Modeling Transfer Pricing Changes for Brazil: An Illustrative Example

Modeling Transfer Pricing Changes for Brazil: An Illustrative Example

Kevin Croy
Managing Director
Aashna Shah
Manager, Transfer Pricing

30 Second Summary

  • In late December 2022, the Brazilian government announced draft legislation that would radically change its transfer pricing rules.
  • The example in this article illustrates an approach for analyzing the potential change in Brazilian law in the context of intercompany sales of tangible goods from Brazil.

Update as of June 15, 2023: Brazil’s transfer pricing reform has been enacted into law by President Luiz Inácio Lula da Silva, aligning the country with international standards regarding the valuation of transactions between affiliated companies. This development will benefit numerous multinational corporations operating in Brazil. The legislation successfully cleared the Senate in May and the Chamber of Deputies (the lower house) in March before being published in the federal government’s official daily gazette on Thursday, June 15, 2023. While the regulations will be obligatory starting from 2024, companies have the option to adopt them in 2023. Contact your GTM transfer pricing team for more information.

As we discussed in detail in an earlier article, on December 29, 2022, the Brazilian government announced draft legislation that would radically change its transfer pricing rules. With this change, Brazil finally conforms to the internationally accepted arm’s length principle under the OECD Transfer Pricing Guidelines.  While this is draft legislation, and Brazil’s Congress must pass it into law within 120 days for it to take effect, many multinational enterprises (MNEs) operating in Brazil are evaluating the impact to their current transfer pricing policies – are you?

Now is the time to prepare for the potential changes and be ready to comply if passed into law.  Compliance will be optional for calendar year 2023 and mandatory for 2024.  On February 17, 2023, the Brazilian Revenue Service published Normative Instruction (NI) no 2,132/23 providing taxpayers with guidance on applying the new transfer pricing rules for intercompany transactions engaged in during 2023. The regulations state that taxpayers can opt into the new rules for 2023 in the period from September 1 to September 30, 2023. This timing presents opportunities now to model the effects of new transfer pricing methods, create a transition plan, and design and prepare systems for operational transfer pricing changes.

GTM helps MNEs model the potential impacts of the proposed transfer pricing rules. The simple example below illustrates an approach for analyzing the potential change in Brazilian law in the context of intercompany sales of tangible goods from Brazil.

Evaluation of Transfer Pricing Policies: Export of Tangible Goods

Step 1: Identify the internal transfer pricing policy currently applied under Brazil’s existing rules

In our example, a US MNE has a wholly owned subsidiary in Brazil (BrazilCo) that primarily manufactures and sells industrial chemicals to third-party customers in Brazil, but also sells chemical products to its foreign related parties, including a related party in the United States (USCo).

Under the existing rules, BrazilCo applies the CAP method to set intercompany prices for sales of chemicals to USCo. The CAP method is defined as the weighted average cost of production for the exported goods, plus taxes charged in Brazil, plus a profit margin of 15 percent.




Average Cost of Production



Taxes Charged in Brazil



Fixed Profit Margin



Transfer Price

D = (A + B) * (1 + C)


Step 2: Evaluate BrazilCo’s operating profit the OECD Guidelines

For the chemical products sold to USCo, BrazilCo records revenue of $138 as presented in the table above. BrazilCo also records standard cost of $85, other cost of goods sold of $15 and allocable general and administrative expenses of $25, resulting in fully loaded operating costs of $125. BrazilCo earns an operating profit of $13, equivalent to a full cost markup of 10.4 percent.




Sales (Transfer Price)



Standard Costs



Other COGS



General and Administrative Expenses



Operating Profit

H = D – E – F – G


Full Cost Markup

I = H / (D-H)


Step 3: Evaluate whether the transfer price is supportable under the proposed rules (i.e., as per the OECD Guidelines).

The taxpayer selects the transactional net margin method (TNMM) as the most appropriate transfer pricing method to evaluate BrazilCo’s sale of chemical products to USCo, and selects BrazilCo as the appropriate tested party. Furthermore, the taxpayer determines the full cost markup is the most appropriate profit level indicator in applying the TNMM. USCo performs a TNMM benchmarking study by identifying a set of ten broadly comparable chemical manufacturers in the Americas region in accordance with the OECD Guidelines. The arm’s length range of full cost markups earned by the selected comparable manufacturers falls between 7 percent and 12 percent.

BrazilCo’s transfer price of $138 results in a full cost markup of 10.4 percent, which falls within the arm’s length range of results. Therefore, no adjustments to the current transfer pricing policy or prices are necessary.

However, had BrazilCo’s transfer price of $138 resulted in an operating profit for BrazilCo that fell above (or below) an arm’s length range of full cost markups, then BrazilCo may need to reduce (or increase) its transfer prices to USCo to comply with the arm’s length principle in accordance with the OECD Guidelines. 

GTM Can Help With Your Transfer Pricing Needs

GTM’s transfer pricing team brings extra expertise and resources when and where needed. We work side-by-side with tax departments and perform the same day-to-day operational transfer pricing tasks of an in-house transfer pricing specialist, but with added benefits including strategic insights, best practices from other leading companies, and the strength of our alliance with WTS Global. Contact Us to find out how we can help evaluate your company’s current intercompany transactions involving Brazil, and recommend potential transfer pricing changes to meet the new transfer pricing rules.

About The Author(s)

Kevin Croy
Managing Director
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As part of GTM’s International Tax Services (“ITS”) practice, Kevin is the Managing Director of Transfer Pricing for the firm. Kevin is responsible for delivering...
Aashna Shah
Manager, Transfer Pricing
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Aashna is a Manager in GTM’s Transfer Pricing practice, based in the firm’s Philadelphia Metro Office. She is primarily focused on supporting the day-to-day operational...