Why has Brazil adapted its TP rules to OECD standards?
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Why has Brazil adapted its TP rules to OECD standards?

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Isadora Thurm of Jáuregui y Del Valle breaks down Brazil’s tax policy overhaul as the country seeks to match international TP standards.

TP is the most controversial and complex issue in international taxation, and it is also the mechanism most widely used by multinationals to transfer profits from one jurisdiction to another. 

An important step in Brazil's integration into the OECD has been the publication of its new TP rules. However, what is the purpose of its integration, the reason why its rules have been revised and the economic impact for the country? 

The main purpose of TP rules is to protect a country’s taxable basis in international transactions to make them adhere as much as possible to the market reality. These rules assume that companies or related parties benefit from a more advantageous tax treatment using strategies to transfer their profits to jurisdictions with lower tax rates. In other words, the expectation is that through a correctly implemented TP practice, transactions between related parties are carried out at arm’s length to prevent profit shifting or tax evasion.

Why should TP rules be in line with OECD standards?

The OECD is a 38 member-country organisation whose purpose is to set international standards and propose solutions to various social, economic and environmental challenges. The organisation constitutes a forum for governments to compare policy experiences, seek answers to common problems and identify good practices, striving to promote prosperity and combat poverty through economic growth and financial stability. 

Four Latin American countries are currently members of the OECD: Chile, Costa Rica, Colombia and Mexico. Mexico joined in 1994. Brazil, Argentina and Peru are currently holding discussions with the OECD Council to join the organisation. 

On December 29 2022, the Brazilian Ministry of the Economy took a decisive step towards joining the OECD, by publishing new TP rules, provided under Provisional Measure No. 1,152 (MP 1,152). 

Current Brazilian TP legislation, included under Law No. 9.430/1996, is not fully aligned with the OECD recommendations, since it considers certain predetermined methods with fixed margins. In other words, Brazil's TP system does not follow the arm's length or market competition principle. This has been widely criticised as it differs from the international practice adopted by many countries and has even caused economic detriment to the country. 

The new TP rules seek to fix existing gaps and weaknesses in the current system, as well as problems resulting from inconsistencies with the OECD standard. These divergences deteriorate international business relationships, the country's insertion in global value chains and collection of tax revenues. The changes contained in MP 1.152 will offer new tools regarding TP. However, they will also entail adaptation efforts for both taxpayers and Brazilian tax authorities. 

The federal government claims that the implementation of such measures is urgent due to a recent change in U.S. tax policy, which no longer recognises or allows tax credit for taxes paid in Brazil due to existing deviations or gaps in the Brazilian TP system. Another reason is due to tax losses that Brazil experiences year after year, due to the various deficiencies existing in Brazilian laws that allow for tax base erosion and profit shifting. If immediate legislative measures are not taken, the country could experience a significant reduction in current investment and lose competitiveness in attracting new capital, negatively impacting employment levels and the national economy.

What are the main challenges and changes?

Despite the loss of simplicity and practicality of the current model, the implementation of this new framework is expected to allow the Brazilian economy to further integrate into the international market, eliminating barriers that hinder trade and foreign investment. The new law has 40 articles, while the current law has only six. This legislative change arises from a project that begun over four years ago, with a collaboration between the OECD and Brazil’s Federal Income Ministry (Receita Federal do Brasil o, RFB), which produced a detailed report on the Brazilian TP methodology and its transition to the OECD’s rules. Based on the findings of this assessment, the project explored Brazil's potential to approach the OECD’s TP standard, which is a critical reference for OECD member countries and followed by most countries in the world. 

Although the new rules will not apply until 2024, it is possible to adhere to such standards in 2023. Regardless, Brazilian companies and legal entities that do business with them must consider that there is still plenty to regulate, with business arrangements to analyse and modify, to allow a convergence to the required standards. 

Technically, the contents of MP 1.152 are broadly descriptive and provide the necessary elements for the intended alignment with OECD standards. There are also subsections with special treatment for commodities (which still depend on a more specific regulation), and more complex issues such as the application of TP adjustments and their interrelation with treaties to avoid double taxation. 

Specifically, Chapter 3 contains six sections that address more specialised issues: transactions with intangibles, hard-to-value intangibles, intra-group services, cost-sharing contracts, corporate restructuring and financial transactions. The current law, due to its limited scope and practicality, is lenient as to documentation and lacks a specific sanctioning regime. Now, Chapter 4 of MP 1.152 establishes the required documentation and applicable sanctions. 

There are endless new updates on the subject matter, and the alignment of current regulations with OECD standards could represent a great challenge for Brazilian taxpayers, due to the complexity and number of changes required for their implementation.

Some of the most important changes are:

  • Establishing the definition and application of the arm's length principle, which is the international TP standard agreed upon by OECD member countries. In applying this principle, transactions between related parties must be entered into considering market conditions, to ensure that transactions are executed under the same conditions and that the parties involved have the same bargaining power to ensure fair treatment;

  • The definition of ‘related party’ is introduced to provide tax certainty to taxpayers and determine what and who will be considered related parties and in which cases;

  • Under the previous regulation, only certain transactions were subject to a TP analysis. Under the new regulation however, all transactions between related parties must be analysed and documented from a TP perspective;

  • As part of the TP analysis of each transaction, conducting a comparability analysis should be considered to select reliable comparables. Such analysis will consider: i) the contractual terms, ii) the functions performed, the risks assumed and the assets used in the transaction, iii) the economic circumstances of both the parties involved and the market where the transactions is carried out, and, iv) business strategies;

  • The following TP methods are established: i) comparable uncontrolled price method, ii) resale price method, iii) transactional net margin method, iv) operating profit transactional margin method, v) profit split method and other methods provided that the alternative methodology adopted produces a result consistent with comparable circumstances; and

  • In selecting the most appropriate method, the following issues should be considered: i) the facts and circumstances of the transaction between related parties and the adequacy of the method, ii) the availability of reliable information on comparable transactions executed between independent third parties, and iii) the degree of comparability between the related party transaction and transactions between independent third parties.

To date, Brazilian taxpayers are still not familiar with the application of OECD standards. Thus, in certain cases, such as when selecting reliable comparable variables, it is important to consider the difficulties and additional costs that these changes could represent. This is due to the lack of experience in the use of databases or specialised tools and considering that access to some of these can be quite costly. 

When selecting appropriate comparables, it is also important to consider Brazilian accounting standards and practices, since the classification of costs and expenses may be different from the classification of the selected comparables. Otherwise, there could be deviations in the results of the profit margins assigned for each method.


Although the new Brazilian TP framework is committed to objectivity and almost completely eliminating certain existing gaps, other issues remain that can give rise to endless controversies or questions. 

Considering the high degree of subjectivity in TP practice, one of the most relevant issues in implementing the new system would be questioning the interpretative weight of the OECD TP regulatory guidelines and/or the UN Manual to resolve regulatory conflicts. This is since the new TP regulations do not refer to such guides as a supplement to interpret Brazilian law. This issue is important when conducting analyses, since the use of a specific and complete guide on TP as reference prevents endless disputes due to subjectivity and/or interpretation of current law. 

Last, it is worth remembering that TP is not an exact science but does require the exercise of judgement by tax authorities and taxpayers. Public consultations and further discussions are expected during the regulation and implementation phase of the new Brazilian regulatory framework, to provide clear answers and avoid disputes and controversies for taxpayers.

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