How Global Practice Could Shape Brazilian Transfer Pricing Audits

Brazil’s alignment with the OECD Transfer Pricing Guidelines became mandatory in 2024 following an optional implementation period in 2023. This represents a decisive shift away from fixed margins and safe harbors toward the arm’s length principle in conducting cross border intercompany transactions, requiring a robust functional analysis and strict documentation for multinational enterprises with operations in Brazil.

This move places Brazil closer to global standards and puts Brazilian taxpayers on equal footing with taxpayers around the world by fostering business investments and reducing double taxation risks. However, this radical change also exposes taxpayers and Brazilian tax authorities to new challenges as they try to adapt to and implement the OECD-based transfer pricing rules.

The rapid transition places all stakeholders on a steep learning curve. Understanding how tax authorities abroad conduct audits, challenge documentation, reinterpret business models, and apply double tax treaties for providing tax certainty and mitigating double taxation offers Brazilian companies valuable resources to prepare before transfer pricing audits and subsequent disputes arise.

Applying Methodology

The first lesson from international experience is the critical importance of coherence between transfer pricing policies and the overall business model. Countries that have long applied the arm’s length principle routinely scrutinize whether the functional analysis, intercompany agreements, and economic rationale truly reflect reality and the way the multinational group operates.

Before preparing documentation, companies must understand their value chain, identify controlled transactions, and map functions, assets, and risks, in particular those linked to intangibles and DEMPE (development, enhancement, maintenance, protection, and exploitation of intangibles) activities. International tax authorities frequently challenge taxpayers when contractual arrangements don’t match actual conduct or when functions allocated to a local entity don’t justify its levels of profitability or their volatility.

The most recent and high-profile case exemplifying this approach is the US case The Coca-Cola Company & Subs. v. Commissioner (155 T.C. No. 10 (2020)), which shows the amounts that can be at stake.

Brazilian tax authorities will soon adapt to these trends and begin using this type of assessment, especially as the Federal Revenue Service enhances its audit capacity. As the procedures transition from safe harbor margins to an arm’s length compensation, particular care must be taken that the methodology chosen and the respective transfer pricing documentation avoid supporting a finding that the Brazilian taxpayer underwent a business restructuring to prevent exit fees being assessed.

Documentation. The quality of transfer pricing documentation is another area where international experience provides valuable insight for Brazilian taxpayers. Many transfer pricing disputes worldwide arise not because the taxpayer’s economic position is inherently weak, but because documentation contains inconsistencies or lacks sufficient detail.

Likewise, when treated as a mere compliance exercise, transfer pricing documentation often contains marketing language that can be found on the company’s website or other customer-facing material and that doesn’t (fully) reflect the transfer pricing reality. Foreign tax authorities often reject analyses that are generic, incomplete, or poorly aligned with local rules. They scrutinize whether the taxpayer properly selected the tested party, used reliable comparable companies, applied appropriate adjustments, and explained the commercial rationale for losses or significant changes in profitability. Inconsistencies between the master file, local file, country‑by‑country report, intercompany agreements, and financial statements commonly trigger audit findings.

Further, a mismatch of marketing and other customer-facing material and the function and risk analysis for transfer pricing purposes further increases the risk of a transfer pricing adjustment. As Brazil adopts similar documentation requirements, taxpayers can expect the same pattern of challenges.

Latin America. Latin American experience offers some of the most relevant parallels for Brazil. Across the region, tax authorities often challenge companies with limited functions operating at sustained losses or with persistently low margins. Transfer pricing adjustments that increase taxable income in these circumstances are to be expected. Several of these cases have reached the courts, with mixed results depending on the taxpayer’s ability to substantiate the elements of the transfer pricing analysis and, most importantly, the coherence between its transfer pricing policies and its true operating model. See Puerto Arturo S.A.S., April 2025, Supreme Administrative Court, Case No. 25000-23-37-000-2021-00357-01 (28256); Drummond LTDA, June 2023, Counsil of State, Case No. 25000-23-37-000-2013-01285-01 (24727); Empresa Minera Los Quenuales S.A., April 2024, Supreme Court, CASACIÓN N° 31608-2022. Brazilian taxpayers should expect similar scrutiny as fixed margins disappear and economic substance takes center stage.

Services transactions. Services transactions also illustrate recurring points of contention. Internationally, tax authorities often focus on the benefit test and the substance of services provided, rather than on the mere mechanics of cost‑based allocations. More important than the profit margin attributable to intercompany services, taxpayers are typically challenged on the appropriateness of the cost base, which represents the larger share of the amount of consideration.

Moreover, when taxpayers lack robust evidence of the services performed, maintain weak or outdated agreements, or fail to demonstrate the economic value generated for the recipient of the services, tax authorities frequently deny deductibility. The Brazilian tax authorities have also long applied these same procedures. Brazilian case law is replete with disputes concerning allocation keys, the distinction between necessary and voluntary expenses, and the economic substance and business purpose of intercompany transactions.

International jurisprudence. Major international jurisprudence reinforces these trends. The Coca‑Cola case mentioned above exemplifies how a tax authority may disregard longstanding audit understandings when it believes that the taxpayer’s economic narrative doesn’t align with actual functions and risks. The resulting $10 billion adjustment demonstrates how quickly exposure can escalate when documentation and substance diverge.

Brazilian multinationals, and foreign multinationals operating in Brazil, can draw a clear conclusion: transfer pricing policies and agreements must be reviewed and updated regularly to reflect evolving business realities. The scrutiny—already significant—is expected to increase even further given the breadth of information taxpayers are now required to submit to the Brazilian tax authorities as part of their annual transfer pricing reports.

Similarly, in Mexico, there are continuous disputes involving distributors with significant advertising expenditures where tax authorities may treat marketing investments as contributions to group intangibles. In these instances, the tax authorities might reject the deduction of the full marketing expenses, or reject the use of one-sided methods like the transactional net margin method, claim the creation of marketing intangibles through the marketing activities, and replace it with a profit-split approach, which would drastically increase taxable income in Mexico. In treaty cases, taxpayers were able to mitigate the double taxation arising through the mutual agreement procedure established in the tax treaties signed by Mexico. Such cases show how authorities may reinterpret local activities in ways that significantly alter profit allocation, an analytical approach Brazil is now equipped to adopt under its new framework.

Global interagency government collaboration. International experience also highlights the increasing global and domestic interagency collaboration and sharing of information among government agencies. In many jurisdictions, tax and customs authorities routinely compare transfer pricing documentation with customs valuation disclosures, financial statements, and transactional data. Brazil now explicitly allows its tax authority to reconcile customs values and transfer pricing values, and customs audit teams may disregard entities or arrangements they deem not aligned with the economic reality of the transaction. Divergences, even if unintentional, may raise suspicions of non‑arm’s length pricing and trigger both income tax and customs adjustments and penalties.

Further, the customs implications of transfer pricing adjustments are a hot button issue and need to be considered carefully, as the increase of customs duties can affect the profitability of the respective company and customs-related fines can be material. For Brazilian taxpayers, this reinforces the importance of coordinated cross‑functional governance.

Technology. Another global trend is the use of technology in audits. Tax administrations increasingly rely on artificial intelligence, digital cross‑referencing, and real‑time analytics to detect anomalies. As Brazil modernizes its audit tools and expands reporting obligations, consistent and high‑quality data becomes essential. Errors that might once have gone unnoticed are now quickly identified, creating a compliance environment that requires ongoing and integrated monitoring.

Mutual agreement procedures and advanced pricing arrangements. International dispute‑resolution mechanisms provide additional insight into what Brazilian taxpayers may increasingly rely on. The growing number of MAP cases around the world shows taxpayers’ reliance on treaty‑based solutions to mitigate or eliminate double taxation. Brazil’s updated rules now expressly require that MAP outcomes be implemented domestically, strengthening the country’s commitment to international standards.

In addition, the forthcoming Brazilian APA program, once fully regulated, is expected to offer a preventive option for obtaining prospective certainty, hopefully mirroring international best practices and responding to requests from the private sector.

Penalties and sanctions. Although the international experience offers valuable guidance, Brazilian taxpayers must also account for the country’s uniquely strict penalty environment. Under Law 14,596/23 and its regulations, late submission of the master dile or local file can result in monthly fines tied to gross revenue, and inaccuracies or omissions may trigger penalties of up to 5% of the value of the controlled transactions or, for master file issues, a percentage of consolidated group revenue. Additional sanctions apply under general tax rules for electronic filings, so that inconsistencies in documentation such as financial statements, customs data, and tax returns can rapidly escalate financial exposure.

This combination of high penalties and increased audit sophistication makes robust documentation, internal consistency, and proactive compliance good practice and essential risk‑mitigation tools in Brazil’s new transfer pricing landscape.

Takeaways

As Brazil enters this new era of transfer pricing enforcement, companies must take proactive measures to strengthen their compliance posture. The combination of robust documentation in line with economic and contractual reality, aligned policies, strategic risk assessments, and an understanding of international audit trends will be essential not only to withstand scrutiny but also to prevent costly disputes. By learning from countries with mature transfer pricing audit practices, and recognizing the severity of Brazil’s local penalty framework, Brazilian taxpayers can reduce exposure, avoid controversy, and navigate the new regime with greater predictability.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Carlos A. Linares-García is a partner with Baker McKenzie in Monterrey. Imke Gerdes is a partner in New York. Gustavo Sanchez-Gonzalez is a partner in Monterrey. Luciana Nobrega e S Loureiro and Clarissa Machado are partners at Trench Rossi Watanabe in São Paulo.*

*Trench Rossi Watanabe and Baker McKenzie have executed a strategic cooperation agreement for consulting on foreign law.

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