Brazil’s Transfer Pricing Overhaul: A Narrowing Window for Action

Chad Martin, BaseFirma Denver Office Lead


Despite the attention that has been directed to Provisional Measure No. 1152/22 (“the PM”) as it makes its way through Brazil’s legislative system toward becoming law (see BaseFirma’s original analysis of the PM here), it is difficult to overstate the practical impact of Brazil’s prospective alignment with OECD transfer pricing (TP) standards on multinational enterprises (MNEs) with a presence in the country. Indeed, the academic and theoretical aspects of alignment may in some ways distract MNEs from the immediate actions that should be taken in advance of the PM’s formal passage into law, expected before June 1, 2023. These range from capacity building (e.g., hiring and training a local tax function knowledgeable in both Brazil’s historical TP regime and the incoming OECD TP standards), in-depth quantitative analysis (e.g., modeling and scenario analysis of different future-state TP structures) to the more immediate need to determine which transfer pricing model the taxpayer will choose to apply to fiscal year 2023.

In this article, BaseFirma seeks to bridge this gap by outlining the most pressing and practical aspects of the impending changes, and providing recommendations for what taxpayers can start doing immediately to mitigate the operational friction that will inevitably accompany one of the most significant transfer pricing developments of this century.

The Human Element: Capacity Building for an Arm’s Length Brazil

Perhaps the most overlooked challenge facing MNE tax departments is the capacity constraints that will be accentuated by Brazil’s OECD accession. In-house TP talent is already a small world, and the number of people well versed in both Brazilian and OECD TP practices is extremely limited. In order to proactively address the present shortage, and the potential attrition that might result from competition for such existing talent, MNEs should consider the following strategies:

·       Training: Invest immediately in training opportunities for tax personnel responsible for managing the Brazilian TP process.

·      Technology: Brazil’s status as a tax “island” means that little attention may have been paid in the past to systems alignment. Now is the time to identify and pursue opportunities for integrating tax technology between Brazil and other jurisdictions.

The time is also ripe for tax departments to engage other involved parties in the transition process, including accounting, finance, treasury, IT, and relevant operational personnel, each of whom will need to make changes to prior operating procedures with respect to intercompany flows and their pricing.

Finally, engaging operational stakeholders before the PM becomes law is crucial, especially for companies for whom transfer pricing may affect key operational performance metrics. In addition to educating such personnel on new policies and practices, MNE leadership should consider ways to reduce negative impact or misaligned incentives associated with intercompany prices, such as using pre-TP book profitability to evaluate managers’ performance.

Identifying Exposures and Opportunities

Before the PM becomes law, and certainly before the OECD TP standards become mandatory (expected January 1, 2024), companies should identify areas where current Brazilian TP practices are at odds with OECD standards. A few common issues are outlined below:

·     Tangible Transactions: Brazilian companies that import and/or export products have often been able to take advantage of Brazil’s allowance for taxpayers to choose the most favorable of the prescribed TP methods. For example, Brazilian full-fledged manufacturers could apply a cost-based TP method for sales to routine distributors in lower-tax jurisdictions, regardless of whether an arm’s length analysis based on functions, assets, and risks would have resulted in a higher allocation of system profits to the Brazilian entity. MNEs should proactively begin value chain and functional analyses with respect to their Brazilian operations in order to prepare for the elimination of such arbitrage opportunities.

·    Service Transactions: Similar to the above, the safe harbor gross margins for the provision and receipt of services meant that taxpayers had relative certainty in their tax positions without needing to conduct extensive functional or economic analyses. Companies providing or receiving high-value services will be particularly affected by the adoption of the OECD TP Guidelines and the requirement for comparability analysis.

·     Intangible Property: Perhaps the most challenging and uncertain aspect of Brazil’s move to align with global TP norms is the treatment of intangible property within MNE groups with Brazilian operations. Given the historical disincentives to involve Brazilian affiliates in intangible TP arrangements (ranging from nondeducibility to denial of foreign tax credits in the US), many MNEs have designed TP structures which exclude Brazil from any regional or global licensing arrangements. Brazilian operations have often been left to operate relatively autonomously, meaning that significant local market intangibles may have accrued under the old TP regulations. The move to the OECD TP standards and its accompanying guidance on IP transactions, DEMPE analysis, business restructurings, etc., creates an imperative for MNEs to reevaluate their global value chains as it relates to Brazil.

Each of these challenges also present opportunities for tax departments who act early and deliberately. Longstanding inefficiencies, ranging from double taxation to non- or limited-deductibility due to the TP regulatory discrepancies can be resolved through proper TP planning in the months ahead, which can improve ETR, reduce administrative burden, and help free up reserves for uncertain tax positions going forward.

Quantitative Scenario Analysis

MNEs have several important decisions to make in the next several months, especially if the PM is formalized with its current stipulations. First, taxpayers will need to decide whether to apply the new TP regulations for FY 2023 or continue under the old rules. The passage of the PM in the coming month would alleviate the potential downside of applying the new methods only for the measure to fail, but that will leave taxpayers with only three months to plan and execute before the deadline in September.

Second, assuming the rules become mandatory in 2024, taxpayers will need to decide how to convert their current Brazilian TP practices into operational policies that align with the arm’s length standard.

Both decisions require prompt and detailed financial modeling. Applying OECD rules for the optional2023 period may be administratively complex, but for some taxpayers, it could be worthwhile – but only comprehensive quantitative analyses can properly inform this decision. The data gathering, design of inputs and assumptions, and review process will likely take weeks, so work should start now in order to optimize decision-making later in 2023.

Even taxpayers who elect to wait until 2024 to implement the new rules should begin the quantitative modeling process to anticipate important financial impacts such as changes to the ETR, tax liability, potential concerns about Brazilian entities’ capitalization or cash positions under new arm’s length TP arrangements, etc. This will necessarily involve preliminary analysis of the most appropriate TP method, benchmarking results, and multi-year forecasts, among others.

Roadmapping and Project Management

Project organization and work planning is a fundamental but overlooked component of tax legislation changes, particularly of the scale and impact of the one expected in Brazil. Tax departments should work in tandem with their service providers to assemble a detailed workplan for the steps that must be taken in the coming months leading up to implementation of the new rules. Managers should devote significant time to training, functional interviews, modeling, and configuration, and not underestimate the potential hurdles that may be encountered at each phase. Navigating a change of this magnitude will require a deliberate, organized, and inclusive approach to project management and scheduling.


The near-term work that must be done by Brazilian and affiliate jurisdiction tax department may seem daunting, but an informed and earnest approach to plan for and execute the changes can meaningfully reduce pressure, improve results and/or decrease risks. Tax leadership should start by ensuring that their involved staff are educated on and prepared for the tasks that await, which includes analyzing Brazilian entities’ relationship with related parties in a new, OECD-aligned light.

BaseFirma has a long-standing, award-winning presence in the Brazilian market, with a local team that has invested countless hours in researching and engaging with the OECD alignment process. We offer personalized, tailored training for in-house staff; support with qualitative and quantitative preparation for the changes; risk analysis; and other key elements of the transition process. We welcome the opportunity to hold a free consultation with any taxpayer interested in our support as partners in navigating this new era of global transfer pricing. Please contact our Brazilian and US specialists below:

Davi Santana, BaseFirma Brazil Partner


Chad Martin, BaseFirma Denver Practice Lead

Davi Santana is a partner for BaseFirma’s International Transfer Pricing Group in São Paulo, Brazil, recently ranked as the top transfer pricing firm in Latin America by the International Tax Review.  Before joining BaseFirma, Davi was a Senior Manager at Ernst & Young in São Paulo and a Senior Consultant at Deloitte Consulting Brazil.

Davi has a Bachelors degree in Computer Science, and holds a Master’s degree in International Trade focused on International tax from the Fundação Getúlio Vargas (FVG) in Brazil.  With more than 13 years of professional experience providing Transfer Pricing advice to top multinational companies in various industry sectors, Davi has lead several audit defense projects in Brazil.  He is an expert on the application and documentation of alternative transfer pricing methods in Brazil (PIC/CPL and PVV/PVA/PVEX), on defining transfer pricing policies focused on companies’ cash savings, and mitigation of assessment risks by the tax authorities. He is fluent in English and Portuguese.

Chad Martin is BaseFirma’s office leader in Denver, Colorado. Chad has over ten years of transfer pricing experience, including planning, documentation, controversy, and implementation. Chad began his career in Dallas, Texas at Ernst & Young LLP, before moving to Denver in 2016. Chad brings a holistic approach to providing transfer pricing solutions to clients in a wide variety of industries, prioritizing transparency, consistency, and operability. He has experience leading transfer pricing initiatives ranging from training programs to operational transfer pricing innovations. Chad has a M.A. in International Affairs from Texas A&M University and a B.A. in History from Lipscomb University. His professional strengths include collaborative leadership, cross-functional teaming, and effective business writing.

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