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Transfer Pricing and Financial Transactions in the UN Manual, OECD Guidelines and Brazil

The subject of this article is transfer pricing in Brazil with a focus on financial transactions. The topic of financial operations was recently updated both in the Transfer Pricing Guidelines of the Organization for Cooperation and Development (OECD TPG), in 2020, and in the UN Practical Manual on Transfer Pricing for Developing Countries (UN Manual), in 2021, which was launched last year at the 22nd Session of the United Nations Committee of Experts on Taxation.

Transfer pricing is the most complex issue in the field of international taxation, being the main mechanism that enables associated enterprises operating in different countries to transfer profits from one jurisdiction to another. The "transfer pricing" issue arises from transactions between associated enterprises because they can freely establish the transaction values, which may, or may not, match with the values adopted in similar transactions, by independent companies. Therefore, transfer pricing legislation may be understood as a sort of specific anti-avoidance rule that aims to curb those practices capable of undermining the tax bases of the various countries involved in the transaction. Adjusting the transaction terms and results as it was performed between independent parties under similar conditions and taxing accordingly is the aim of the transfer pricing legislation, which is the application of the arm's length principle (ALP).
Intragroup financial operations are also subject to transfer pricing rules and constitute a specific topic due to their singular aspects, adding more complexity to the already complex matter.

It is well known that the Brazilian transfer pricing legislation/methodology is a simplified adaptation of the ALP and differs in several aspects from the model adopted by developed countries, embodied in the OECD Transfer Pricing Guidelines (TPG) and art. 9 of the OECD Model Convention. It is the same ALP also embodied in art. 9 of the UN Model Convention (with the same content in the OECD Model Convention, except that it does not present Parag. 3). The ALP is adopted in the UN Manual as a result of the mandate of the UN Taxation Committee, to which the Subcommittee on Transfer Pricing is subordinate.

The traditional methodology of transfer pricing based on the ALP seeks to verify what would be the price/margin/profit/value of the transaction carried out between associated enterprises if it were conducted under similar conditions between independent enterprises. The value considered in the transaction may be the price of the product, the margin used, the interest rate charged, the profit, etc., depending on the transaction analyzed and the methods used in the analysis of the case. Once this arm's length value is identified, adjustments may be made to expenses or income, if they are different from the arm's length value, to correctly calculate the taxable profit to the company in a specific jurisdiction.

Determining the ALP value of an controlled transaction involves the analysis of several aspects of the transaction, such as the risks borne by the parties involved, the assets employed, the contractual terms, the rationality of the operation and, in the case of financial operations , the purpose of the transaction in the context of the multinational company's business, among other factors, in order to delineate the transaction, proceed with the comparability analysis, and identify the best applicable transfer pricing method to determine the arm's length value.

There are five traditional methods to apply the ALP, namely: the comparable uncontrolled price (or transaction) method (CUP/CUT), the cost-plus method (CP), the resale price method (RPM), which are the transaction-based methods; and the transactional methods, which are the profit split method (PSM), and the transactional net margin method (TNMM), also called comparable profits method (CPM). In the case of CUP, a specific methodology for commodities was developed, based on exchange quoted prices in organized international markets, also known as the “sixth method”.

It is not the goal of this article to detail how these methods are structured. However, it is worth mentioning that the current Brazilian methodology does not use the transactional methods (PSM and TNMM) or require a comparability analysis when applying the CP and RPM; rather they adopt profit margins fixed by law for the application of these two methods. It is a simplifying measure, with great practicality, but with the potential to generate double taxation, or even low taxation, depending on the circumstances.

The central point of this article resides in the new section on financial operations contained in the recent update of the UN Manual (Chapter 9). The 2021 UN Manual deals with financial operations in a more detailed way, also bringing examples and approaches that can simplify the application of the transfer pricing methodology, such as the use of rankings by specialized agencies (S&P, Moody´s, etc.). On the other hand, the new section of the Manual does not deal with intra-group financial operations when it takes place within the scope of typical financial conglomerates (subject to the rules of the Basel agreements), due to their particularities.

At this point, it is worth remembering that many of the activities of multinational enterprises require financing (loans). It may be operations for maintaining or supplying working capital, to finance acquisitions of other companies, or to purchase operating assets, among others. Intragroup loans, which imply a change in the financing balance of the entity's resources (liabilities versus equity), also trigger other tax legislation such as the “thin cap” rules (also present in the Brazilian tax system). In addition, financial operations involve a broader scope of transactions, such as financial guarantees, intragroup cash pooling arrangements, as well as other operations involving financial derivatives, which may constitute an intra-group financial transaction, treasury services, and other related activities, including intra-group insurance operations.

As already noted, Brazilian transfer pricing legislation is a simplification of the ALP. With regard to intragroup financial transactions, it is restricted to loans made between associated enterprises. The interest rate considered to be arm's length is based on the rates of certain government bonds, or the six-month Libor rate plus a spread set by the Minister of Finance. One may say that it is a kind of sixth method for financial transactions (except that instead of commodity exchanges, the interest rate is determined by some standard financial operations in the international market).

Law No. 9,430/1996 is the transfer pricing law, and the Normative Instruction RFB n. 1312/2012, as amended, that brings a more detailed regulation of the law, addresses financial transactions in its art. 38-A:

"Article 38-A. As of January 1, 2013, interest paid or credited to a related person will only be deductible for purposes of determining taxable income up to the amount that does not exceed the amount calculated based on a rate determined in accordance with this article plus a percentage margin by way of spread, to be defined by act of the Minister of State for Finance based on the market average, proportionate to the period to which the interest refers.

§ 1 In the case of a loan with a related person, the lending legal entity, domiciled in Brazil, must recognize, as financial income corresponding to the operation, at least the amount calculated in accordance with the provisions of this article.

§ 2 For the purpose of the limit referred to in this article, interest will be calculated based on the value of the obligation or right, expressed in the currency object of the contract, and converted into Brazilian reals at the exchange rate, published by the Central Bank of Brazil, to the end date of the interest calculation.

§ 3 The value of the charges that exceeds the limit mentioned in the head paragraph will be added to the real profit and to the CSLL calculation basis.
§ 4 The difference in revenue determined in the form of § 2 will be added to the actual, presumed or arbitrated profit and to the CSLL tax basis.

§ 5. In interest payments in which the sender individual or legal entity assumes the burden of the tax, its value will not be considered for the purpose of the deductibility limit.

§ 6 The calculation of interest referred to in the head paragraph may be carried out by contract or a set of financial operations with identical dates, rates and terms.

§ 7 For the purposes of the provisions of this article, financial operations are those arising from contracts, including those for the application of resources and capitalization of a credit line, entered into with an individual or legal entity resident or domiciled abroad, whose remittance or entry of principal has been conducted in a foreign currency or by means of an international transfer in local currency.

§ 8 The rate referred to in the head paragraph will be the rate:

I - the market for sovereign bonds of the Federative Republic of Brazil issued in the foreign market in United States dollars, in the event of operations in United States dollars at a fixed rate;

II - the market for sovereign bonds of the Federative Republic of Brazil issued in the foreign market in reais, in the event of operations in reais abroad at a fixed rate; and

III - Libor for a period of 6 (six) months, in other cases.

§ 9 In the case of item III of § 8, for operations carried out in other currencies in which the own Libor rate is not disclosed, the Libor rate value for deposits in United States dollars must be used.

§ 10. The verification as referred to in this article must be carried out on the date of contracting the operation and will be applied to contracts entered into from January 1, 2013.

§ 11. For the purposes of the provisions of § 10, novation and renegotiation are considered new contracts.

§ 12. In the event of operations contracted before December 31, 2012, proof of the contracting date must be carried out with the demonstration of the contract registered with the Central Bank.

§ 13. In the absence of proof of registration, mentioned in § 12, the legal entity must observe the interest limit, for the expense or income, calculated based on the Libor rate, for deposits in United States dollars for a period of 6 (six) months, plus 3% (three percent) per year as a spread, as provided for in art. 58. (Not an official translation.)"

The spread mentioned in article 38-A is defined in Ordinance MF No. 247/2013, as 3.5% for interest paid (it limits the deduction of interest expense) and 2.5% for interest received (it works as a minimum of interest income to be recognized). It should be noted that these rules apply not only to transactions between associated enterprises, but also to all transactions with low-tax or non-cooperative jurisdictions, and to operations carried out under a privileged tax regime (the jurisdictions are listed in the Normative Instruction in RFB 1.037/ 2010).

Although interest rates in transfer pricing law are mandatory for intragroup international loan operations, many tax experts understand that they are safe harbor rules, because whenever the taxpayers comply with the specific rules, they will not be subject to disputes. (On the other hand, it may not be considered a safe harbor because it is mandatory and not a taxpayer´s option. Actually, until 2013, there was a “safe harbor” rule for financial transactions (loans). Before 2013, if the taxpayer register the operation with Brazilian Central Bank, the taxpayer would not be subject to transfer pricing adjustments. There was a presumption that the Central Bank would not allow for operations out of the scope of regular transaction between independent enterprises.)

As we said before, Brazilian transfer pricing rules only deal only with interests and loans. It does not have specific provisions to deal with other types of financial transactions, such as guarantee fees, i.e., a guarantee payment (which is similar to a bank guarantee), or the amount charged for centralizing treasury services (which may involve different activities).

In the current Brazilian methodology, the transfer pricing analysis of financial transactions, other than loans, may apply the CUP method. It is a problem, because the CUP may not be feasible for most of the cases, and the other two methods (cost plus and resale price methods) apply fixed margins. However financial transactions have peculiar margins and structures, and the use of the methods with fixed margins may lead to unreasonable distortions and misleading results. Furthermore, the Brazilian law does not allow the application of PSM and TNMM, which would be more feasible to some financial transactions. While the fixed margins methodology is acceptable for operations with tangible goods, it presents a problem for other types of transactions.

Brazil's Future in the OECD

Brazil is candidate to become a full member of the OECD. In the near future Brazil will have also to align its tax practices with those of OECD. After a very rigorous study, a detailed report was prepared by the OECD in collaboration with the RFB on the Brazilian transfer pricing methodology and its transition to the OECD TPG rules (Convergence Report). It is interesting that other characteristics of the Brazilian tax system, such as the complex and inefficient taxation on consumption, the regressivity of the tax system or other issues on taxation of income and property were not addressed in the Report. The focus was only on transfer pricing rules, most likely because of the extreme importance of the topic.

The aforementioned Convergence Report specifically deals with financial transactions in its Chapter 10, noting that in 2020 the OECD TPG were updated based on studies by the BEPS Project (Base Erosion and Profit Shifting), incorporating a more detailed chapter on financial transactions. The UN Manual followed suit with updates to its 2021 edition.

As already mentioned, the Brazilian transfer pricing methodology, with regard to financial transactions, only deals with transactions that are typical loans (involving only payment or receipt of interest, in addition to the amount loaned). Thus, for the other operations that also fall under the concept of financial transactions, there is a sort of legislative vacuum that requires significant interpretation and can generate several legal problems, either due to the absence of an adequate method to deal with these operations, or due to the difficulty of adapting the fixed margins of the Brazilian legislation to the margins of the financial sector when it is not possible to use the CUP method.

The unavoidable conclusion is that, regardless of Brazil's entry into the OECD, a legislative change for transfer pricing in relation to financial operations is necessary to achieve a more comprehensive regulatory architecture. At this point, the UN Manual, by virtue of its more simplified approach, but without disregarding the complexity of the topic, can be useful. Furthermore, the aforementioned Convergence Report reiterates the need of simplification and practicality measures in the implementation of new transfer pricing rules, without disregarding, in particular, the possibility of safe harbor rules and advanced price agreements (APAs, and BAPAs), which also must be adopted.

This article was originally published  at (Portuguese).


OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022.

United Nations Practical Manual on Transfer Pricing for Developing Countries (2021).

Stig Sollund & Marcos Valadao. The Changes and Their Significance (Transfer Pricing) and the Ongoing Work on the UN Transfer Pricing Manual. Bulletin for International Taxation, v. 66, p. 608-612, 2012.

Published on Mar 29, 2022 2:02:56 PM

Marcos Valadão, S.J.D. is partner at Valadão, Capone & Reis Law Firm (Brazil) and member of the Subcommittee on Transfer Pricing of the UN Tax Committee. He has served on the committee since its creation, when he was also a Member of Committee, and was Chair of the 1st Section at the Brazilian Administrative Court of Tax Appeals (CARF) (with competence to decide transfer pricing cases). He also holds an LLM in International and Comparative Law and Masters Degree in Law. He can be contacted at

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Topics: Intercompany Financing, Tax Law, OECD Guidelines, Brazil Transfer Pricing