The Local File and the evolution of the technical perspective in Brazil’s new transfer pricing landscape

By Fabiane Lima

After nearly 30 years of operating under a predictable model based on fixed margins and objective formulas, Brazil’s new transfer pricing regime has created a situation of significant disruption for many professionals in the accounting and tax fields.

Law No. 14,596/2023 and its regulation through RFB Regulatory Instruction No. 2,161/2023 established, effective as of the 2024 calendar year, a new regulatory standard aligned with the guidelines of the Organisation for Economic Co-operation and Development (OECD), significantly altering the logic traditionally applied to transactions between related parties in Brazil.

When the new rules began to be discussed in the Brazilian corporate world, the prevailing sentiment in many organizations was not one of technical mastery, but of uncertainty. The search for objective guidelines, ready-to-apply formulas, and standardized answers quickly revealed a deeper challenge: the new model no longer required merely calculations but demanded an economic understanding of operations.

For professionals who had historically been trained in an environment strongly focused on tax compliance, the change represented not only the introduction of new documentation requirements, but also a significant shift in the very way transactions between related parties are interpreted.

Concepts such as functional analysis, comparability studies, selection of the most appropriate method, and economic justification of transactions began to take center stage in discussions that, until then, were often conducted under a predominantly operational and tax-based framework.

In this context, the Local File has gradually taken on increasing importance within organizations.

More than just a document required by regulation, the Local File has begun to provide professionals with structured access to information about the entities’ business models, such as the functions performed by the companies, the risks they assume, the operational dynamics of multinational groups, and the economic rationale underlying transactions between related parties.

This role was made possible, in part, by the very architecture of the new documentation model. In line with OECD guidelines, Brazilian law now requires a structured set comprising the Master File, the Country-by-Country Report, and the Local File, each with a specific purpose but complementary to one another. Among them, the Local File occupies a unique position: it is in this document that the group’s global information is linked to the operational reality of the Brazilian subsidiary, allowing for an understanding not only of the financial effects of the transactions but also of the economic reasons that justify their existence.

Historically, many accounting professionals had access to the financial records of transactions between related parties, but not to the information needed to clearly explain the economic rationale behind those structures and decisions. Relevant information often existed, but it was scattered across contracts, accounting records, internal reports, financial flows, and different areas of the organizations, with no need, until then, to integrate it into a common economic narrative.

With the need to build the Local File, many companies began to realize that this set of information was not always organized in a sufficiently coherent manner to support the new standard required by the arm’s length model. In many cases, it became necessary to connect the previously scattered data and, in doing so, gain a more integrated understanding of how operations actually functioned: what roles were performed by the entities involved, what risks were assumed, and what economic rationale underpinned certain structures and financial flows.

This shift fostered greater integration among the accounting, tax, financial, legal, and operational departments of organizations.

Naturally, this transition did not occur in a linear fashion. For many professionals, the initial adaptation process was marked by uncertainty. The search for objective formulas, fixed parameters, and standardized answers revealed the difficulty of transitioning to a model that now required technical judgment, economic interpretation, and a deeper understanding of transactions between related parties. In highly integrated multinational groups, this difficulty was even more pronounced: strategic decisions and operational structures built globally did not always reach local teams with the economic rationale underpinning them, and without structured documentation, the risk of a disconnect between financial records and operational reality became a real concern.

In this context, the Local File has gradually come to serve as a link between the financial records of operations and the economic logic underpinning the business activities of entities belonging to multinational groups.

More than just meeting the documentation requirements imposed by the new regulatory framework, practical experience with the Local File has revealed a gradual broadening of Brazilian accountants’ technical perspective on the operations and business activities of the organizations they serve.

Transfer pricing support

Domingues e Pinho Contadores assists companies in applying transfer pricing in accordance with current regulations, helping to ensure compliance in transactions between related parties. Contact us for support: dpc@dpc.com.br.