With the entry into force of Law No. 14,596/2023 and RFB Normative Instruction No. 2,161/2023, Brazil has adopted a new Transfer Pricing regulatory framework aligned with the OECD’s international principles. Among the most innovative elements of this system are the so-called compensatory adjustments, which represent a significant change from previous tax practice and pose both legal and operational challenges.
What Are Compensatory Adjustments?
According to Brazilian regulations, compensatory adjustments are corrections made by the parties to a controlled transaction to ensure that the price applied is within the Arm’s Length range. These adjustments must be made before the end of the fiscal year and be duly supported by accounting, tax, and contractual documentation that demonstrates their economic reasonableness.
Unlike primary adjustments (determined by the tax authorities) or spontaneous adjustments (made unilaterally by the taxpayer), compensatory adjustments require recognition by both parties involved, which must be reflected in the accounting records through the issuance of tax documents, such as credit or debit notes. This requirement increases the need for advanced planning and coordination among related entities.
Regulatory Ambiguities: Impact on Other Taxes?
Although the regulatory framework establishes that compensatory adjustments do not affect taxes other than Corporate Income Tax and Social Contribution on Net Income automatically, the term “automatically” raises legal uncertainty.
For example, if an adjustment affects the value of an import, customs may question the declared values, leading to a reassessment of related taxes, such as Import Tax, Tax on Industrialized Products, or PIS/COFINS. Internationally, there are already precedents in countries such as Poland, where the applicability of the VAT to these types of adjustments has been discussed, concluding that they do not constitute consideration for services but rather price correction mechanisms among related parties.
These uncertainties require taxpayers to thoroughly assess to determine whether the adjustment may trigger indirect effects on other tax obligations.
Practical Challenges and Need for Guidance
To comply with Brazilian regulations, companies must establish strong internal control mechanisms and consistent documentation processes. Additionally, reviewing intercompany contracts, clearly defining the applicable Transfer Pricing methods, and preparing reports in advance to support corrections are necessary.
Due to the lack of complementary rules that detail the effects of compensatory adjustments on other taxes or regimes (such as foreign trade, ISS (Imposto Sobre Serviços – Tax on Services), or tax benefits), regulatory gaps still exist, generating legal uncertainty.
So far, the Receita Federal do Brasil has not issued specific guidelines clarifying whether or not compensatory adjustments can modify the tax base of other taxes. This regulatory void represents potential risks for taxpayers, especially in international operations or those involving tax incentives.
Final Observations
Compensatory adjustments are essential for the convergence of the Brazilian system with international best practices, especially regarding the Arm’s Length Principle. Conversely, their practical application requires caution, due to possible collateral repercussions in other areas of the tax system.
In the absence of clear guidelines, taxpayers should carefully evaluate each situation, keep detailed records, and, if possible, consult the tax administration to avoid future contingencies. Likewise, to the extent that the implementation of the new regime is consolidated, the Receita Federal should issue complementary regulations providing greater legal certainty regarding the collateral effects of these adjustments.
Source: Migalhas