By Gabriela Bittencourt – Senior Manager, International Tax
The enactment of Law No. 14.596/2023 represented a profound change in Brazil’s transfer pricing regime, bringing the country closer to the international standard adopted by the OECD. Among the key changes is the abandonment of the logic of selecting the most fiscally favorable method. Under the new model, the application of the most appropriate method becomes mandatory, that is, the one that best reflects the economic reality of the controlled transaction.
In accordance with the legislation and RFB Normative Instruction No. 2.161/2023, the choice of method must result from a technical analysis based on the facts and circumstances of the transaction. The most appropriate method is the one that provides the most reliable determination of the terms and conditions that would be agreed upon between independent parties, taking into account the nature of the transaction, the availability of reliable comparable data and the degree of comparability present.
In this context, the first step is the delineation of the controlled transaction, which requires an understanding of the functions effectively performed, the assets used and the risks assumed by each party. This functional analysis is central to the correct application of the arm’s length principle and prevents the adoption of standardized methods that do not adequately reflect the company’s business model.
In practice, certain technical directions recur consistently. In commodity transactions, where there are public prices or reliable internal comparables, the Comparable Uncontrolled Price (CUP) method tends to be the priority, as it allows for direct comparison with the market. In intragroup services, contract manufacturing or routine activities with low risk, the Cost Plus method is frequently the most appropriate, ensuring remuneration compatible with simple functions and limited risks.
For distribution and resale transactions, particularly where accounting differences between countries affect gross margins, the Transactional Net Margin Method (TNMM) is often more reliable, as it reduces distortions and allows for broader comparisons. In financial transactions, such as intragroup loans and guarantees, the analysis focuses on the interest rate, which typically leads to the application of the CUP method based on market rates, taking into account credit rating, tenor and currency. In transactions involving unique intangibles or highly integrated structures, where both parties contribute meaningfully to value creation, the Profit Split Method (PSM) tends to be the most appropriate.
For illustrative purposes, these directions tend to recur in practice:
| Transaction Type | Most Indicated Method | Why Use It |
|---|---|---|
| Commodities | CUP (Comparable Uncontrolled Price) | Priority method when public prices or reliable comparables are available |
| Routine services and manufacturing (low risk) | CPM (Cost Plus) / SBVA | Suitable for transactions with a simple functional profile and limited risk |
| Distribution and resale | TNMM (Transactional Net Margin) | Reduces accounting distortions between comparables |
| Financial (loans and guarantees) | CUP (interest rate) | The market rate is compared, taking into account credit rating, tenor and currency |
| Unique intangibles and integrated transactions | PSM (Profit Split) | Indicated when both parties contribute meaningfully to value creation |
Another essential element is the definition of the tested party, which should be the one with the lowest functional complexity and the greatest availability of reliable information. When the application of the method yields a range of comparables, it is this range that serves as the benchmark for assessing adherence to the arm’s length principle.
Under the new regime, the choice of transfer pricing method has become a technical exercise in understanding the business, and not merely a matter of tax compliance. The application of a method that is incompatible with the reality of the transaction significantly increases the risk of challenges and tax adjustments. For this reason, robust functional analyses and consistent documentation have become central elements of tax governance for companies with international operations.
At MCS Markup, we support companies in the practical application of transfer pricing rules, from transaction delineation and the selection of the most appropriate method through to the preparation of required documentation and tax risk assessment. Our work is guided by Brazilian legislation, OECD guidelines and international best practices, contributing to greater security, transparency and soundness in tax management.
