Brazil's new transfer pricing system has received mixed reviews from legal experts, with some welcoming its measures while others find it highly subjective.
The ruling, issued by the Federal Revenue of Brazil (RFB), is legally binding and came into effect on September 29. The new system, which aims to align Brazil more closely with OECD principles, is set to be fully implemented on January 1, 2024. Taxpayers were allowed to adopt the new rules early, with retroactive effect from January 1, 2023, during the period between September 1 and 31. However, a key feature of the ruling is the extension of the deadline for early adoption until December 31.
"The final wording [of the ruling] is based on the document submitted for public consultation in July, with few adjustments such as simplification measures regarding documentation requirements, which are very welcome," says Stephanie Makin, partner at Machado Associados in São Paulo.
The ruling is based on a document that was previously submitted for public consultation in July, with minor adjustments, particularly simplification measures regarding documentation requirements. According to Stephanie Makin, a partner at Machado Associados in São Paulo, these simplification measures are "very welcome." Brazil's government has encouraged voluntary compliance with the new system, even before its official implementation, a move seen as significant by legal experts.
The extended deadline for early adoption allows taxpayers more time to assess the impact of the new rules. Additionally, the ruling ensures that OECD guidelines and any future changes to them can be used as a basis for interpreting Brazil's transfer pricing rules, pending RFB approval. It also provides detailed guidance on events related to a controlled transaction's non-recognition.
"The new rule surely remains highly subjective and is likely to give rise to disputes," he tells ITR. One significant change in the ruling is the disallowance of compensatory adjustments in transactions involving a party based in a favorable tax regime, a provision that was absent in the draft of the normative instruction. The ruling also permits the inclusion of return operations or capital subscriptions for the purpose of delineating a controlled transaction, along with express rules for the delineation of undocumented transactions.
However, lawyers in Brazil are still analyzing the numerous changes and key aspects of the ruling, which contains over 80 articles. Allan Fallet, a partner at Mauger Muniz Advogados in São Paulo, suggests that while the tax authorities seem to have incorporated many suggestions and requests made by taxpayers during the consultation process, disputes over the subjective nature of the new rule are likely to arise in the future.
By fLEXI tEAM