Comparability Analysis: Transfer Pricing in Brazil 2024

February 29, 2024

Introduction to Comparability Analysis

The comparability analysis is the main axis of the application of the Arm’s Length Principle, which regulates the new Brazilian Transfer Pricing due to the comparison of the terms and conditions of two particular transactions: A related related-party transaction and another independent-party transaction. We will address the new Brazilian regulations regarding the comparability analysis.

OECD Guidelines on Comparability

The Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines state that the comparability analysis always aims to identify the most reliable comparables.

Definition and Scope of Comparability Analysis

Likewise, these guidelines define comparability analysis as the comparison of a related-party transaction with one unrelated. Transactions, whether related or unrelated, may be considered comparable if no significant discrepancies are affecting the key factor employed in the methodology, such as price or margin, or if there are necessary adjustments to neutralize such differences.

Comparability Analysis Objective Under the Brazilian Regulations

Accordingly, the recent Brazilian Transfer Pricing Regulations state that the comparability analysis aims to compare the terms and conditions of the related-party transaction with those established between unrelated parties in comparable transactions.

Issues to Be Considered in the Comparability Analysis

In addition, the Brazilian legislation in the recent Law No. 14596 states the issues to be considered:

  1. The economically relevant characteristics of the related-party transaction and unrelated-party transactions.
  2. The date on which the controlled transaction and the unrelated party ones were carried out to ensure that the economic circumstances of the transactions to be compared are comparable.
  3. The availability of information on unrelated party transactions to compare their economically relevant characteristics to identify the most reliable comparable unrelated party transactions.
  4. Selection of the most appropriate method and financial indicator to be examined.
  5. Uncertain price or valuation when performing the related-party transaction and whether such uncertainties were addressed as unrelated parties would have in comparable circumstances, including the adoption of appropriate mechanisms to ensure compliance with the Arm’s Length Principle.
  6. The existence and relevance of group synergy effects.

Comparability Factors

In this regard, the Secretariat of RFB (Receita Federal do Brasil – Brazilian Federal Revenue/Brazilian IRS) issued Normative Instruction No. 2161, which identifies the economically relevant characteristics or comparability factors to be considered for the alignment of the related party transaction and the comparability analysis:

  1. The derived contractual terms of the transaction from formalized documents and contracts and from evidence of the actual behavior of the parties.
  2. The functions performed by the parties to the transaction, considering the assets used and the economically significant risks assumed;
  3. The specific characteristics of the goods, rights, or services object of the controlled transaction.
  4. The economic circumstances of the parties and the market in which they operate.
  5. Commercial strategies.
  6. Other characteristics considered economically relevant.

Usual Procedures of the Comparability Analysis

According to the OECD, the Brazilian regulations detail seven usual procedures of the comparability analysis.

  • Procedure 1: Determination of the period to be covered by the analysis.
  • Procedure 2: Verification of internal comparables.
  • Procedure 3: Identification of available information sources on external comparables, when necessary, considering their relative reliability and limitations regarding the specificity and quality of the data.
  • Procedure 4: Selection of the most appropriate method and, depending thereon, of the profitability indicator and the tested party.
  • Procedure 5: Identification of potential comparables, including the determination of the essential characteristics necessary in any unrelated party transaction to be considered potentially comparable, considering the design of the controlled transaction and the comparability factors.
  • Procedure 6: Identification and reasonable accurate comparability adjustments, where appropriate.
  • Procedure 7: Interpretation and use of the data gathered and the determination of appropriate remuneration under the Arm’s Length Principle.

Types of Comparables

Brazilian regulations indicate two types of comparables:

  • Internal Comparables: Unrelated-party transactions in which one of the parties is also involved in the related-party transaction.
  • External Comparables: Unrelated-party transactions in which none of the parties is involved in the controlled transaction.

Conclusion

The comparability analysis is the key to the Arm’s Length Principle, given that this analysis aims to identify whether the related party transactions under study are compatible therewith. Therefore, the new Brazilian regulations adopt this principle to adapt to an international tax environment on Transfer Pricing to avoid double taxation and prevent the loss of revenue for the tax administration.