Brazil: Transfer pricing considerations (COVID-19)

Brazil: Transfer pricing considerations (COVID-19)

There may be transfer pricing considerations for multinational groups affected by the economic situation resulting from the coronavirus (COVID-19) pandemic.


According to some economic forecasts, there are expectations for an economic contraction. In this context, the pricing of intercompany operations within multinational entity (MNE) groups may be severely affected.

Economic forecasts, a naturally complex exercise in normal circumstances, are more complex in times of crisis and economic instability.

MNE groups operate in various countries that, for the most part, have their own domestic transfer pricing laws and rules that are based on global (OECD) standards. As a consequence, the pricing of intra-group transactions would need to reflect general market conditions—thereby requiring the difficult task of requiring transfer pricing professionals to make decisions in real time about adjustments, price changes, and respective policies. In particular, taxpayers need to consider the perspective of transfer pricing under Brazilian law.

The devaluation of the Real has significant implications for taxpayers. Considering that most importing companies demonstrate their transfer prices through the application of the resale price minus profit (preço de revenda menos lucro—PRL) method (based on pre-defined margins), recall that this method does not provide for adjustments resulting from exchange variation. In this context, high amounts paid on imports will not necessarily be passed on in local resales / distributions, possibly resulting in a significant variation between prices and parameters and, subsequently, transfer pricing adjustments. 

KPMG observation

Companies need to consider evaluating application of transfer pricing methods that reflect conversion-rate equalization. Two of the transfer pricing methods (preços independente comparado—PIC and custo de produção mais lucro—CPL) eliminate the exchange rate effect, since the rates used in the conversion of practiced prices and parameters tend to be similar, thus removing the effect observed in the application of the PRL method. Unlike the OECD model, Brazilian transfer pricing rules do not impose the “best method rule.” In this way, taxpayers have a certain amount of freedom to choose the methods to be applied.

In relation to exports, it is common for there to be an excuse (or safe harbor) from transfer pricing representations when the amounts realized on the subject transactions do not exceed 5% of net revenues for a given period. However, with the devaluation of the Real, it would appear that there could be an increase in the amounts of transactions when denoted in a foreign currency. Thus, in these situations, the taxpayer would not be excused from proving the transfer prices by applying the methods. Considering the tendency of taxpayers to develop their transfer pricing calculations only after the end of the fiscal year, it may be prudent to prepare preliminary calculations and analysis in the second half of 2020, before the end of the fiscal year. This not only would allow for greater availability for collecting the necessary data and documentation, but also allow taxpayers to formulate robust arguments for discussions with other members of the MNE group.

The reduction in revenues resulting from measures taken to address the pandemic and the resulting cash management challenges are among the most immediate economic implications encountered by companies. In MNE groups, the approach to these issues and the option for various forms of financing (internal and external) are usually conducted within the groups. Historically, such decisions have been made by professionals in the financial and treasury areas, without the participation of members of the tax department—thereby potentially impairing the analysis of tax and transfer prices considerations. In particular, in situations when intra-group financing is used, the arrangements are subject to the effects of transfer pricing rules, both under the OECD model and under Brazilian law.

When changes in the economy make the financing and cash management structures of multinationals incompatible with the economic conditions, taxpayers can assess the discontinuation or revision or renegotiation of pre-existing loan contracts. Brazilian transfer pricing rules on financial transactions may result in very different interest rates (from comparable rates based on LIBOR to rates on National Treasury bonds issued on the foreign market), depending on the characteristics of the contracts. Thus, it is up to the taxpayer to weigh which rates best reflect their financial conditions.

Read an October 2020 report (Portuguese) [PDF 594 KB] prepared by the KPMG member firm in Brazil

For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in Brazil:

Edson Costa | +55 (11) 3940-5313 |

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