At the end of 2024, when the new Brazilian transfer pricing legislation became mandatory for all companies that carry out cross-border operations with related entities, the Federal Revenue of Brazil (RFB) clarified some issues concerning this new regulation. However, others still remain under a thick, nebulous layer.
Among these topics, one is notoriously under a strong spotlight of the Brazilian tax authorities and represents an important resource for the taxpayer, as has been observed in other countries that adopt the arm’s-length principle as the basis of the legal framework in terms of transfer pricing. Here, we specifically refer to advance pricing agreements (APAs), which were the subject of a public consultation regarding their standardisation within the new regulation.
The process began in August 2024, when the RFB published a draft of the normative ruling that will regulate the consultation procedures for the establishment of APAs. Taxpayers could analyse it and forward their suggestions to the RFB, narrowing an important listening channel to understand the opinions of those who deal with transfer pricing in their companies on a daily basis. This helped the tax authorities to broaden their perceptions to practical issues that have a tax, and even operational, impact on companies.
Although the RFB’s reaction seems to have been a little late due to part of its guidelines having already been valid in some cases since 2023, the RFB should be praised for submitting its draft normative ruling for public consultation.
It is also worth mentioning that the authorities and the Brazilian taxpayer are in the process of assimilating the new rules and if both sides talk about a regulation before it is published, it makes the result more consistent and less likely to become the possible object of litigation.
Summary of APAs
APAs are established in advance between a taxpayer and the tax authority of that country and create a set of criteria – which may include methods, comparables, and appropriate adjustments, as well as assumptions about future events – for the determination of transfer pricing in controlled transactions.
Once agreed upon by both parties, this instrument avoids the surprise of future inspections in relation to the operations included in it. APAs therefore generate important legal certainty in this new scenario of numerous subjectivities for Brazilian companies that operate with foreign parties that are considered related, preventing litigation and significantly reducing discussions in court.
The unilateral nature of Brazilian APAs
The Brazilian APA is essentially unilateral, which greatly limits its effects in terms of avoiding double taxation as a result of the alignment of expectations and fiscal practices, as would be the case for the application of a bilateral or multilateral APA.
However, the RFB has stated that it is open to the execution of bilateral or multilateral APAs with countries with which Brazil has already signed agreements for the avoidance of double taxation. This pronouncement by the RFB is relevant, even though Brazil has been able to sign APAs with countries with which it has such agreements for decades, since these documents have a clause related to the mutual agreement procedure similar to Article 25 of the OECD Model Tax Convention on Income and on Capital.
It should be remembered that this facility has not been exercised so far, but it is expected that the creation of the Brazilian APA will make this effective, based on the information provided by the RFB.
Eligibility to make an APA proposal
In addition to unilaterality, another ‘but’ that is presented as an important aspect of the RFB’s draft concerns when it mentions that “the taxpayer who carries out or intends to carry out transactions subject to transfer pricing control and has participated in the cooperative tax compliance programme for at least six months may submit an APA Proposal”, remembering that there are three cooperative tax compliance programmes created by the government. All of them have high requirements for compliance and are set out below:
The Authorised Economic Operator programme;
The Sintonia tax compliance stimulus programme; and
The Confia cooperative tax compliance programme.
An RFB statement has clarified that participation in just one of these three programmes would be sufficient to qualify for submitting an APA proposal, despite the link between these programmes and the approval of an APA seeming illogical and limiting access to APAs for a few taxpayers.
Questions over timelines
Another point that also draws attention is that the RFB has the power to define the maximum number of APA proposals that can be accepted for analysis per year, considering its limited operational capacity, since they require efforts from the administrative teams with regard to the analysis of the instruments, meetings with taxpayers, discussions, etc.
However, it is not clear in the draft of the normative ruling how the maximum number of proposals would be defined, nor when the criteria that the RFB will use in defining the limit for APA proposals will be disclosed.
Not unlike the practice in other countries where the use of the APA is already a mature reality, the draft of the proposal that will regulate this instrument in Brazil mentions that it will be valid for up to four years, extendable for another two years, and may be applied to previous calculation periods.
Although it seems like a reasonable extension of validity, there is still the question of what would be the deadline for approval of an APA for it to be, in fact, a viable resource for the taxpayer from a practical point of view.
Although we do not know what the deadline for approval of an APA will be or the capacity of the tax authorities to assess them, it is already possible to at least chart the path that a consultation process will follow for a proposal, which can be divided into four phases:
Preliminary phase – the feasibility of entering into an APA will be evaluated, in view of the taxpayer’s transfer pricing policy and the facts and circumstances of the controlled transactions;
Analysis – the taxpayer must submit the APA proposal, containing detailed information and documentation that supports the application of the transfer pricing method used and the conclusions reached, within 90 days after a positive decision in the preliminary phase;
Conclusion – the RFB decides on the APA, and may agree with the proposal, propose a modified or alternative agreement, or even reject the APA; and
Formalisation – all terms, definitions, and conditions of the APA will be confirmed.
Inspections and revocations
Another gap left by the draft is whether the taxpayer would be exempt from being inspected in relation to the transactions subject to an applicable APA while this instrument is analysed by the RFB. This is a significant issue that the agency is obliged to clarify so that the APA is a resource that will be worth its effort.
An APA may also be revoked or cancelled by the RFB for the following reasons, respectively:
Due to non-compliance with the agreement by the taxpayer; and
Due to being based on erroneous, false, or misleading information, or if there was an omission on the part of the taxpayer.
Therefore, care is required to avoid these possibilities, since an APA results in financial costs to the taxpayer, and both parties should dedicate time and effort to its execution.
Another aspect that cannot be avoided is that the proposal for a normative ruling that creates the Brazilian APA reflects the RFB’s tendency to adapt international rules but with some ‘biases’.
These biases become clear in the rules that support the Brazilian APA, which create uncertainty for the taxpayer. The RFB may return a proposal if it understands that there is an intention of tax planning, if it understands that the taxpayer has not cooperated sufficiently, or even if it simply claims that it does not have a team available for analysis.
A step towards alignment with the OECD guidelines
Although the above and other issues are evident in the draft of the normative ruling, the RFB is clearly determined to apply the new instrument. This represents a step of paramount importance in Brazil’s alignment with the OECD guidelines practised in other countries, even facilitating the search for bilaterality or multilaterality, and thus avoiding exposure to the risk of double taxation.
Brief comment on APAs in a generative AI environment
The tax authorities have increasingly had broad access to taxpayers’ information. For example, in Brazil, for almost two decades, taxpayers have been required to digitally provide files containing their tax and accounting bookkeeping to the authorities.
This data that the tax authorities have been accumulating, combined with the power of new technology resources such as generative AI (GenAI) that could be implemented in the near future, will make it even easier for tax authorities to carry out faster and more efficient audits. In this scenario, being supported by an instrument such as the APA will surely create a more comfortable and stable situation for the taxpayer.
It is expected that with the use of these technologies, future litigation will be more intense. Those that invest now in a new, efficient, and more secure approach to transfer pricing will therefore be better prepared to interact with tax authorities on future issues and support the positions adopted today.
This means ensuring that tax and transfer pricing policies are aligned with the organisation’s broader forms of public exposure, and adopting pre-filing and dispute resolution programmes, such as APAs.
Key takeaways on the new transfer pricing regime in Brazil
It is a fact that companies subject to the new transfer pricing rules in Brazil have a fresh challenge and need to prepare for the new realities, ensuring the stability of their business as much as possible.
Apart from the adoption of a pre-negotiation and dispute resolution tool such as the APA, it is important to warn that companies need to prepare for a world where data underpins their transfer pricing approach.
To this end, it is important to have standardised information to align the company’s tax positions with broader business objectives. The standardised data will also help to prepare the organisation for transfer pricing litigation and to meet expectations regarding efficiency and GenAI-based analytics, providing better information to the entire executive body in charge of decision-making.
Finally, it is also important to highlight the essentiality of transfer pricing professionals being connected and interacting directly with the various areas of operation, and participating more actively in R&D and supply chain planning. This would help to ensure they have sufficient knowledge of their company’s business to facilitate any negotiation process with the tax authorities.
