Provisional Measure (MP) 1,142 was published on December 29, 2022, and, after several proposals for amendments to the original text, the MP had its final wording approved unanimously on May 10, 2023, by the Federal Senate through the Bill of Law 8/2023 and will now go for sanction by the President of the Republic.
The new transfer pricing rules imply the immediate need for companies that have operations with related parties and/or tax havens and privileged tax regimes (controlled transactions) to review their controlled transactions, as well as any relationships between the parties.
The urgency and relevance of changing the transfer pricing rules were justified by the recent change in the tax policy of the United States, which no longer allows the use of tax credits referring to taxes paid in Brazil, among other, due to the fact that Brazil does not apply the arm’s length principle; also on the need to facilitate Brazil’s accession to the OECD; the tax collection losses that Brazil experiences year after year due to the various existing deficiencies in the Brazilian legislation, which leads to the erosion of the tax base and transfer of profits (BEPS); as well as the double taxation resulting from the rigidity of the current rules that ends up reducing investments in the country.
The new Brazilian transfer pricing rules incorporate the arm’s length principle, an internationally standard adopted for controlled operations between related parties. In general, based on this principle, for purposes of determining the Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) calculation basis, the terms and conditions of a controlled transaction will be established in accordance with those that would be established between unrelated parties in comparable transactions.
We highlight below the main aspects set out in the new legislation:
- Concept of controlled transactions: Controlled transactions comprise any commercial or financial relationship between two or more related parties, established or carried out directly or indirectly, including contracts or arrangements in any form and series of transactions;
- Definition of related parties: Parties are related when at least one of them is subject to influence, exerted directly or indirectly by another party, which may lead to the establishment of terms and conditions in their transactions that differ from those that would be established between unrelated parties in comparable transactions. The MP provides for some hypotheses of related parties, without prejudice to others that fit the definition;
- Transactions between unrelated parties will be considered comparable to the controlled transaction when (i) there are no differences that may materially affect the financial indicators (prices, profit margins, indexes, profit sharing between the parties or other data considered relevant) under the most appropriate method; or, if necessary, (ii) adjustments can be made to eliminate the material effects of the differences;
- Introducing OECD’s transfer pricing methods: The MP amends the existing methods based on fixed margins and introduces the five transfer pricing methods recognized by the OECD Guidelines to establish whether the conditions imposed on commercial or financial relationships between related parties are consistent with the arm’s length principle: (i) Comparable Uncontrolled Price Method; (ii) Resale Price Method; (iii) Cost Plus Method; (iv) Transactional Net Margin Method; and (v) Profit Split Method;
- Taxpayers will no longer be able to choose the applicable transfer pricing method. Instead, they will need to follow the MP’s provisions, the Brazilian tax authorities (RFB) regulations and the OECD guidelines to apply the ‘most suitable’ method – the one that provides the most accurate determination of the terms and conditions that would be established between unrelated parties in a comparable transaction. The RFB still need to discipline the way in which the most appropriate method will be determined, including the possibility of combining methods;
- Specific situations: The new rules also introduce specific rules for certain situations, such as: transactions involving intangibles, intragroup services, cost sharing agreements, business restructurings, insurance contracts, intragroup guarantees and financial transactions;
- End of non-deductibility of royalties: The MP also revokes the current limitations for deductibility of royalty payments, maintaining the prohibition of deductibility of royalty payments exclusively in cases (i) in which the beneficiary of the payment is resident or domiciled in a country with favored taxation (tax haven) or beneficiary of a privileged tax regime; and (ii) that generate asymmetries in such a way that the deduction generated in Brazil does not correspond to taxable income in other jurisdictions;
The new transfer pricing provisions will apply as of 2024. However, as per the Normative Instruction 2,132/23, taxpayers have the option to adopt the new rules as of September of 2023.
It should be noted that the application of the new transfer pricing rules still lacks specific guidance on several aspects and new RFB regulations are expected to be published soon.
The effects and tax impacts of the MP must be analyzed on a case-by-case basis and our tax team is available to further analyze this matter.
Philippe Jeffrey and Carla Tredici