Brazil - Transfer Pricing - Dispute Resolution - IBFD

Brazil - Transfer Pricing & Dispute Resolution - Country Tax Guides (Last Reviewed: 15 June 2023)
Transfer Pricing & Dispute Resolution

Brazil
Authors
Marcelo Natale
Partner, Deloitte, São Paulo, Brazil
Daniel Macedo
Partner, Deloitte, São Paulo, Brazil
IBFD Tax Technical Editor

Vigdís Tinna Sigurvaldadóttir
Latest Information
This chapter is based on information available up to 15 June 2023. Please find below the main changes made to this
chapter up to that date:
Provisional Measure with new Brazilian Transfer Pricing Rules transposed into law.
MAPs to become a viable way to mitigate double taxation in Brazil.
The Brazilian Federal Revenue released 2022 audit statistics for Brazil.
1. Introduction
1.1. Overview of TP documentation procedure
See Brazil – Transfer Pricing section 13.
1.2. Overview of local dispute procedure

A dispute procedure can be divided into an administrative procedure and a judicial procedure. In the case of a tax assessment,
the administrative litigation procedure begins with the taxpayer’s objection to the assessment. The judicial procedure begins with
the taxpayer’s filing of a petition, and once accepted by the relevant court will bar discussion of the relevant subject matter at the
administrative level. Therefore, judicial litigation precludes the administrative discussion of that subject matter, although there are
instances where this conclusion is not straightforward. Other aspects of a tax assessment may still merit administrative objection
even if part of the matter is the subject of judicial litigation.
The administrative litigation procedure begins with the objection of the assessed taxpayer to the relevant tax authority, following
the administrative procedure that led to the assessment. Once assessed, the taxpayer has 30 days to pay the tax on the
outstanding assessment, or initiate litigation.[1] The taxpayer’s objection to the assessment is considered by the Delegacia da
Receita Federal de Julgamento [2] (first-instance review), a Receita Federal do Brasil (RFB) panel of five tax inspectors. A decision
issued by this panel may be appealed to the Conselho Administrativo de Recursos Fiscais, an administrative court comprised
of three RFB representatives and three representatives of taxpayers.[3] In certain limited cases,[4] a decision by the Conselho
Administrativo de Recursos Fiscais (Administrative Council of Tax Appeals, CARF) may allow recourse to the Câmara Superior
de Recursos Fiscais (CSRF), which is also an administrative court comprised of representatives of both taxpayers and tax
authorities.[5]
1. Art. 10 Decree 70,235/72 (Processo Administrativo Fiscal).

2. Ordinance 58 (Regimento Interno DRJ).
3. Ordinance 256: CARF Procedural Rules (Regimento Interno CARF).
M. Natale & D. Macedo, Brazil - Transfer Pricing & Dispute Resolution, Country Tax Guides IBFD (accessed 17 August 2023). 1
© Copyright 2023 IBFD: No part of this information may be reproduced or distributed without permission of IBFD.
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Cases definitively decided after administrative litigation, or cases taken directly to the judicial system, will be heard by the Federal
Courts. Federal Court decisions may be appealed to the Federal Appeals Courts. Constitutional matters may be appealed to the
Supreme Court. The Superior Court has the final say on federal law matters. See Appendix 1.
1.2.1. Availability of international procedures and relief from double taxation

Brazilian experience with international procedures to relieve double taxation is limited. In restricted situations, the Brazilian tax
authorities will issue a statement of taxes paid in Brazil to substantiate claims of foreign tax credits in other jurisdictions, as well as
in certain procedures to avoid concurrent collection of social security charges where there is an applicable totalization agreement.
Brazilian tax authorities have not entered into advance pricing agreements, or negotiations to resolve instances of double taxation
with any Brazilian tax treaty partners. A new development in this regard was the issuance of Normative Instruction 1,846/2018 [6]
regulating the mutual agreement procedures (MAPs) along with MAP Guidelines.[7] The issuance of this regulation is an additional
indication of the Brazilian tax authorities’ commitment to align with OECD Transfer Pricing Guidelines for Multinational Enterprises
and Tax Administrations (OECD Guidelines) and to reinforce Brazil as a candidate for membership.
Besides high expectations for MAPs to provide a positive discussion channel among taxpayers and tax authorities, in recent
years only one case involving transfer pricing matters was closed, and the outcome was achieved by a “unilateral relief granted”
decision.
1.2.2. Tax authorities

1.2.2.1. Organizational structure with relevant areas of jurisdiction
See Appendix 2.
1.2.2.2. Other relevant players

The Federal Attorney’s Office represents the interests of the federal government in administrative and judicial litigation, and is
therefore active in both the administrative and judicial court systems. See Appendix 3.
1.2.2.3. Programmes to ensure consistent application of TP policies and penalties

Over time, audit teams have developed internal materials, checklists, audit methodologies, procedures and software aimed at
speeding up transfer pricing audits and reaching a more uniform and consistent application of transfer pricing provisions by
taxpayers.
A good example of an attempt to come to extensive enforcement of transfer pricing legislation was the large-scale transfer
pricing audit based on Normative Instruction 86 (IN 86), which required taxpayers to prepare and keep available for auditors
electronic files covering several different types of accounting and tax information. Although this is a relatively old requirement, many
taxpayers rarely attempted to comply with this legislation, as it was not commonly mandated by auditors and no mandatory filing
was imposed. In 2009, the RFB commenced a large-scale audit process covering thousands of taxpayers, asking them to present
IN 86 data files which would, in principle, allow the tax authorities to calculate transfer pricing adjustments.
For all federal taxes, including for transfer pricing purposes, the RFB has since adopted a clear approach to large-scale, uniform
tax data collection and electronic cross-checking. Some of the dozens of existing electronic tax returns represent a potential source
of valuable data for transfer pricing audits. The income tax return itself contained specific transfer pricing schedules in which
taxpayers were required to identify their most relevant transactions. The ECF, a part of the Sistema Público de Escrituração Digital
(Public System of Digital Bookkeeping, SPED), provides the tax authorities with highly detailed information about taxpayers. The
SPED is a complex and sophisticated data filing system under which taxpayers are to electronically file on a regular basis (not
merely for audits) all available accounting and tax information based on a standard, uniform format. Instead of limited (and filtered)
information provided in a tax return, tax authorities have full and permanent access to all data and are able to track information on
a transaction-by-transaction basis.
Although the SPED has been in place for some years, tax authorities typically require the collaboration of taxpayers to execute
a transfer pricing calculation. In practice, the SPED’s powerful database is being used much more as a consistency data check
rather than a full autonomous data source for the authorities to perform a full transfer pricing calculation without the direct
involvement of taxpayers.
6. See the English translation available at https://www.gov.br/receitafederal/pt-br/acesso-a-informacao/legislacao/acordos-internacionais/map/in-rfb-

no-1846-2018_en.pdf (accessed 20 July 2023).
7. The MAP guidelines issued by RFB can be found in English at https://www.gov.br/receitafederal/pt-br/acesso-a-informacao/legislacao/acordos-internacionais/
map/manual-map_en.pdf (accessed 25 July 2023).

1.2.2.4. Downward TP adjustments procedure

Brazilian transfer pricing regulations provide only for an increase in the contribution base of income tax or the social contribution.
No secondary adjustment is stipulated under transfer pricing law. Therefore, a transfer pricing adjustment does not lead to any
further adjustment of taxes levied on imports or withholding taxes.
1.2.2.5. Contact information

The relationship between taxpayers and the RFB is formally managed by the regional RFB office with jurisdiction over the
administrative region in which the taxpayer’s headquarters is located. However, most information required from taxpayers on an
ongoing basis is filed electronically, by means of programs produced and distributed by the RFB and signed electronically by the
taxpayer. Taxpayers are requested to resolve pending issues online, using digital certificates that allow for protection of identity
and data. For an audit, typically the auditor is associated with the RFB office within the taxpayer’s jurisdiction. This office is also the
primary contact for formal filing of papers and personal contact.
The RFB headquarters (Secretaria da Receita Federal do Brasil) is located in Brasilia, Federal District:
Receita Federal do Brasil
Ministério da Fazenda, Ed. Sede – Bloco “P” – 6th floor – Room 605
CEP: 70048-900 – Brasília – DF
Telephone: +55 61.3412.2710
www.receita.fazenda.gov.br
According to the dispute resolution profile submitted by Brazil,[8] MAP requests should be made to:
Special Secretary of Federal Revenue of Brazil (competent authority of Brazil)
Point of contact:
International Relations Office (Asain)
Address: Setor de Autarquias Sul, Quadra 3, Bloco “O”, Sala 805
CEP: 70.079-900 – Brasília/DF
Email asain@rfb.gov.br
The documents regarding MAP requests to be presented by Brazilian taxpayers should be delivered to the tax administration’s
local office where the taxpayer has its domicile (Delegacia da Receita Federal do Brasil, Centro de Atendimento ao Contribuinte).
From then on, the case will proceed by electronic means, just like any other administrative procedure involving taxpayers and the
tax administration.
1.2.2.6. Comment on profile and aggressiveness

Up to fiscal year 2023, the Brazilian transfer pricing approach is not really economics-driven but rather formula-driven. In practice,
this means that there is no emphasis on hiring economists to work with transfer pricing auditors. Most transfer pricing audit efforts
are aimed at obtaining taxpayer data, checking consistency and applying the formula of the transfer pricing method. Auditors
do not try to analyse the business and risks, but in fact check whether all transactions were “tested” according to the methods.
Consequently, the mathematical adjustment is more important than the economic explanation behind a certain transaction. This is
why compliance is critical in a dispute procedure, as many taxpayers fail to have the robust and precise documentation needed to
face a transfer pricing audit.
Because of the stringent requirements under the transfer pricing law, auditors are not required to adopt more aggressive positions
than the law and regulations prescribe. Practitioners believe that the general audit is already quite aggressive because of the
volume of data, timeframe, level of detail involved and the need to rebuild past transactions. Notwithstanding, special consideration
should be given to Normative Instruction 243/2002, the major focus of transfer pricing controversy in Brazil until tax year 2012.
This Instruction created a litigious environment among taxpayers and authorities, as the effects of the Instruction can lead to
transfer pricing adjustments significantly larger than those under the transfer pricing law.
The major issue associated with Normative Instruction 243/2002 is the PRL (Preço de Revenda Menos Lucro, resale price)
method formula (PRL 20% and 60%). A simple comparison between the wording of Law 9,430/1996 and Normative Instruction
8. See https://www.oecd.org/tax/dispute/brazil-dispute-resolution-profile.pdf (accessed 20 July 2023).

243/2002 shows a significant difference. This is not a mere difference in vocabulary, as the “new” formula provided by the
Instruction results in a much higher transfer pricing adjustment. In the authors’ experience, the adjustment can be 100 times higher
than that determined under the law. Taxpayers reacted against this aggressive position by challenging its legality, but auditors
continue to apply the Instruction on a daily basis because no final decision was issued against the Instruction at the administrative
or judicial level, even though the latest high court judicial decisions indicate a position unfavourable to the Normative Instruction
243/2002.
As from fiscal year 2013, the extent of this transfer pricing controversy in courts has not increased since a new PRL calculation
formula was provided in the law, and Normative Instruction 243/2002 was replaced by Normative Instruction 1,312/2012;[9]
taxpayers are likely to argue that the change in the legislation reinforces the argument against the RFB interpretation of the PRL
expressed in Normative Instruction 243/2002.
The current formula regulated by Normative Instruction 1.312/2012 has eliminated the differentiation between pure resale
(distribution) and resale with local production (manufacturing), and introduced a PRL formula through which the parameter
price (whose starting point is a sale transaction entered into by the Brazilian taxpayer) must take into account the ratio of the
products, services or rights purchased from foreign related parties in the total cost of a given product, service or right sold by the
Brazilian taxpayer. This change enacts into law a calculation procedure that resembles the Normative Instruction 243/2002 PRL
60% method. Stated differently, and disregarding the new gross profit margins, the PRL formula provided by Law 12,715/2012
resembles calculation procedures the RFB authorities were imposing on taxpayers when applying the PRL 60% method for goods,
services, or rights applied in the production process since 2003 (i.e. under Normative Instruction 243/2002). Hereunder is a
comparison of the PRL formulas provided by Normative Instruction 243/2002 and the legislation that is in force for fiscal years from
2013 onwards (unless elected to be adopted early by the taxpayer in 2012).
Normative Instruction 243/2002 formula[1] USD Current PRL formula[3] USD
(A) Imported component CIF+II[2] 50.00 (A) Imported component FOB[4] 40.00
(B) Cost of goods sold 80.00 (B) Cost of goods sold 80.00
(C) Net sales 100.00 (C) Net sales 100.00
(D) Ratio (A/B) 62.50% (D) Ratio (A/B) 50.00%
(E) Base for PRL (C*D) 62.50 (E) Base for PRL (C*D) 50.00
(F) PRL margin (E*60%) 37.50 (F) PRL margin (E*20%) 10.00
(G) PRL price (E-F) 25.00 (G) PRL price (E-F) 40.00
(H) Transfer pricing adjustment (A-G) 25.00 (H) Transfer pricing adjustment (A-G) 0.00
1 For tangible products applied in the manufacturing process, based on Normative Instruction 243/2002.
2 Normative Instruction 243/2002 requires taxpayers to base the analysis on the cost insurance and freight (CIF) plus import taxes
prices for the tested product.
3 The demonstration considers a gross profit margin of 20%; however, this will depend on the taxpayer's industry sector.
4 The current PRL rule allows taxpayers to base the analysis on the free on board (FOB) prices for the purchased products.
The current rules have reduced the controversy involving the resale-minus method. On the other hand, it was expected that
commodities and financial transactions would become important items of scrutiny by the Brazilian tax authorities. However, to date,
this has not materialized in practice.
On 29 December 2022, Provisional Measure 1,152/22 was published with the new Brazilian Transfer Pricing Rules, which will be
effective on 1 January 2024. The new Rules establish a significant milestone for Brazil and will align the transfer pricing legislation
with the OECD Guidelines, allowing multinational groups to apply the global standards on intercompany transactions without
specific adjustment for Brazilian entities. Provisional Measure 1,152/22 was converted into Law 14,596/23 on 14 June 2023.
The main aspects of the new Rules comprise:
- the terms and conditions of a controlled transaction will be established in accordance with those that would be established
between unrelated parties in comparable transactions, respecting the arm’s length principle;
- expand the scope of local rules as it will comprise any business or financial relationship between two or more related parties,
as well as transactions carried out with countries classified as tax havens;
- redefine the current related parties’ concept, including “influence” among the terms that classify entities as related;
9. Art. 48 Law 12,715/2012.

- require a description of the tested transactions and parties involved, including the definitions of functions performed, risks
assumed and assets applied;
- comprise a comparability analysis with the relevant economic characteristics;
- allow the definition of the tested party and the selection of methods based on the most suitable to the transactions;
- include royalties among the transactions subjected to the Brazilian transfer pricing rules; and
- set the general aspects of documentation formalization and penalties.
The new Rules also allow taxpayers to apply them for transactions carried out in calendar year 2023; however, this is a choice that
will not be able to be reverted once the decision is made. For all other purposes, the rules are mandatory from 1 January 2024.
2. Audit
2.1. Historical background
Based on practical experience, Brazilian transfer pricing audit history can be separated into three phases.
Phase 1: Initial phase, from 1997 to 2002

This phase was characterized by limited audit resources and experience, and was a learning period for taxpayers and tax
authorities. The Special Department of International Affairs (Delegacia Especial de Assuntos Internacionais, DEAIN), a group of
auditors located in São Paulo focused on transfer pricing, was created.
Phase 2: Enforcement phase, from 2002 to 2009

With the enactment of Normative Instruction 243/2002 in 2002, which made substantive changes in the way that the authorities
“read” the transfer pricing rules, a new phase in transfer pricing audits commenced. This phase was characterized by an increased
number of audits, and better-prepared auditors with a clearer focus on imports instead of exports. Most audits involved tangible
products instead of services, rights or financial transactions. The PRL was widely adopted as the primary option for auditors,
resulting in the issuance of very significant assessments. The lack of a proper legal basis for Normative Instruction 243/2002
and its use in many audits led to a large case load for tax courts, as most taxpayers did not observe the Instruction and adopted
the literal wording (and formula) prescribed by Laws 9,430/1996 and 9,959/2000. During this phase, the “electronic approach”
became prevalent, with intensive use of electronic data and cross-checking information instead of in-depth economic analysis.
Phase 3: Revision phase, from 2010 to 2018

The attempt to introduce a new resale-minus method (the so-called “PVL 35%”), through Provisional Measure 478/2009,
represented not merely an ordinary amendment, but a change of behaviour by the tax authorities. In fact, although Provisional
Measure 478/2009 was not converted into law by the Brazilian Congress, the context and the notification of the bill (the President
must send a notice to Congress with an explanation of the reasons for the proposal) was quite informative, as it contains an implicit
recognition of the need for a revision after several years of arbitrary application of PRL 20%/60% through Normative Instruction
243/2002.
Law 12,715/2012 is the most significant event in the revision phase that started with PM 478/2009. The PRL calculation formula
provided in Law 12,715/2012 has similarities with PM 478/2009 and Normative Instruction 1,312/2012, but with important
refinements, such as the different margins by industry sector. For a detailed explanation of Normative Instruction 243/2002, that
was revoked by Normative Instruction 1,312/ 2012, see section 2.2.
Further evidence that the transfer pricing environment in Brazil entered a new phase, was the creation of special Large Taxpayer
Departments (Delegacias de Grandes Contribuintes), audit groups focused on large corporations. These departments are
composed of top auditors and take a multifunctional perspective. They focus only on large, complex and more sophisticated
taxpayers, and use the best in-house resources to scrutinize taxpayers’ practices. The authors’ experience with more recent audits
performed by these groups shows an increased capability to audit more sophisticated transactions and carry out more strategic
audits, for example by challenging the business purposes and connections with transfer pricing procedures.
Phase 4: A more positive stance towards the OECD starting in 2019

With the inauguration of Jair Bolsonaro as president of Brazil in January 2019, the new Finance Minister Paulo Guedes adopted
a new emphasis toward the OECD standard. A series of actions, task forces and working groups started a detailed gap analysis
and the old ideological resistance of the RFB against the OECD dissipated. The progression of discussions with the OECD aiming

to identify gaps and to increase understanding about the possible alternatives to move Brazil to an OECD-like transfer pricing
legislation indicates a clear political decision to overcome old paradigms. A joint report issued by the OECD and the RFB on
18 December 2019 identified the two options for the convergence of the Brazilian transfer pricing environment with the OECD
standard: either a full and immediate alignment or a full and gradual alignment.[10] During 2020, a survey was performed to better
identify the potential use of safe harbours to mitigate predictable issues in a transition.
In 2022, the Brazilian tax authorities held a series of meetings with task groups, associations and taxpayers in order to disclose the
general aspects of the new transfer pricing rules, indicating that Brazil will have a legislation extensively lined up with the OECD
Guidelines.
Phase 5: Alignment with the OECD standard

With Law 14,596/23, Brazil made the first step on building a legislation based on the arm’s length principle. Additional regulation
by tax authorities shall come within calendar year 2023.
This will spawn new understandings by tax authorities, controversy chapters and litigation resolutions never witnessed before
in the Brazilian courts, both on an administrative and judicial level. Transactions not covered by the current rule, such as
intercompany royalties, will be topics of discussion and benchmark sets will define the tracks in which intercompany transactions
will be designed.
2.2. Primary current controversies

The most relevant controversies affecting taxpayers subject to transfer pricing legislation are considered below.
C.i.f. + II (import tax) versus f.o.b. criteria for PRL method

This controversy involves the criteria for comparing actual transactions entered into versus the “parameter price” determined
using a transfer pricing method, in order to determine a possible transfer pricing adjustment for imports under a resale-minus
method. Because the PRL method became the predominant method used for imports, mainly due to the availability of data for
taxpayers, anything affecting the PRL method will most likely affect a significant number of taxpayers subject to transfer pricing
rules. The controversy is associated with several ambiguous articles[11], [12] in laws and administrative rulings, with several formal
and mathematical aspects involved. There are several different interpretations and economic, accounting, tax and legal arguments
used to defend each position. Should the transfer pricing adjustment be based on a simple price comparison on an f.o.b. basis,
or also consider the freight and taxes paid upon importation? The relevance of this discussion is associated with the increase of
disqualified expenses for tax deduction in case of inclusion of freight and insurance. In other words, the c.i.f. + import tax criterion
results in an increase in transfer pricing adjustment. This is the question under discussion in the administrative and judicial courts.
The authors have followed 295 cases involving transfer pricing matters in general at the level of the Administrative Council of Tax
Appeal (CARF), issued up to 30 April 2022. Among these cases, 54 specific cases were identified regarding this matter (c.i.f.
versus f.o.b.) and the authorities won in 42 cases (77.8% of the total). This indicates a clear trend in favour of the tax authorities,
meaning that freight and taxes should be added for comparison purposes when adopting the PRL method according to the tax
court. The authors have furthermore identified a few judicial cases that still do not show any clear trend with regard to decisions
reflecting a consistent judicial court interpretation of the statute.
Up to 30 April 2022, the authors identified five judicial court cases regarding this matter, one of which was favourable to the
taxpayer and four of which went against the taxpayer.
Law 12,715/2012 includes a provision with the objective to solve this debate by providing that freight and insurance should only
be considered as an acquisition cost component in the PRL calculation if freight and insurance are paid to related parties. The
introduction of this provision may be interpreted as an express recognition that even for fiscal years prior to 2013, freight, insurance
and import taxes should not be taken into account for PRL calculation purposes, if not paid to related parties, while on the other
hand, tax authorities can argue that only now the legislation expressly excludes such items from the calculation.
Normative Instruction 243/2002

Although most of this Normative Instruction was basically the consolidation of pre-existing administrative provisions, the tax
authorities used it to “change” the understanding of the mathematical formula to be used for PRL 60%. The literal formula provided
10. See https://web-archive.oecd.org/2019-12-18/540502-brazil-identifies-a-clear-pathway-for-aligning-its-transfer-pricing-framework-with-the-oecd-standard.htm

(accessed 20 July 2023).
11. Art. 18, para. 6 Law 9,430/1996: “The freight and the insurance costs – when the related burden is assumed by the importer – and the taxes paid on the
importation will be built into the cost, as deductible items.”
12. Art. 4, paras. 4 and 5 Normative Ruling 243/2002.

in the law[13] states that the 60% calculation basis is to be determined by deducting the “value added” in Brazil. In practice, many
taxpayers have significant concerns about a high 60% margin, which many consider almost impossible to observe. Normative
Instruction 243/2002 introduced a formula[14] that ignored the “value added” effect and therefore required that taxpayers obtain an
“actual” 60% gross margin in Brazil. Several simulations and assessments have shown that the difference between the two criteria
is tremendous, sometimes 100 times more, which naturally gave rise to strong resistance among taxpayers.
The debate in the tax courts focuses, on the one hand, on the inconsistency between the Normative Instruction and the Law,
meaning that Normative Instruction 243/2002 exceeded the scope of the Law when describing a different mathematical formula
while, on the other hand, the tax authorities argue that the Normative Instruction is a proper interpretation to effect the provisions of
the Law.
Decisions from the CARF in the last years indicate a more complex scenario. Among the 295 administrative cases followed up
to 30 April 2022, the authors could identify 143 administrative court cases that ended with a decision, 134 of which (93.7%)
favouring the tax authorities, and many decided with a tiebreak vote by the president of the panel, who is a representative of the tax
authorities. This bias suggests that more and more disputes will continue to judicial level. Some practitioners associate this trend
at the CARF with the massive change of judges that occurred some time ago as a consequence of new restrictions to attorneys
acting simultaneously in law firms and being judges.
Up to 30 April 2022, the authors identified 25 judicial court cases, 9 of which were favourable to the taxpayer, 13 of which went
against the taxpayer and 1 case partially favourable to taxpayers. It is important to note that it may take more than 10 years for
cases to be finally decided at the judicial level, which explains the small number of existing cases so far. The authors also identified
one case decided by the Superior Tribunal de Justiça (Superior Court of Justice, STJ). This is the highest court with jurisdiction
over non-constitutional matters. Considering that additional cases are scheduled to be evaluated in the following years, it is
expected that it will finally be possible to identify a trend in this long-term discussion about the interpretation of the legal validity of
Normative Instruction 243/2002, with respect to the application of the PRL method.
Due to the introduction of Law 12,715/2012, Normative Instruction 243/2002 was revoked by a new Normative Instruction
1,312/2012 and therefore this controversy is limited until calendar year 2012. Since the statute of limitation in Brazil is 5 years, the
last year under the old rules (2012) expired on 31 December 2017.
Due to the COVID-19 pandemic, administrative and judicial courts have dramatically reduced the number of new cases evaluated
and, as a result, the authors could not identify substantial change in the above statistics.
Adoption of PRL 20% by pharmaceutical companies

In 1997, the tax authorities issued the first Normative Instruction on transfer pricing (Normative Instruction 38/1997). It included a
restriction on the use of the resale-minus method, such that the PRL (at that time there was only PRL 20%, before the introduction
of PRL 60%) was not available where the imported material resulted in a “new product” to be (re)sold in the internal market.
Because this provision was not consistent with the wording of Law 9,430/1996 (prior to amendment by Law 9,959/2000)[15] and
considering the technical understanding adopted in the pharmaceutical business that an active ingredient is not “transformed”
13. Art. 18 Law 9,430/1996 (compare with arts. 12 and 13 of Normative Ruling 1,312/2012):
II. 'Resale price less profit' method (PRL). Arithmetic average of resale prices of goods or rights, less:
a) the unconditional discounts granted;
b) the sales taxes;
c) the commissions or brokerage fees paid; and
d) a profit margin of:
1. 60%, calculated over the resale price after the deduction of the items referred to above and the value added in Brazil, in case of imported goods used in
the production process (PRL 60%);
2. 20%, calculated over the resale price, in other cases (PRL 20%).
14. Art. 12 Normative Ruling 243/2002 and art. 57 Normative Ruling 1,312/2012.
15. II. ‘Resale price less profit’ method (PRL). Arithmetic average of resale prices of goods or rights, less:
a) the unconditional discounts granted;
b) the sales taxes;
c) the commissions or brokerage fees paid; and
d) a profit margin of 20%, calculated on the resale price.

into a “new product” when active elements are combined for purposes of preparation of commercially available drugs,[16] several
assessments were issued to taxpayers. After some years, the CARF (see discussion of relevant cases in section 3.3.) decided in
favour of the taxpayer in 22 administrative cases, among 27 identified. Since the new Law 9,959/2000 introduced PRL 60%, this
controversy is no longer relevant for most taxpayers.
Relevant matters with limited tax court’s precedents

Besides the fact that Brazilian legislation has adopted several unique criteria, very often controversial, it is interesting to note the
insufficiency of precedents on relevant matters to identify a trend in the courts, such as:
Fixed statutory margins. Although very often discussed among tax experts and taxpayers, the notorious adoption of fixed
margins is not a primary subject being discussed. The “formulary approach” adopted, that in practice ignores the arm’s length
principle, represents an obvious distortion of Brazilian TP rules. There are several reasons to explain this absence. In the
authors’ experience, dealing with several taxpayers, most of them prefer a practical approach avoiding litigation on matters
without precedent. Another reason is the fact that such discussion would necessarily take place at a judicial level and not at an
administrative level. The absence of a specialized judicial court is also considered as a concern among taxpayers given the fact
that TP is a very complex matter.
Tax treaties. Whether there would be limits to the application of domestic TP rules in the case of existence of an applicable tax
treaty, such as the requirement to follow the arm’s length approach instead of the formulary approach, this subject has very few
administrative cases decided and all of them against taxpayers.
Related-party concept. Brazil adopted a very broad concept of related party that goes beyond the corporate relationship. Indeed,
exclusivity arrangements for distribution may characterize a related party. Despite the arbitrary formal list of related parties, the
authors are not aware of discussions surrounding the imposition of TP consequences in concrete situations where parties act at
arm’s length.
Interest. The TP rules for interest were changed in 2012 and since then there are some open questions that may end up in
litigation. So far we are not aware of tax assessments and discussions related to the rules currently in force. It is somewhat
surprising that so far no major audit and dispute has been raised in this regard, considering the relevance of the subject.
Intangibles. According to Brazilian authorities, TP rules are applicable to transactions such as share deals, but there is a general
understanding that Brazilian TP methods are not customized for these transactions, making the compliance somewhat challenging
and uncertain. The fact that authorities have not systematically inspected taxpayers in this regard may explain why this matter is
absent from court litigation.
Safe harbour: Although the use of safe harbours by Brazilian exporters became widespread from 1997 until 2012, it is interesting
to observe that there are very few cases in which there was a dispute surrounding the application of such mechanisms to the
concrete cases.
Given the changes in the Brazilian transfer pricing legislation in 2012, which clarified most of the aspects regarding interpretation
of local rules, the authors could not identify substantial change in the above statistics.
Specifically regarding safe harbours, there has been increased attention and more frequent discussions among the OECD, the
Brazilian tax authority and taxpayers with a view of understanding to what extent safe harbours can be a mechanism to enable
a transition from current rules to OECD-like rules. Indeed, many Brazilian taxpayers have reported to the OECD the concern to
move to a new transfer pricing environment without having the desirable legal certainty and whether safe harbours could be used
to mitigate such legitimate concern. In this respect, the OECD and the RFB launched a joint survey on 30 July 2020 to seek public
input on transfer pricing issues relating to the design of safe-harbour provisions and other comparability considerations.[17]
Although COVID-19 caused the release of a series of tax reliefs aiming to reduce the dramatic economic effects of the pandemic,
no specific change was introduced to the transfer pricing rules. It is important to note that the combination of significant exchange
devaluation combined with eroded economic conditions in the internal market have potentialized the TP adjustments for many
taxpayers that faced limited conditions to increase their prices in order to reflect the increased costs. Indeed, TP methods such as
the resale minus method could trigger TP adjustments under such conditions and it is advisable to taxpayers to consider other TP
methods available to reduce the risk of increased TP adjustment.
16. A formal consultation of the tax authorities was filed at that time (1998-99) by representatives of the pharmaceutical business, backed by scientific appraisals and
opinions. One of the authors assisted in that project.
17. See https://www.oecd.org/tax/transfer-pricing/oecd-and-brazil-federal-revenue-authority-invite-taxpayer-input-on-transfer-pricing-issues-relating-to-the-design-of-
safe-harbour-provisions-and-other-comparability-considerations.htm (accessed 20 July 2023).

2.3. Audit process and milestones

2.3.1. Authorities involved
Transfer pricing audits in Brazil are generally conducted by RFB auditors. Although major audits have been conducted by the
Special Delegation for International Affairs (DEAIN), any federal auditor in charge of income tax is, formally speaking, authorized
to audit and assess a transfer pricing case. Few cases exist in which there is a more comprehensive discussion involving transfer
pricing auditors and customs auditors at the same time.
2.3.2. Joint audits

In a domestic perspective, Brazilian authorities have adopted some cooperation agreements among federal and state authorities
aiming primarily to exchange information and not necessarily joint audits. One example in this regard is the donation information
included in the individual income tax return that the Federal Revenue Authority provides to the State Revenue Authority to check if
the inheritances and gift state tax (ITCMD) was properly paid. In this sense, there is no joint audit but only information exchange/
cooperation.
Considering that cross-border joint audits presume the existence of treaties for exchange information, Brazil has limited experience
in this regard. Despite the fact that Brazil has 36 double tax conventions in force with exchange of information provisions, to the
authors’ knowledge, Brazil has no records of joint audits conducted with a focus on transfer pricing. An objective reason for this
fact is that Brazil does not follow the OECD Guidelines.
However, it is important to note that in the past few years Brazil has been taking some relevant steps towards information
exchange, by signing the following treaties:
- the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (CbC MCAA) (along with 86
other countries (status updated by the OECD on 23 July 2020));
- the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (CRS MCAA)
(along with 104 other countries (status updated by the OECD on 25 April 2019));
- a Bilateral Arrangement between the Competent Authority of the United States of America and the Competent Authority of the
federative Republic of Brazil on the Exchange of Country-by-Country Reports (CbC CAA);
- Agreement between the Government of the United States of America and the Government of the Federative Republic of
Brazil to Improve International Tax Compliance and to Implement FATCA (IGA);
- the Tax Information Exchange Agreement (TIEA) with Argentina, Switzerland, the United Kingdom, the United States (already
in force) and Uruguay (not yet in force at this moment); and
- the Convention on Mutual Administrative Assistance in Tax Matters (along with 146 other countries (status updated by the
OECD on 27 September 2022)).
To regulate the treaties executed by the Brazilian state, the Federal Revenue Authority has issued a number of ordinances, such
as Normative Instruction 1,689/2017, that indicate the process for sharing a summary of private rulings dealing with transfer
pricing matters with the tax authorities of treaty partner countries, but this has not yet been put into practice. In this perspective, it
is foreseeable that Brazil will either need to cooperate with other jurisdictions or engage in joint audits, especially given the global
trend epitomized by the BEPS Project. In 2018, the Brazilian tax authorities enacted Normative Instruction 1,846/2018 regulating
MAPs along with MAP Guidelines, thus expanding the number of regulations applicable to double taxation treaty matters.
A significant inclusion in Law 14,596/23 comprises a mandatory rule for Brazilian tax authorities to formally implement the agreed
result of MAPs. As formal regulation is provided by tax authorities, MAPs shall become a viable alternative to mitigate double
taxation treaties, including one-sided transfer pricing adjustments.
2.3.3. Audit timeline

Audits commence with the issuance of a mandate by the Head of the Tax Office for the taxpayer’s jurisdiction[18] to a specific tax
inspector (or tax inspectors) to initiate an audit of the taxpayer for a specific subject matter and period. The taxpayer is formally
notified of the audit initiation and will typically receive a request of information at that time. Additional information requests may
follow, depending on how the audit progresses. Once the tax inspector concludes the audit, he may issue an additional tax
18. Ordinance 4,066/2007.

assessment if a deficiency has been identified. Here, the taxpayer will be formally notified of the assessment, at which point the 30-
day period commences during which the taxpayer may object to the assessment administratively.
2.3.4. Rights and obligations of taxpayers

Generally, taxpayers are entitled to a due process of law in the collection of taxes, as well as to a number of constitutional and legal
rights, such as prospective application of the law and respect for acquired rights.[19] However, taxpayers are obliged to fulfil their
legally specified obligations, and to collaborate in tax inspections conducted under the terms of the law and regulations.
If the taxpayer does not fulfil its obligations, the law provides for penalties in the form of fines. There are penalties for non-
compliance with filing requirements as well as tax collection obligations. Criminal acts related to tax evasion are punishable
by detention,[20] but under the law, collection of the tax before a criminal charge by the public attorney’s office will pre-empt
detention.[21]
2.3.5. Rights and obligations of tax authorities

Tax authorities are entitled to respectful treatment by taxpayers, and are obliged to act under the terms of the law, impartially,
ethically and through formal procedures.[22]
2.3.6. Information used in tax audits

Typical information required in a transfer pricing audit includes:
- corporate structure;
- list of related parties with transactions in the audited period;
- databases containing all transactions entered into (transaction by transaction);
- commercial list of products;
- spreadsheets with calculations under transfer pricing methods, product by product;
- indication of the transfer pricing method adopted by product, and any possible adjustments;
- opening and closing inventories;
- depending on the method adopted, supplementary information (comparables, third-party data, etc.);
- contracts, invoices, accounting and tax books; and
- tax returns.
The tax inspector has the discretionary authority to decide what information and documents to request from the taxpayer to
achieve the objectives of the audit mandate.[23]
The taxpayer is obliged to facilitate the inspection, producing the necessary documents and information.[24] Documents to be
produced can be classified into the following categories:
- documents required by law to be produced by the taxpayer to fulfil its tax obligations (e.g. accounting journal and general
ledger, financial statements, tax calculation book, inventory book);[25]
- documents that are public in nature (e.g. articles of association);
- tax returns required by the regulations (e.g. ECF);
- electronic accounting files (e.g. ECD); and
19. Specifically, in the Constitution, articles 150 to 152 provide for limitations on the state’s taxing power (other taxpayer rights are identifiable throughout the
Constitution, such as in the provisions dealing with the process for the production of law and its entry into force). Decree 70,235 stipulates procedural rules for the
assessment of tax by authorities and the administrative court procedures, while Law 9,748 provides the general administrative court procedures supplementing
the former.
20. Law 8,137/1990.
21. Art. 34 Law 9,430/1996.
22. Art. 37 Federal Constitution.
23. Art. 288 Income Tax Regulations, Decree 9,580/2018.
24. Arts. 971 to 97932 Income Tax Regulations, Decree 9,580/2018.
25. Title VII Chapter. II (Taxpayer Bookkeeping) Income Tax Regulations, Decree 9,580/2018.

- the supporting documents and calculations used to fulfil the return filing requirements that should be kept by the taxpayer to
justify its filing positions.[26]
2.3.7. Confidentiality of information
All tax data is confidential;[27] this extends to transfer pricing documents and audits. All data provided by a taxpayer to the auditor
should be treated as confidential. A violation of this duty constitutes a criminal offence for the auditor or those responsible for the
data leakage.
2.3.8. Right of access to information

Situations have arisen where the tax authorities collected information that would not be publicly available to support assessments
based on a transfer pricing method other than the one relied on by the assessed taxpayer, after disqualifying such method.[28]
There has been one administrative appeals court decision dealing with this matter, where the conclusion was that the unavailability
of access to the data by the taxpayer justified the inapplicability of the method preferred by the tax authorities.[29]
Tax auditors have the right to request accounting books, tax books and electronic files, as well as the supporting documentation
(e.g. contracts, invoices) to perform the audit. The law provides for increased penalties if the taxpayer is notified of, but does
not respond timely to, requests for information and access to electronic data systems,[30] as well as penalties for not presenting
the electronic files in a timely manner, correctly and completely when requested.[31] There is some controversy regarding secret
comparables and the determination of transfer prices. Brazil has adopted some powerful databases (the so-called Siscomex,
Sistema de Comercio Exterior for imported and exported goods and, up to July 2020, the Siscoserv, for services and transactions
involving intangibles), in which all import and export transactions are to be registered along with all commercial information
associated to the invoice. The tax authorities may consequently search for comparable transactions covering all Brazilian trade for
several years, but in practice this has not been the priority focus in most audits, possibly also because of the commercial sensitivity
of the disclosure of prices adopted among competitors.
Although Brazil has not executed many double tax treaties recently, there is a tendency of executing agreements for the tax
authorities to exchange information, as mentioned in section 2.3.2.
2.3.9. Penalties
If the auditor determines a transfer pricing adjustment higher than that already determined by the taxpayer, this can have two
consequences. First, by recalculating the income tax and social contribution using the new transfer pricing adjustment, insufficient
tax may have been collected. In this case, the shortfall will be subject to penalties and interest (according to the Selic rate, a
domestic interbank basic interest rate). The rules applicable to penalties are: (i) 20% in the case of late payment of self-assessed
taxes before collection procedures are initiated by tax authorities; (ii) 75% in the case of collection procedures that are initiated
by tax authorities; (iii) 75% reduced to 37.5% in the case of full payment in 30 days without a dispute of amounts assessed for
collection; (iv) 75% plus 50% (equal to 112.5%) in the case of lack of cooperation during audit procedures; (v) 150% in the case
of “evident intent of fraud” by the taxpayer; and (vi) 150% plus 50% (equal to 225%) in the case of intent of fraud combined with
lack of cooperation. Second, by recalculating the income tax and social contribution, tax losses may be sufficient to absorb the new
adjustment such that there is no shortfall of collected tax. Here, the auditor will adjust the net operating loss (NOL) carry-forward to
check whether in future periods the reduced NOL may give rise to any tax shortfall. No carry-back is allowed. No penalties apply to
NOL reductions.
Another type of penalty was introduced together with the new corporate income tax return (ECF) that replaced the old return,
formerly known as DIPJ: a 3% penalty applicable on every single incorrect, incomplete or missing information, regardless of any
insufficiency in tax collection. Indeed, the ECF is much more comprehensive and detailed than the former return, and, in a context
of several transfer pricing schedules required in the ECF, this provision may cause unexpected liabilities if accuracy is not properly
observed.
26. Art. 265 Income Tax Regulations, Decree 9,580/2018.

27. Arts. 198 and 199 National Tax Code (Código Tributário Nacional), Law 5,172/1966.
28. This case involved the use of comparables obtained from other competitors of the taxpayer under audit. The procedure was as follows: the tax auditor selected
one specific product that was subject to transfer pricing tests and, using internal databases, identified other taxpayers, typically competitors, that imported similar
products. Then these taxpayers were required to present technical information about such products and consent to the use of this information for purposes of
support of the tax assessment against their competitor. One of the authors has assisted taxpayers in this situation.
29. Decision 108-09.551 (11 July 2008).
30. Art. 44, para. 2 Law 9,430/1996.
31. Art. 57 PM 2,158-35/2001.

2.3.10. Access to foreign-based information

Depending on the transfer pricing method, taxpayers may obtain and use data on foreign comparables. Generally speaking, all
foreign data must be translated into Portuguese and duly notarized to have legal effect in Brazil. This means that only registered
translators may perform the translation, and that a public notary must certify that the copies are truthful. Special consideration
should be made for the manufacturing cost plus profit (Custo de Produção mais Lucro, CPL) method, as significant controversy
exists as to the reasonability of data requirements. The tax authorities have issued guidance indicating a detailed level of foreign
information to be provided[32] (such as general ledger, copies of invoices, payroll and tax returns), which in practice is difficult
for taxpayers to accomplish. Moreover, taxpayers that attempted to adopt this method have realized that auditors will disregard
simplified or incomplete documentation, effectively forcing the adoption of the PRL method. The PRL is a method that is more
“transparent” and allows auditors to have full access to tax and accounting data. Taxpayers that still consider adopting the
CPL method must be aware of the likelihood of documentation being disregarded and the increasing aggressiveness by the tax
authority in the case of an audit.
The commodities methods PCI (Preço sob Cotação na Importação, commodity import method) and PECEX (Preços sob Cotação
na Exportação, commodity export method) were regulated by Normative Instruction 1,312/2012, which replaced Normative
Instruction 243/2002 and consolidated administrative provisions on transfer pricing.
As part of the G20 group, Brazil has participated in the discussions with the OECD that resulted in the well-known BEPS Project.
While Brazil is not a member of the OECD, Brazilian authorities have publicized the intention to incorporate in the domestic
legislation certain provisions inspired in the BEPS Actions Plans. Until the moment this chapter was written, the only concrete
measure taken was the introduction of the country-by-country (CbC) requirement applicable for the calendar year starting in 2016,
via Normative Instruction 1,681/2016. As already mentioned in sections 2.3.2. and 2.3.8., Brazil has executed several treaties
that will allow the exchange of information and may change the transfer pricing audit landscape. The new federal government has
stated explicitly since its inauguration in January 2019 that OECD membership is a priority for the new administration and several
political and technical actions were adopted with this objective. A detailed gap analysis related to TP regulations was performed
by the OECD together with the Brazilian authorities and results are being discussed to establish a road map. At this point, it is still
unclear if and when Brazil will finally be accepted as a new member by the OECD.
2.3.11. Burden of proof

Taxpayers are required to provide a significant amount of information through their tax returns and electronic filings, and are
expected to substantiate such information. If a taxpayer is delinquent in providing the relevant information and documentation
to support its transfer pricing positions, the tax authorities will be able to take an alternative position, and thus will be required to
substantiate that position. In extreme situations, where the taxpayer’s accounting documentation is unreliable, the tax authorities
may take the extreme step of estimating the taxable basis. The same auditor may also seek to perform the calculation under
the methods on his own; if the taxpayer has not completed the documentation or is not cooperative, that auditor may base the
assessment on his own calculation. Unfortunately, this is not an exceptional circumstance, as many taxpayers have still not
invested resources to compile a robust level of local transfer pricing documentation. Because the level of documentation may vary
from one extreme to the other (e.g. complete absence of information to absolute completion), the judge responsible for deciding
the case will have some flexibility to conclude whether a tax assessment is sound. Any flaws in the assessment may have various
consequences – although assessed amount of tax is never increased, it may possibly be reduced or eliminated entirely.
2.3.12. Statute of limitations

The statute of limitations for tax assessments in Brazil is 5 years from the last day of a given taxable period (typically 31
December).[33] In particular cases, such as fraud or where the taxpayer has not made any self-assessed tax payments, the statute
of limitations commences on the first day of the second year subsequent to the end of the taxable period.[34]
Under a second statute of limitations, no process for the collection of tax may be docketed in court after 5 years from the
assessment (counted from the date on which the assessment is definitive, such that the assessment may no longer be contested at
the administrative level).
32. The Receita Federal published so-called perguntas e respostas (frequently asked questions) on its website; see https://www.gov.br/receitafederal/pt-br/
assuntos/orientacao-tributaria/declaracoes-e-demonstrativos/ecf/perguntas-e-respostas-pessoa-juridica-2021-arquivos/capitulo-xix-irpj-e-csll-operacoes-
internacionais-2021.pdf (accessed 20 July 2023). Question 38 of Chapter XIX on International Operations addresses the documents necessary to support the
adoption of this method.
33. Art. 150 National Tax Code (Código Tributário Nacional), Law 5,172/1966.

2.3.13. Information requests

Requests for the production of documentation may only be made after the issuance of a mandate by the head of the Tax Office for
the taxpayer’s jurisdiction[35] to a tax inspector, providing for the review of a given taxpayer’s tax return (or, more broadly, a taxable
period). The mandate, which is a formal document the validity of which can be verified online through a pass code, authorizes the
tax inspector to review certain periods and tax matters. Thus, the tax inspector’s discretionary authority to request documentation
to be produced is limited by the boundaries of the mandate.
The mandate has a definite term for the inspection to be concluded, but may be extended as many times as necessary
(conceptually until the statute of limitations expires).
The main consequence of an ongoing inspection is the unavailability of self-assessment penalties to the taxpayer, which are
typically lower than the penalties applied by the tax authorities. Self-assessment penalties refer to the penalty applicable for late
payment (20% maximum).
2.3.14. Solicitor-client privilege

Any form of communication between a solicitor and his client is protected and treated as private, provided that such
communication is connected to the representation of clients.
The Brazilian Constitution respects this privilege, and the tax authorities have set formal procedures to initiate an audit and seek
collaboration from taxpayers for the production of relevant tax information.
2.4. Recommendations for taxpayers during a tax audit

The following general recommendations can be offered to taxpayers to promote effective dispute management:
- be prepared for an audit before the auditor arrives. Robust contemporaneous documentation with extensive coverage and
critical analysis of results is key when facing a transfer pricing audit;
- involve attorneys and advisors at the onset of an inspection. The right strategy will reduce unnecessary operational work and
increase the chances of success;
- provide data required after a critical analysis. Checking in advance for inconsistencies and mistakes will facilitate the audit
and help prevent misunderstandings;
- avoid extensive audits by providing correct information. Long audits increase the likelihood that the auditor will expand the
scope of the audit;
- offer helpful comments on the auditor’s preliminary findings, before the auditor issues an assessment;
- perform a realistic self-assessment to identify weaknesses before an assessment is formally issued and therefore be
in position to decide whether to initiate a defensive procedure (and be able to apply for a reduced penalty if there is no
expectation of winning the dispute); and
- consider changing transfer pricing methods before the audit starts, as new provisions introduced by Law 12,715/2012 do
not allow a change of method after the RFB audit is initiated, unless the method chosen by the taxpayer is disqualified as
inapplicable by the tax inspector, which will result in a 30-day term for the taxpayer to present an alternative method and
calculation, before the tax inspector unilaterally applies a suitable transfer pricing method.
3. Appeals and Litigation

3.1. Historical statistics
The Brazilian Tax Office has disclosed, through annual reports denominated “Plano Anual da Fiscalização”, certain information
regarding tax audits and assessments, however, not specifically referencing transfer pricing cases.
Table 1 indicates some fluctuation in tax collection volumes, with a significant increase in 2017.
Table 1: Amounts assessed on an annual basis and yearly percentage decrease/increase
35. Ordinance 6,478/2017.

Year Amounts assessed (BRL) Variation (%)

2013 181,616,552,959.00 -
2014 144,556,799,956.00 -20.40
2015 125,227,321,703.00 -13.40
2016 117,794,178,958.00 -5.90
2017 199,127,165,381.01 69.00
2018 181,587,828,818.51 -8.80
2019 196,513,455,587.94 8.20
2020 173,317,153,536.28 -11.80
2021 187,664,937,460.47 8.30
2022 131,692,601,770.21 -29.80
Source: Relatório Anual de Fiscalização - Resultados 2022 Planejamento 2023, by the Brazilian Federal Revenue.
The following table summarizes the variation of the number of tax assessments and amounts assessed between 2021 and 2022.
Table 2: Variation of the number of tax assessments (individuals and legal entities) and amounts assessed between 2021 and
2022.
Consolidated 2021 2022 Variation
Number of Amounts assessed Number of Amounts assessed Number of Amounts
assessments (BRL) assessments (BRL) assessments (%) assessed (%)
External audits 8,497 188,011,241,915 4,587 131,675,813,171 -46.02 -29.96
Review of returns 398,841 11,310,673,211 244,109 5,069,186,532 -38.80 -55.18
Grand total 407,338 199,321,915,126 248,696 136,744,999,703 -38.95 -31.39
The following table, Table 3, shows the trend of continued increase in the percentage of tax audits ending in tax assessments over
the period of time from 2011 to 2015, followed by a slight decrease between 2015 and 2021 and a further decrease in 2022.
Table 3: Percentage of tax audits resulting in tax assessments between 2011 and 2022
Year 2011 (%) 2012 (%) 2013 (%) 2014 (%) 2015 (%) 2016 (%) 2017 (%) 2018 (%) 2019 (%) 2020 (%) 2021 (%) 2022 (%)
Percentage of tax 89.35 89.53 91.14 92.22 92.40 91.47 91.75 91.60 91.55 91.62 87.56 86.3
audits resulting in
assessments
The next table, Table 4, breaks down the statistics per industry sector about the number of tax assessments and amounts
assessed, concerning fiscal years 2021 and 2022. The increase in number of audits is much greater than the amount assessed,
indicating that a larger number of taxpayers were audited but the amount of tax collected did not increase in the same proportion.
Also, there was a significant change in the business sectors audited and assessed. In most sectors there was a reduction in the
amount assessed.
Table 4: Variation of the number of tax assessments and amounts assessed between 2020 and 2021, per industry sector

Description 2021 2022 Variation

Corporate taxpayer's Number of Amount assessed Number of Amount assessed (BRL) Number of Amounts
industry assessments (BRL) assessments assessments (%) assessed (%)
1 Trade 1,261 23,441,117,959 827 25,767.373.808 -34.42 9.92
2 Services 1,277 19,892,223,307 713 16,907.679.490 -44.17 -15.00
3 Industry 1,487 81,745,124,113 811 51,624.365.000 -45.46 -36.85
4 Transportation 345 4,858,119,265 181 2,937,689,346 -47.54 -39.53
5 Construction 251 2,496,233,520 126 1,709,351,976 -49.80 -31.52
6 Utilities 102 4,382,622,432 64 2,995,416,581 -37.25 -31.65
7 Financial services 118 21,446,439,572 99 19,763,963,922 -16.10 -7.85
8 Investment holdings 120 12,280,823,656 62 1,515,866,646 -48.33 -87.66
9 Other 702 10,449,998,816 325 5,064,553,490 -53.28 -51.54
Total corporate taxes 5,663 180,992,702,640 3,208 128,286,260,259 -43.35 -29.12
Penalties 412 112,600,909 196 18,262,599 -52.43 -83,78
Corporate tax return audits 10,618 3,844,581,237 31,452 3,061,959,046 196.21 -20,36
Total corporate taxpayer 16,693 184,949,884,786 34,856 131,366,481,904 108.81 -28,97
audits
3.2. Appeals and litigation process

There are two types of courts that handle tax litigation in Brazil.
Administrative Council of Tax Appeals – “CARF”

The administrative courts are typically the first to rule on tax assessments, and do so without the taxpayer having to pay the tax
in advance. All assessments may be contested before administrative courts. The taxpayer’s objection will be decided at the
first level by a panel of tax inspectors. Once a decision is served, the taxpayer may appeal to the CARF, which is composed of
representatives of taxpayers and tax inspectors. The administrative tax courts review assessments and follow the procedure
stipulated in Decree 70,235/1972. The taxpayer presents its appeal in writing; at the CARF the taxpayer has the right to distribute
written briefs to the judges and to make oral arguments before the court. A majority decision will typically put an end to the
administrative litigation unless there are contradictory decisions between panels of the CARF. In that case, special recourse may
be had to the procedure aimed at harmonizing the understanding of the law at the level of the administrative courts.
The scope of analysis by the administrative courts emphasizes the formal and substantive aspects of the assessment, the
proof supporting the assessment and the possible interpretations of tax law. The administrative courts do not decide issues on
constitutional matters or against the text of a law passed by Congress.
A taxpayer may submit evidence to the administrative court to support its objection to the assessment as long as (1) the taxpayer
demonstrates that it was incapable of presenting the evidence together with its initial objection to the assessment, (2) the evidence
relates to a new fact or (3) the proof refutes arguments that were not part of the assessment. While a case is expected to be either
decided definitively at any court level or appealed to a higher court that is competent to review the decision, procedural issues may
take a case back to a previous level if there has been a procedural error that can be corrected.
Due to the COVID-19 pandemic, many tax measures have been implemented to postpone deadlines and provide some temporary
relief to taxpayers notoriously affected by the unprecedented impacts of the pandemic. In this perspective, Ordinance 543, issued
in March 2020 and amended several times since then, postponed the deadlines of certain procedural acts and administrative
procedures and recognized the logistics limitations associated with the mandatory social distancing. Ordinance 4,105, issued in
July 2020, amended Ordinance 543 and formalized the suspension of certain administrative procedures executed by the RFB
until 31 August 2020. Ordinance 4,261 issued on 28 August 2020 replaced the above-mentioned ordinances and established the
general rules for remote or physical attendance by tax authorities, for services provided by the RFB and special circumstances for
the official post’s activities.

Judicial courts
In the judicial court system, taxpayers have the opportunity to litigate disputes involving issues of constitutionality and legality, in
addition to errors in the assessment, and evidentiary matters.
Decisions issued by the administrative courts, if favourable to the taxpayer, pre-empt the Federal Attorney’s Office from litigating
the case before the judicial courts. Although there have been instances where the Federal Tax Attorney’s Office has sought an
exception to this rule, such efforts have been without success to date. If a decision of an administrative court is not in favour of the
taxpayer, the assessed tax becomes payable. Once the assessed tax is payable, the taxpayer is required to make a deposit or to
post liens on its property to secure collection of the tax before starting the judicial-level litigation.
In the judicial court system, after the second level of appeal, the taxpayer still has recourse to the Superior Court (the court of
last instance to decide on the interpretation of laws passed by Congress) and the Supreme Court (the court of last resort for
Constitutional matters).
There are different types of actions available to the taxpayer to contest a tax collection that breaches the terms of the law (e.g.
injunction, ordinary action, declaratory judgement,[36] opposition to collection,[37] tax repayment claim,[38] writ of mandamus[39] and
annulment action[40]). The particulars of the case determine which is the most appropriate procedure to be followed to secure the
taxpayer’s rights. The procedural details depend on the specifics of the action filed by the taxpayer.
3.3. Notable court decisions

Due to the extremely slow litigation procedures in Brazil, there is a significant delay in the time during which matters and disputes
are finally solved between taxpayers and authorities. Indeed, there is a huge inventory of unsolved and ongoing disputes and very
frequently tax litigations can take up to 15 years or even longer. The issue is not only the speed, but also uncertainty. As time
goes by, judges change, authorities change, interpretations evolve, the fiscal deficit may increase pressure, which all combined
implicates random trends in jurisprudence. Often, trends in favour of the taxpayer may later change direction, as well as vice versa
(albeit less often).
There are multiple and historical reasons to explain this environment. The fact is that transfer pricing matters present additional
challenges for interpretation as most administrative and judicial judges are not familiar with the extensive list of details involved in a
transfer pricing dispute.
Considering the above, the authors have considered in this section court decisions that reflect the evolution of the jurisprudence,
but it is always advisable to consider the possibility of a drastic trend change in the decision until the ultimate decision occurs.
Since the enactment of Brazilian transfer pricing rules, there has been heated debate on whether they contradict the Brazilian
treaties based on the OECD Tax Convention on Income and Capital (OECD Model). A number of Normative Instructions, issued
by the Brazilian tax authorities in response to taxpayer consultations, supported the position that there is no contradiction between
Brazilian transfer pricing rules and the OECD Model.[41] The CARF reached a similar conclusion in Decision 101-96.665.[42]
Decision 103-22.016[43] dealt with the possibility of employing alternative methods to those expressly provided for under Brazilian
transfer pricing legislation; the Court ruled against the taxpayer, supporting the exhaustiveness of the transfer pricing methods
provided by law.
One of the more heavily contested issues since the enactment of Brazilian transfer pricing legislation concerns the possibility for
taxpayers to rely on the resale-minus price method in instances where there was some form of modification of the imported product
(often involving pharmaceutical companies that imported active ingredients that were merely formulated locally to be suitable for
distribution to consumers).
Processo de Consulta 22/2008[44] informed the enquiring taxpayer that exclusively repackaging a product was considered pure
resale, while additionally branding the product was considered a modification and aggregation of value to the product, thus falling
36. Civil Procedural Code, Law 13,105/2015.

37. Law 6,830/1980.
39. Law 12,016/2009.
41. Processos de Consulta 12 (2 Aug. 2000); Processos de Consulta 19 (31 Oct. 2000); and Processos de Consulta 20 and 21 (3 Nov. 2000).
42. Decision 101-96.665 (8 Aug. 2008).
43. Decision 103-22.016 (8 May 2008).
44. Processo de Consulta 22/2008 (20 Aug. 2000).

under the modified resale-minus method applicable to local production, which requires that a larger margin be earned by the
taxpayer. Processo de Consulta 16/2008[45] reached a similar conclusion.
Before the modified resale-minus method (PRL 60%) was enacted by Law 9,959/2000, a number of companies (mainly in the
pharmaceutical sector) were assessed under the argument that the resale-minus method (original PRL 20%) as used by the
taxpayer was not appropriate because the specific good under analysis had been modified. In other words, the transaction
was not a pure, straightforward resale of a finished good in the internal market. However, the very specific case involved active
ingredients used in the pharmaceutical business in which other elements (neutral, non-reagent chemical media, such as water)
are used merely as a “package” of the active ingredient. The CARF supported the position that the PRL method as originally
stipulated in the law was appropriate in instances where there are modifications to the imported product.[46] While Decision
9101-001.349 reaffirmed this position, very likely settling the matter for fiscal years before Law 9,959/2000 entered into effect,
Decision 1302-00.915 readdressed this issue, concluding by a majority decision, that the repackaging of products in Brazil is
subject to PRL 60%, not being characterized as pure resale. Although this issue became one of the major TP disputes in Brazil,
there are multiple decisions in favour of and against taxpayers, sometimes because of the fact pattern and sometimes because of
a tie-breaker rule with a clear bias in favour of the authorities. Examples that were decided in favour of taxpayers are the Eli Lily
(CARF case 1201001.402) and Pfizer (CARF case 16561.000185/2007-11) cases and cases decided against the taxpayer are for
instance the Schneider Electric (CARF case 2003.61.00.017381-4) and McDonalds (CARF case 16561.720065/2017-14) cases.
Because this matter has been scaled from an administrative level (CARF) to a judicial level, these administrative jurisprudences
do not represent a clear trend on what will be the ultimate and definitive trend in the courts. For example, some taxpayers could
refer to a preliminary injunction favourable to taxpayers that could turn into to an administrative decision favourable to the tax
administration (see Schering Plough Ind. Farmaceutica LTDA – TRF judicial case 5028207-05.2018.4.03.6100).
Decision 108-09.551[47] also dealt with the issue of whether the tax authorities could rely on information collected from third
parties to support an assessment against a taxpayer, where the assessed taxpayer could not have access to such information
contemporaneously with its tax calculation and return filing. The CARF decided in favour of the taxpayer to forbid the use of secret
comparables.
While transfer pricing law allows the taxpayer to rely on whichever method results in the smallest adjustment (instead of a best-
method approach), Decisions 103-22.016,[48] 105-16.472,[49] 105-16.711,[50] 105-17.103[51] and 1102-00419[52] stated that the
tax authorities were not required to calculate the taxpayer’s transfer prices under different methods to demonstrate that the
assessment was based on the transfer pricing method that resulted in the smallest adjustment possible. On the other hand,
Decision 107-09.411[53] concluded differently, affirming that the tax assessment must be based on the transfer pricing method that
results in the smallest adjustment possible, or demonstrate the impossibility of applying other transfer pricing methods given the
circumstances.
Decision 1102-00419[54] addressed the question whether two Brazilian affiliates were considered related parties for transfer pricing
purposes. In a highly controversial decision in which judges split on opposing sides, the tie-breaker vote issued by the presiding
judge, a representative of the RFB, decided that two Brazilian entities are not related for transfer pricing purposes, therefore
confirming an assessment issued against a taxpayer that disputed the application of PRL method based on sales to Brazilian
affiliates.
The tie-breaker vote (voto de qualidade) by the CARF has attracted significant debate due to the general perception of bias in
favour of authorities. Besides multiple statistics used by both sides to support arguments in favour and against the mechanism, a
new legislation was approved (Law 13,988/2020) that abolished the procedure. However, this change has not put an end to the
debate, as new disputes in the courts have started and new bills were presented aiming to reintroduce it. It is too early to anticipate
the outcome but, in practical terms, recent decisions have already reflected the elimination of the mechanism. The Supreme Court
decision on the constitutionality of abolishing the tiebreaker vote is expected in 2023.
In 2022 Brazil had its first transfer pricing case evaluated by the Superior Court of Justice, which concerned the main Brazilian
transfer pricing controversy. The Normative Instruction 243/2002 wording regarding the PRL 60 calculation method (see section
2.2.) resulted in substantial differences over the eventual tax adjustments calculated based on the formula disclosed in Law
45. Processo de Consulta 16/2008 (22 Apr. 2008).

46. E.g. Decisions 101-94.859 (8 Sept. 2005); Decision 101-94.863 (21 Oct. 2005); Decision 107-08.725 (25 Apr. 2007), and Decision 108-09.551 (7 Nov. 2008).
47. Decision 108-09.551 (11 July 2008).
48. Decision 103-22.016 (8 May 2008).
49. Decision 105-16.47 (24 Oct. 2008).
50. Decision 105-16.711 (4 Nov. 2008).
51. Decision 105-17.103 (9 Mar. 2009).
52. Decision 1102-00419 (14 Oct. 2011).
53. Decision 107-09.411 (11 Mar. 2008).
54. Decision 1102-00419 (14 Oct. 2011).

9,430/1997, and it was in favour of the taxpayer, and in the opposite direction of the CARF trend of recent decisions on the same
matter.
The court decision was made on 4 October 2022 in favour of Janssen Cilag. The matter was the application of the PRL
60 method applied by the company for the fiscal year 2002 transfer pricing documentation. The matter was previously
decided by the third Regional Federal Court, TRF, which decided against the taxpayer back in 2011 (see TRF judicial case
0006125-90.2003.4.03.6100/SP).
3.4. Advantages and disadvantages

Whenever a taxpayer believes that a tax assessment is formally or substantially unsound, the assessment is generally contested.
Advantages of contesting an assessment include:
- the ability to postpone payment of the taxes;

- the ability to postpone the deduction of taxes in situations where the taxpayer is in a tax loss position (where the
corresponding deduction would serve only to increase the tax loss pool) to a more opportune time from a deduction
perspective; and
- the possibility that the federal government provides an amnesty programme, allowing the payment of assessed taxes at a
discount.
Disadvantages of contesting an assessment include:
- the potential cost to be incurred, both directly through fees for professionals (e.g. attorney’s fees) directly dedicated to the
dispute and indirectly through the efforts of the taxpayer’s personnel dedicated to the matter or required to devote time to
understanding it and evaluate its consequences;
- the financial cost associated with litigation, considering the steep official interest rates charged on assessed taxes;
- non-deductibility of disputed taxes for income tax purposes while not collectible by the Federal Attorney’s Office;
- the need to keep documentation for an extended period of time to support the objection to the assessment;
- the need to closely monitor litigation to have access to tax certificates to allow participation in bidding processes, and to have
access to certain sources of financing;
- possible liens attached to assets, so as to prevent the free disposition thereof; and
- public access to information on the litigated cases.
4. Mutual Agreement Procedure and Arbitration

Members of the Inclusive Framework on BEPS, including Brazil, commit to the implementation of the Action 14 minimum standard
and to have their compliance with the minimum standard reviewed and monitored by their peers. The BEPS Action 14 minimum
standard seeks to improve the resolution of tax-related disputes between jurisdictions. Brazil’s Stage 1 peer review report
was published in November 2019[55] and Stage 2 peer review report in October 2021.[56] These reports provide an accurate
assessment regarding challenges and limitations of implementing an effective MAP programme in Brazil. Indeed, there is a very
limited experience in this field, and it seems that taxpayers are still evaluating the matter.
As mentioned in section 2.3.2., Law 14,596/23 comprises rules that will allow MAPs to become a viable alternative to mitigate
double taxation treaties and to promote an effective MAP programme in Brazil.
According to Brazil’s Stage 1 peer review report:
Its treaty network is partly consistent with the requirements of the Action 14 minimum standard, except mainly from the fact
that:
55. OECD/G20, Making Dispute Resolution More Effective: MAP Peer Review Report, Brazil (Stage 1) – Inclusive Framework on BEPS: Action 14 (OECD 2019),
available at https://www.oecd.org/brazil/making-dispute-resolution-more-effective-map-peer-review-report-brazil-stage-1-12acb5ea-en.htm (accessed 20 July
2023).
56. OECD/G20, Making Dispute Resolution More Effective: MAP Peer Review Report, Brazil (Stage 2) – Inclusive Framework on BEPS: Action 14 (OECD 2021),
available at https://www.oecd.org/brazil/making-dispute-resolution-more-effective-map-peer-review-report-brazil-stage-2-30e8a050-en.htm (accessed 20 July
2023).

- The majority (80%) of its tax treaties neither contain a provision stating that mutual agreements shall be implemented
notwithstanding any time limits in domestic law (which is required under Article 25(2), second sentence), nor the
alternative provisions for Article 9(1) and Article 7(2) to set a time limit for making transfer pricing adjustments.
- More than half (51%) of its tax treaties do not contain the equivalent of Article 25(3), second sentence of the OECD Model
Tax Convention (OECD, 2017) stating that the competent authorities may consult together for the elimination of double
taxation for cases not provided for in the tax treaty.
- Less than a quarter (20%) of its tax treaties do not contain the equivalent of Article 25(1), as the timeline to file a MAP
request is shorter than three years from the first notification of the action resulting in taxation not in accordance with the
provision of the tax treaty.
On 18 October 2021, the OECD released the Stage 2 peer review report of Brazil. Stage 2 focuses on monitoring the follow-up
of any recommendations resulting from Brazil’s Stage 1 peer review report. The report concludes that Brazil has solved some
of the identified deficiencies and that it has clear and comprehensive guidance on the availability of MAP and how it applies this
procedure in practice.[57]
In order to address the above deficiencies, Brazil reported that it intends to update all of its tax treaties to be compliant with the
requirements under the Action 14 minimum standard via bilateral negotiations. Such bilateral negotiations have already been
initiated or are envisaged to be initiated for all of those treaties.
The BEPS Action 14 minimum standard also requires OECD member countries to:
- carry out timely and complete reporting of MAP statistics [58] based on a new MAP statistics reporting framework; and
- publish their MAP profiles [59] pursuant to an agreed template.

There are no official statistics on mutual agreement procedures issued by the Brazilian authorities. Although the Brazilian tax
authorities do not disclose official statistics regarding MAP, the Brazilian authorities submit MAP statistics to the OECD every
year. According to the 2021 MAP statistics submitted by Brazil,[60] 41 transfer pricing MAP cases were pending with the Brazilian
tax authorities at the end of 2021 and the authorities only closed four transfer pricing MAP cases that year, in three of which the
resolution is labelled “withdrawn by Taxpayer”. Therefore, there is very limited information available on MAPs and hopefully more
taxpayers will explore this possibility under the Normative Instruction 1,846/2018.
4.2. Mutual agreement procedure

The MAP has been regulated, in the Brazilian domestic law, with Normative Instruction RFB 1,669/2016, updated by Normative
Instruction 1,846/2018 from 2018.
4.2.1. Notification process and conditions to the request

In December 2018, the Brazilian tax authorities published a Manual of Mutual Agreement Procedures[61] to complement the
information provided by Normative Instruction 1,846/2018. This Manual provides further guidance regarding application and forms
that need to be prepared by the taxpayer.
4.2.2. Time limits

See section 4.2.
57. OECD/G20, Making Dispute Resolution More Effective: MAP Peer Review Report, Brazil (Stage 2) – Inclusive Framework on BEPS: Action 14, Executive
summary, p. 9 (OECD 2021), available at https://read.oecd-ilibrary.org/taxation/making-dispute-resolution-more-effective-map-peer-review-report-brazil-
stage-2_30e8a050-en#page11 (accessed 20 July 2023).
58. For details, see http://www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics.htm (accessed 20 July 2023). The 2021 MAP statistics for Brazil are
available at https://www.oecd.org/tax/dispute/2021-map-statistics-brazil.pdf (accessed 20 July 2023).
59. For details, see http://www.oecd.org/tax/beps/country-map-profiles.htm (accessed 20 July 2023) The MAP profile of Brazil is available at https://www.oecd.org/
tax/dispute/brazil-dispute-resolution-profile.pdf (accessed 20 July 2023).
60. For more information, see the 2021 OECD MAP statistics for Brazil, available at https://www.oecd.org/tax/dispute/2021-map-statistics-brazil.pdf (accessed 20
July 2023).
61. The manual can be accessed at https://www.gov.br/receitafederal/pt-br/acesso-a-informacao/legislacao/acordos-internacionais/map/manual-map_en.pdf
(accessed 20 July 2023).

4.2.3. Penalties and interest

See section 4.2.
4.3. Arbitration
Brazil does not have provisions for arbitration of tax matters. Arbitration is in fact forbidden for public matters and is available only
among private parties.
In September 2020, a bill proposing the introduction of an arbitration procedure during the audit procedure was presented at
the Brazilian Senate (Bill 4468/20). Such arbitration procedure could be requested either by the taxpayer or the tax authorities.
According to the proposition, the arbitration would not be applicable to tax assessments already issued and matters would
be decided by three judges, one indicated by the tax authorities, one by the taxpayer and the third one indicated by common
agreement of both judges or indicated by the arbitration chamber that should necessarily be based in Brazil.
Although this is an innovative proposition, it is difficult to evaluate the chances of this bill being approved by the Senate, the
Chamber of Deputies and finally not being subject to President’s veto. Indeed, there is a long tradition of Brazilian public and
administrative law arguing that the public interest should not be subject to any kind of negotiation. Moreover, this bill is not
sponsored by the tax authorities and without their support, it seems unlikely to be approved.
5. Advance Pricing Agreements

Up to late 2016, Brazil had no specific provisions for advance pricing agreements (APAs). Article 5, paragraph 2 of Normative
Instruction RFB 1,669/2016 of 9 November 2016 mentions that an APA may be subject to appreciation by the tax authorities.
However, the corresponding proceedings have not yet been regulated.
Since the introduction of transfer pricing legislation in 1996, this issue has been discussed among tax practitioners when
comparing Brazilian legislation and international experience. However, because the Brazilian tax system (federal Constitution
and regulations) does not authorize Brazilian authorities to “negotiate” with taxpayers (i.e. it is forbidden for authorities not to
attempt to receive all taxes that are due by taxpayer), the adoption of APAs in Brazil is quite difficult. In fact, the introduction of an
APA in Brazil would demand not just one specific provision in law, but also more structural changes to the Brazilian tax system to
overcome the general restriction to charge “all” possible tax under an APA and therefore avoid that a future APA would become
subject to dispute itself. Moreover, the structure of the RFB would naturally need to be adapted to make APAs feasible.
The new transfer pricing rule also sets the basic rules involving formal consulting process by taxpayers to the RFB to advance the
evaluation of intercompany transactions as part of the measures to increase legal security. With specific regulation tax authorities,
Brazil shall have the rules to perform APAs in the near future.
5.2. Advance pricing agreement process

See section 5.1.
5.2.1. Governmental agencies involved

See section 5.1.
5.2.2. Domestic regulations; bilateral or multilateral

See section 5.1.
5.2.3. Coverage
See section 5.1.
5.2.4. Process
See section 5.1.
5.2.5. Fees
See section 5.1.

5.2.6. Timing for filing requests for advance pricing agreements

See section 5.1.
5.2.7. Timeline for unilateral advance pricing agreement

See section 5.1.
5.2.8. Timeline for bilateral advance pricing agreement

See section 5.1.
5.2.9. Critical assumptions

See section 5.1.
5.2.10. Withdrawals
See section 5.1.
5.2.11. Agreement with taxpayer

See section 5.1.
5.2.12. Revocation, revision and renewal

See section 5.1.
5.2.13. Annual compliance reporting

See section 5.1.
5.2.14. Public disclosure of advance pricing agreements

See section 5.1.
5.3. Practical experience with advance pricing agreements and advance tax
rulings
See section 5.1.
5.4. Advance pricing agreement in times of economic downturn

See section 5.1.
5.5. Special advance pricing agreements

See section 5.1.
5.6. Advantages and disadvantages

See section 5.1.
6. Recommendations
Due to the peculiar transfer pricing approach adopted by Brazilian legislation, it is common for international tax professionals
to become frustrated with some inflexible legal provisions. Based on experience with several audits, assessments and appeal
procedures since the Brazilian transfer pricing rules were enacted, the authors provide the following recommendations.
First, do not underestimate the relevance of transfer pricing compliance. Proper and proactive compliance will certainly put the
taxpayer in a much more comfortable position to face an audit. Due to the transactional track record required, a transfer pricing
project can easily take several months to be concluded, and therefore proper planning is critical to meet official deadlines.

Second, learn from the past. Unfortunately, the authors have seen taxpayers incurring transfer pricing adjustments and risks
year after year without the ability to change the course of history. In fact, it is necessary not merely to “clean up” the open 5 years
corresponding to the statute of limitations, but also to extract some lessons from the past. What products are responsible for the
majority of adjustments? What are the business reasons? Why not renegotiate prices with related-party suppliers? Are there other
feasible transfer pricing methods that could reduce the adjustment? What can be done differently now so as not to repeat past
problems?
Third, adopt permanent and continuous management of transfer pricing, and not just once a year or when under audit. Designating
a part-time or full-time professional member of staff as a dedicated “transfer pricing manager” increases the level of proactivity.
The best practices involve an increased awareness of several areas within the company (such as legal, contracts, commercial,
treasury, etc.) that very often give rise to transfer pricing risks without the taxpayer being aware of it. Periodic internal presentations
are also useful.
Fourth, know the rules, play the game. Some taxpayers spend a lot of time, energy and money complaining about the rules
and trying to find shortcuts so as to avoid all difficult compliance. Unfortunately, such hard work is inevitable and the sooner it is
commenced, the better. An in-depth understanding of the rules and documentation requirements may allow more strategic analysis
prior to a transfer pricing audit.
There is no doubt that transfer pricing has become a concrete risk for numerous taxpayers in Brazil. From an initial belief that tax
authorities could not really audit such complex transactions in 1997, one sees today that taxpayers realize the huge potential of
collection associated with transfer pricing rules. As the country continues to develop and attract more and more foreign investors,
there is increasing frustration among taxpayers that it is time for an in-depth review of the rules, as both the tax authorities and
taxpayers have accumulated substantial theoretical and practical knowledge about transfer pricing.
Law 14,596/23 allows the application of the OECD Guidelines and the arm’s length principle on intercompany transactions carried
out after 1 January 2024, or carried out after 1 January 2023 for taxpayers that decide for an early adoption of the new Brazilian
transfer pricing rules.
7. Case Study
The Weight Resources group is a multinational group resident in Wonderland, a low-tax jurisdiction. The group is in the business of
developing, manufacturing and distributing weight loss supplement products. One of their products is a weight loss pill registered
under the trademark “Less is More”. It is the crème de la crème of weight loss supplement products, and has proven to be one of
the group’s best sellers. It contains a secret active ingredient, known as “Minimynox”.
Facts:
- The parent company of Weight Resources Group (resident in Wonderland) discovered Minimynox (the active ingredient) at its
research facilities. It also developed the Less is More product in its commercial form there, obtained the necessary patents,
conducted all trials, invented the technology for the manufacture of the active ingredient, was the first to launch the product
outside Wonderland and has developed the worldwide marketing strategy.
- LocalCo is a company resident in the case study country, and a distributor of Less is More. It purchases the product in
market-ready form directly from its parent company. There is a licence agreement between LocalCo and its parent company,
under which LocalCo pays the parent a royalty (7% of sales) for the exclusive distribution rights in the case study country.
- LocalCo took the lead in acquiring approval of regulatory authorities for bringing Less is More to the local market. It also
implemented the marketing strategies established by the parent company and introduced the product on the local market
by conducting on-site sales activities using its sales staff. The customer base includes first-tier (upper-end market) shops,
private clinics and wellness centres. Regulatory approval was obtained in 2015 and LocalCo began selling the product in
2016.
Profits for LocalCo are as follows (all figures in millions):
2015 2016 2017 2018 2019 2020
Sales 0 150 220 270 310 360
COGS 0 100 150 175 205 240
Gross profits 0 50 70 95 105 120
Gross profits (as a percentage of sales) n/a 33.3% 31.8% 35.2% 33.9% 33.3%
Operating expenses 25 50 60 70 71 77

2015 2016 2017 2018 2019 2020

Royalty expenses 0 13.3 15.4 18.9 21.7 25.2
Net profits −25 −13.3 −5.4 6.1 12.3 17.8
Net profits (as a percentage of sales) n/a −8.9% −2.5% 2.3% 4% 5%
Questions and answers

1. Based on the above facts, looking back, what action could LocalCo have taken to address the transfer pricing risks when it first
established operations and/or began to distribute “Less is More” through LocalCo (documentation, APA, etc.)? What would be the
relative advantages or disadvantages?
Considering Brazilian transfer pricing legislation, the described fact pattern suggests a classical case for the resale-minus
approach (PRL 40% for all years). But before discussing the specific issues associated with the adoption of PRL 40%, the pros
and cons of each transfer pricing method in this present case should be considered.
As the case considers fiscal years 2015 to 2020, the analysis of the case study has taken into account the changes to the PRL
method introduced by Law 12,715/2012 that entered into effect for fiscal years 2013 onward.
Brazilian law does not impose the best-method rule for products that are not regulated as commodities (subject to PCI and PECEX
from 2013 onward) and therefore taxpayers may choose the method that results in the lowest adjustment possible. Obviously, it is
possible to achieve this conclusion if (and only if) the taxpayer actively and timely explores all possibilities and methods.
PIC/CUP method
An initial challenge to adopting this method relates to the concept of “product” under Brazilian law and issues of comparability. As
mentioned, there is no clear or conceptual definition of “product” and for the present case, based on the fact that LocalCo imports
items in “market-ready form”, the first approach would be to consider each different item imported as a single product. This does
not mean a transaction-by-transaction test, because the methods should be applied considering the annual average amounts.
In practice, some interesting situations may occur. For example, it is common to see pharmaceutical products that can be sold
in different concentrations (100 mg or 50 mg), different presentations (pills or injectable), different package sizes (200 ml or 100
ml) and different “vehicles” (gel or liquid), among others. The difficulty here is to adapt these realities to the definition of “similar
products” provided by the PRL method. For the sake of adoption of the CUP (Preços Independentes Comparados, PIC) method,
two products will be deemed to be similar if they meet (cumulatively) three criteria, namely that they (i) have the same nature and
function, (ii) can replace each other and (iii) have similar technical specifications. This definition creates some complex situations,
as taxpayers face difficulties in accommodating reality and concepts. Exploring the feasibility of the PIC method and taking into
consideration the similarity issue described before, LocalCo will most likely have difficulties adopting this method, considering that
“Less is More” is quite unique and patent protected. Also, LocalCo may face compliance difficulties, as different presentations
can implicate different “products” for transfer pricing analysis. In practice, this means that “debits” and “credits” among individual
products cannot be offset, such that excess profits in relation to the statutory margin in one product cannot absorb insufficient profit
from another product. Therefore, LocalCo would need a very precise pricing track record. In summary, most likely the PIC method
would not be feasible, either for the taxpayer or for tax auditors, unless LocalCo is able to identify an internal comparable within its
affiliated companies – a factor that is unknown under the present fact pattern.
CPL method (equivalent to the cost-plus method)

There are some typical problems with the adoption of this method. First, it must be verified whether the allowed margin of 20% is
consistent with the effective margin, specifically for the pharmaceuticals and supplements industries. Second, and more relevant,
there is the documentation issue. In the present case, the documentation would involve all production documentation, such as
acquisition invoices of raw materials, breakdowns of all costs, allocations, spreadsheets, depreciation, payroll, etc., plus general
ledgers and tax returns. Everything must be translated and notarized. Although simple in concept, this method is very difficult to
implement in practice. Few taxpayers have seriously tried it and even fewer have succeeded in building a robust case that could
withstand a transfer pricing audit. It is always possible and likely that the auditor will ask for more details. This could evolve into an
endless discussion. Many other details could also be discussed, such as GAAP differences, exchange effects, existing tax benefits
in the production plant, etc., but this is not the primary focus in this chapter. In summary, this method is not the primary option. The
authors have never seen a tax auditor push for adoption of the CPL method, but rather the opposite.

PRL method
Since 2013, due to changes in the legislation, PRL 40% has been applicable to taxpayers in the pharmaceutical industry. Note
that Brazilian legislation imposes three different margins for PRL: 20%, 30% and 40%, with the latter being mandatory for
pharmaceutical products.
PRL 40% calculation 2015 2016 2017 2018 2019 2020
Net resale price – 150.0 220.0 270.0 310.0 360.0
Taxes on sales – 56.2 82.4 101.1 116.1 134.8
Gross resale price – 206.2 302.4 371.1 426.1 494.8
Margin 40% – 82.5 120.9 148.4 170.4 197.9
Parameter/comparable price – 67.5 99.1 121.6 139.6 162.1
Effective price – 100.0 150.0 175.0 205.0 240.0
Transfer pricing adjustment – 32.5 50.9 53.4 65.4 77.9
Assumptions (1):
1. COGS represents cost of product imported, including taxes (CIF + II). Conservative approach. See controversy explanation.
2. Calculations consider the existence of just one product, based on the product-by-product approach.
3. Sales represent net sales, after VAT (that may include ICMS, IPI, PIS and COFINS).
Additional comments and considerations
- APA. Because Brazilian law does not provide rules for APAs, this is not a feasible option. See section 5.1.
- International transfer pricing study. Most likely a study based on economic analysis would not comply with Brazilian rules
based on product-by-product formulae. It is advisable to perform a local analysis and not to rely on an international transfer
pricing study.
- Royalties. Brazilian rules impose fixed rates for specific intellectual-property transactions. For Brazilian tax purposes, and in
very broad terms, royalties refer to payments made for intangible rights, such trademarks, patented technology and technical
assistance associated with transfers of technology (a contractual arrangement through which know-how is transferred over
a period of time). In the present case, the proposed 7% royalty for exclusive distribution rights would represent a significant
tax issue for several reasons. First, the case suggests that there is no transfer of know-how to LocalCo or compensation for
the trademark, which is deductible up to 1% of associated revenues (the express deductibility provisions, which go as high as
5% for some industries, most likely will not be available to LocalCo, as this case does not deal with the licensing of a patented
technology, but rather an exclusive distribution right). Second, the attempt to adopt the 7% rate may result in three situations:
(1) the INPI (Brazilian Patent Office) would not even register such a contract, and without registration, it is not possible to
remit money from Brazil. Therefore, it is not simply a regulatory or tax issue, but first of all a remittance issue. Also, without
registration, no royalty would be deductible if accrued in the financial statements;
(2) the INPI agrees with 1% as a trademark royalty and imposes amendment of the contract to reflect exactly that percentage;
or
(3) the INPI approves of the contract stating 7%, but the tax deduction is limited to 1%.
Please note that the new Rules significantly update the Brazilian royalty rules, the limits and procedures disclosed above
will be eliminated and an arm´s length based approach shall define the transactions limits and no approval by the INPI
shall be required for the remittance. The rules mentioned in this chapter cover the aspects in force until the end of 2023.
The following table presents a scenario in which the financial statements are restated because the INPI did not approve the
contract:
Possible restatement due to excess royalty from 7% to 1%

2015 2016 2017 2018 2019 2020

Sales 0 150 220 270 310 360
COGS 0 100 150 175 205 240
0 n/a 50 33.30% 70 31.80% 95 35.20% 105 34.00% 120 33.00%
operating 25 50 33.33% 60 27.27% 70 25.93% 71 22.90% 77 21.39%
expenses
royalty expense 0 13.3 15.4 18.9 21.7 25.2
–25 n/a –13.3 –8.90% –5.4 –2.50% 6.1 2.30% 12.3 4% 17.8 5%
reversal of – 11.8 13.2 16.2 18.6 21.6
excess royalty
net deductible – 1.5 2.2 2.7 3.1 3.6
royalty 1%
adjusted profit (25) n/a (1.5) –1.0% 7.8 3.5% 22.3 8.3% 30.9 10.0% 39.4 10.9%
income tax 34% – – 2.7 7.6 10.5 13.4
adjusted net (25) n/a (1.5) –1.0% 5.1 2.3% 14.7 5.5% 20.4 6.6% 26.0 7.2%
profit
Assumptions:
1. A 7% royalty contract will most likely not qualify for registration with INPI. The excess is non-remittable and non-deductible.
2. Contract most likely amended to 1% for trademark.
3. Financial statements restated to reflect new contract of 1%.
4. Profit before income tax subject to 34% income tax and social contribution taxes.
As a final remark, the above considerations are not affected by the existence (or not) of an income tax treaty between Brazil and
Wonderland, nor by whether or not Wonderland is an EU country.
2. Which transfer pricing method is likely to be most acceptable to the tax authorities based on the above facts and why? What
factors are critical in making this judgement?
The PRL method is the natural choice for both the taxpayer and the tax authorities. If the taxpayer adopts a different method,
it should be robust enough to convince the tax authorities to not disregard it, something that occurs in many cases. In such a
case, a tax auditor would try to calculate the PRL themself and replace the original choice, unless the transfer pricing adjustment
indicated by PRL is lower than the original one chosen by the taxpayer. It is a matter of controversy whether the tax auditor is
obliged to attempt more than one method and adopt the lowest adjustment possible. Predictably, the authorities have rejected
such understanding, saying that this burden falls only on taxpayers.
3. Could LocalCo apply for an APA in Brazil? If so, which facts would be taken into consideration and which requirements and
documentation should be met/provided?
Not applicable, as APAs are not available in Brazil.
4. If the tax authorities were to look at LocalCo’s transfer pricing, what would be the process (information request, review, audit,
etc.)?
Once selected for a transfer pricing audit, the taxpayer will receive a notice indicating the commencement of the audit and the
initial documents to be prepared, typically within 20 days. The taxpayer may apply for an extension; the tax authorities have
the discretion to extend or not. Very often the documentation request is made in a way that the auditor will be able to perform
calculations themself, regardless of the choices made by taxpayer. From this perspective, the primary focus is not to review what
the taxpayer did, but to compare transfer pricing adjustments and impose the highest one. Audits are data-intensive and very often
most of the information should be provided electronically and according to a certain layout, as it will be checked through proprietary
software.
5. What would be the areas of concern for the Brazilian tax authorities?
Typical areas of concern include proper compliance work, extensive data coverage, the risk that not all individual transactions are
disclosed, adoption of proper formulae, exchange calculations and cross-checking with accounting and tax data. For example, it is
quite common that the auditor starts the audit procedure with the importation/exportation data obtained directly from the Siscomex

(the official database that registers all foreign transactions). The focus in this case is to be sure that taxpayer did not “forget” to test
any particular product, and therefore the intention is to have 100% coverage of tangible goods imported/exported.
In the case of services, contracts, invoices and exchange transactions are the main source of data. In the case of “imported
services” (payment to a non-Brazilian party), there is a natural overlap with the withholding tax test, and in fact the authors have
seen transfer pricing audits that developed to significant assessment of taxes due on remittances abroad.
Audits involving “rights” are not that common and demand a more complex analysis, also because royalties are regulated by
specific legislation that imposes certain deduction limits. Therefore, royalties were excluded from the scope of transfer pricing
legislation. From this perspective, “rights” subject to transfer pricing analysis should be understood as all other intangible property
that is not covered by royalty regulations. In practice, the most relevant “right” subject to transfer pricing analysis is software
licensing and the related fees, as the domestic concept of royalties does not cover such fees. This is yet another instance of how
Brazilian tax concepts differ from those of other countries.
As mentioned, the above considerations are not affected by whether or not there is an income tax treaty between Brazil and
Wonderland, or whether or not Wonderland is an EU country.
6. Is it likely that the Brazilian tax authorities would make a primary adjustment? If so, why and based on what factors? What
other actions might they take (e.g. penalties, secondary adjustment)?
This issue should be dealt with on a case-by-case basis. According to the authors’ experience, it is quite common for tax
authorities to impose primary adjustments. Some reasons for this include a lack of proper transfer pricing compliance work done
in an earlier stage, distortions caused by the product-by-product approach, imposition of statutory margins and exchange effects.
The primary transfer pricing adjustment leads to an increase in the income tax and social contribution calculation bases. If the
taxpayer is in a profit position, most likely there will be a shortfall of taxes paid and a tax assessment will be imposed. Penalties
apply, typically at 75% on top of the unpaid tax, plus interest for late payment. No secondary adjustment is provided for under the
law.
As mentioned, the above considerations are not affected by whether or not there is an income tax treaty between Brazil and
Wonderland, or whether or not Wonderland is an EU country.
7. If a primary adjustment is made by the Brazilian tax authorities, what options would realistically be available for LocalCo if (a) it
does not agree with the adjustment or (b) it does agree with the adjustment but does not wish to be subject to double taxation?
A specific analysis of the actual case is necessary to distinguish between two main sources of tax assessment, namely (1) fault of
taxpayer or lack of proper compliance work or (2) mistakes made by the auditor when performing the audit.
In any event, depending on the particularities of the assessment, and the taxpayer’s willingness to dispute it, there may be
arguments to be presented in the administrative and judicial court systems, with the aim of reducing the amount of taxes under
dispute and penalties.
There is no amicable negotiation procedure to reach a settlement with the Brazilian tax authorities, as there are no mechanisms in
place for an agreed solution to the dispute. Once the tax is assessed, the taxpayer is required to either pay it or dispute it.
There is also no mechanism in place to resolve potential double taxation arising from a transfer pricing assessment.
As a consequence, the above considerations are not affected by whether or not there is an income tax treaty between Brazil and
Wonderland, nor by whether or not Wonderland is an EU country.

Appendix 1 - Overview of the local dispute procedure

Appendix 2 - Organizational structure of the RFB

Appendix 3 – Organizational structure of the CARF


Brazil - Transfer Pricing - Dispute Resolution - IBFD

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Brazil - Transfer Pricing & Dispute Resolution - Country Tax Guides (Last Reviewed: 15 June 2023)

Transfer Pricing & Dispute Resolution

IBFD Tax Technical Editor

1.2. Overview of local dispute procedure

1. Art. 10 Decree 70,235/72 (Processo Administrativo Fiscal).

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

1.2.1. Availability of international procedures and relief from double taxation

1.2.2. Tax authorities

1.2.2.2. Other relevant players

1.2.2.3. Programmes to ensure consistent application of TP policies and penalties

6. See the English translation available at https://www.gov.br/receitafederal/pt-br/acesso-a-informacao/legislacao/acordos-internacionais/map/in-rfb-

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

1.2.2.4. Downward TP adjustments procedure

1.2.2.5. Contact information

1.2.2.6. Comment on proﬁle and aggressiveness

8. See https://www.oecd.org/tax/dispute/brazil-dispute-resolution-proﬁle.pdf (accessed 20 July 2023).

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

9. Art. 48 Law 12,715/2012.

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

Phase 1: Initial phase, from 1997 to 2002

Phase 2: Enforcement phase, from 2002 to 2009

Phase 3: Revision phase, from 2010 to 2018

Phase 4: A more positive stance towards the OECD starting in 2019

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

Phase 5: Alignment with the OECD standard

2.2. Primary current controversies

C.i.f. + II (import tax) versus f.o.b. criteria for PRL method

Normative Instruction 243/2002

10. See https://web-archive.oecd.org/2019-12-18/540502-brazil-identiﬁes-a-clear-pathway-for-aligning-its-transfer-pricing-framework-with-the-oecd-standard.htm

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

Adoption of PRL 20% by pharmaceutical companies

a) the unconditional discounts granted;

b) the sales taxes;

c) the commissions or brokerage fees paid; and

d) a proﬁt margin of:

a) the unconditional discounts granted;

b) the sales taxes;

c) the commissions or brokerage fees paid; and

d) a proﬁt margin of 20%, calculated on the resale price.

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

Relevant matters with limited tax court’s precedents

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

2.3. Audit process and milestones

2.3.2. Joint audits

2.3.3. Audit timeline

18. Ordinance 4,066/2007.

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

2.3.4. Rights and obligations of taxpayers

2.3.5. Rights and obligations of tax authorities

2.3.6. Information used in tax audits

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

2.3.8. Right of access to information

26. Art. 265 Income Tax Regulations, Decree 9,580/2018.

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

2.3.10. Access to foreign-based information

2.3.11. Burden of proof

2.3.12. Statute of limitations

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

2.3.13. Information requests

2.3.14. Solicitor-client privilege

2.4. Recommendations for taxpayers during a tax audit

3. Appeals and Litigation

35. Ordinance 6,478/2017.