidance for those mulling an early adoption of the new rules for 2023 and pledged to release further detailed regulations for greater clarity.

A significant consideration for United States Multinational Enterprises (MNE) groups having operations in Brazil and American subsidiaries of Brazilian MNEs, is the impact this legislation has on the ability to leverage foreign tax credits in the US for Brazilian income taxes.

The FTC final regulations, released on December 28, 2021, introduced a new attribution requirement for the “net gain” condition. This defines the criteria for a foreign tax to be creditable in the United States. In a scenario where a foreign tax is imposed on residents of a jurisdiction, the FTC regulations mandate that a foreign tax will meet the attribution requirement only when the jurisdiction’s tax allocation rules are consistent with both the ALP and OECD Guidelines, as stated in US transfer pricing regulations. Consequently, foreign tax paid in certain jurisdictions may not be eligible for FTCs in the United States.

The adoption of OECD-based transfer pricing rules marks a pivotal moment for Brazil’s economic landscape. The integration into the international taxation network promises to mitigate double taxation issues and underlines Brazil’s commitment to a more conducive environment for trade and investment. The implications are critical for US MNEs and subsidiaries of Brazilian MNEs, affecting their ability to claim foreign tax credits in the US for Brazilian income taxes. As we move forward, these new tax regulations warrant scrutiny, offering valuable insights into how such legislative changes can shape cross-border economic dynamics in the era of globalization.