One of the most significant changes introduced by Brazil’s new transfer pricing legislation, aligned with OECD guidelines, is the specific treatment of Low Value-Adding Intra-Group Services (LVAS).
But what exactly qualifies a service as “low value-adding” for transfer pricing purposes?
The Concept
Law No. 14,596/2023 and the regulations issued by the Brazilian Federal Revenue Service establish that low value-adding intra-group services are those that:
• Have a supporting operational nature and do not constitute part of the group’s core business activities;
• Do not involve the assumption of significant risks by the service provider;
• Do not utilize unique and valuable intangible assets;
• Do not generate a significant competitive advantage or contribute to the group’s strategic decision-making.
Examples recognized under the legislation include:
• Routine accounting and financial services;
• Administrative legal support services;
• Human resources activities;
• IT support services;
• Support-related communications and marketing activities.
Application of the Simplified Method
Once a service is classified as a low value-adding service, a simplified pricing methodology may be applied based on the total cost of providing the service, plus a 5% gross profit markup.
However, this markup operates differently depending on the direction of the transaction:
• A minimum markup of 5% applies when the service provider is a legal entity domiciled in Brazil, protecting the Brazilian tax base on exported services;
• A maximum markup of 5% applies when the service provider is a related party located abroad, limiting deductibility on imported services and preventing profit shifting through excessive pricing.
This differentiated treatment is intended to prevent both the underpricing of exported services and the overpricing of imported services that could improperly reduce Brazil’s taxable income base.
Important Consideration
The improper classification of a service as LVAS is one of the most common risks in this area.
Services that, in substance, involve the transfer of know-how, strategic decision-making, or the use of valuable intangible assets do not qualify for the simplified treatment, regardless of how they are described in intercompany agreements.
For example, sales and marketing teams may formally be described as providing operational support services. However, if they directly influence the group’s commercial strategy, brand management, or market development efforts, the economic substance of the transaction may prevent the service from qualifying as LVAS.
Shared Employee Costs
Another equally relevant and often overlooked risk involves sales, marketing, HR, finance, or legal professionals employed by a Brazilian entity who dedicate part of their time to benefiting a related entity located abroad.
In such cases, an intra-group service is being provided and must be compensated accordingly.
If the service qualifies as LVAS, the treatment is relatively straightforward:
• The proportional cost associated with the time dedicated to the foreign related party must be identified and segregated;
• A minimum 5% markup must be applied to both direct and indirect costs;
• The allocation among beneficiary entities must be formalized using a reasonable allocation key and supported by proper documentation.
Companies that fail to formalize this arrangement may effectively subsidize the foreign entity without compensation. In addition to violating the arm’s length principle, such situations may be challenged by the Brazilian Federal Revenue Service as unreported revenue or as evidence of an undocumented transfer pricing policy.
For tax purposes, the characterization of a transaction is not determined solely by the terminology adopted by the parties. The economic substance of the transaction prevails over its contractual form.
The proper identification and documentation of low value-adding intra-group services is not merely a compliance requirement. It is a strategic decision that directly impacts a group’s transfer pricing policy, effective tax burden, and legal certainty in transactions between related entities.
Drummond Advisors has a specialized Transfer Pricing and Cross-Border team ready to assist companies in evaluating the impacts of transfer pricing regulations. Our services include reviewing international structures, intercompany agreements, transfer pricing policies and documentation, as well as assessing whether transactions comply with the arm’s length principle under Brazilian legislation, U.S. tax rules, and OECD guidelines.
Written by Adriana Lemos, Transfer Pricing & Cross-Border Strategy Lead at Drummond Advisors