The recent tax reform in Brazil has introduced significant structural changes in the way the tax bases for new consumption taxes are determined. Among these changes, the explicit incorporation of the concept of market value as a reference for the taxation of certain transactions stands out.
Although this approach seeks to bring taxation closer to real economic conditions, its implementation poses significant technical challenges when analyzed in conjunction with the transfer pricing regime, especially in transactions between related parties. The lack of alignment between the two regulatory frameworks can lead to risks of double taxation, valuation inconsistencies, and increased exposure to audits.
Market value in the new Brazilian tax structure
The Brazilian tax reform, implemented through recent complementary regulations, incorporates market value as the basis for determining new consumption taxes, such as the Imposto sobre Bens e Serviços (IBS) and the Contribuição sobre Bens e Serviços (CBS).
From a conceptual point of view, market value aims to reflect the price that would have been agreed between independent parties under comparable conditions. However, unlike transfer pricing, consumption tax regulations do not develop specific methodologies or clear hierarchies for its determination, which opens up significant room for divergent interpretations.
The arm’s length principle and its role in transfer pricing
In the field of transfer pricing, the arm’s length principle is the central axis for evaluating transactions between related parties. This principle not only defines the objective-to replicate market conditions—but also establishes recognized methods, comparability criteria, and detailed functional analyses to achieve that objective.
The coexistence of two regimes that use similar concepts (market value and arm’s length), but with different levels of technical development, creates regulatory tension that is particularly relevant for multinational groups with complex transactions.
Lack of regulatory alignment: a latent risk
One of the main challenges identified is the possible lack of alignment between the value determined for indirect taxation purposes and the value used for income tax purposes.
For example:
- An intra-group transaction could be accepted as consistent with the arm’s length principle for transfer pricing purposes.
- However, that same transaction could be questioned under consumption taxes if the tax authority considers that the declared value does not adequately reflect “market value,” even without clearly defined technical criteria.
This situation increases the risk of inconsistent tax adjustments, legal uncertainty, and higher compliance costs for companies.
Practical impact for multinational groups
For multinational groups operating in Brazil, this lack of regulatory coordination can have significant implications:
- Duplication of valuation analyses, with different methodologies for the same economic event.
- Greater exposure to audits, both for direct and indirect taxes.
- Risk of economic double taxation, in the absence of clear coordination mechanisms.
- Increased documentation and tax defense costs.
In particular, transactions involving intra-group services, transfers of intangibles, and corporate reorganizations are most susceptible to this type of questioning.
The importance of economic consistency
From a technical perspective, the key to mitigating these risks lies in maintaining comprehensive economic consistency across different tax analyses. Although the objectives of consumption taxes and income taxes are different, the underlying economic basis of transactions should be consistent.
In this context, transfer pricing studies—when properly prepared—can be a valuable technical reference to support the market value of transactions, even beyond the scope of income tax.
Conclusion
The incorporation of the concept of market value into the Brazilian tax reform represents a step toward taxation that is more aligned with economic reality. However, the lack of technical alignment with the transfer pricing regime poses significant challenges that should not be underestimated.
For multinational groups, the current scenario requires a preventive approach based on sound economic analysis, robust documentation, and an integrated view of the various tax fronts. In an environment of increasing scrutiny, consistency between market value and the arm’s length principle will be a determining factor for adequate tax risk management.
Is your company prepared to face the challenges of tax reform in Brazil?
At TPC Group, as a company specializing in transfer pricing, we assist multinational groups in the analysis and documentation of intra group transactions, ensuring consistency between market value and the arm’s length principle. Our technical approach allows us to anticipate risks arising from regulatory changes and strengthen our clients’ tax position in the face of increasingly demanding audit scenarios.
Source: Jota