Brazil to Adopt the OECD Transfer Pricing Standard

Brazil’s federal revenue authority (RFB) has finally adopted OECD Transfer Pricing Guidelines on December 28, 2022. The draft legislation is still pending approval by the Brazilian legislative branch. However, if passed, the new regulations will become mandatory starting January 1, 2024. Brazilian taxpayers may also choose to use the new rules for the fiscal year 2023.

This move by Brazil may help to alleviate double-taxation concerns when it comes to cross-border intercompany transactions involving Brazilian entities.

However, it’s important to note that the new regulations will have some differences from the OECD standard. For instance, there will be specific treatment for commodities transactions, which are significant to the Brazilian economy, as well as limitations set for loan interest and guarantees.

This adoption of the OECD standard by Brazil will have a significant impact on United States multinational enterprises (MNEs) with operations in Brazil. This is due to the impact it will have on the ability to leverage foreign tax credits in the US for Brazilian income tax. The new attribution requirement for the “net gain” condition for determining whether a foreign tax is creditable in the United States as per the US Foreign Tax Credit (FTC) final regulations, released on December 28, 2021.

The FTC regulations state that a foreign tax will meet the attribution requirement only when the allocation rules are followed, consistent with the arm’s length principle as stated in US transfer pricing regulations and OECD guidelines. This means that foreign tax paid in certain tax jurisdictions will not be creditable as FTCs in the United States.