Law No. 14,596/2023 was published on June 15, 2023, as a conversion of Provisional Measure (MP) 1,142, of December 29, 2022, which determines the new transfer pricing rules in line with the standards of the Organization for Economic Cooperation and Development (OECD); and incorporates the arm’s length principle, an internationally adopted standard for transfer pricing control in transactions between related parties.
The rules apply to transactions with (i) related parties, (ii) parties resident or domiciled in countries that do not tax income (or taxes it at a rate lower than 17%); or (iii) that benefits from a privileged tax regime.
In general, based on the arm’s length 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 according to those that would be established between unrelated parties in comparable transactions.
According to Law No. 14,596/2023, parties are related when at least one of them is subject to influence, exercised 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 new Law provides for some hypotheses of related parties, without limitation regarding others that fit the definition.
The new transfer pricing rules create the immediate need for companies that have operations with related parties and/or tax havens and privileged tax regimes (controlled operations) to review the signed contracts; as well as any relationships between the parties (e.g. service provision, debt operations, expense and cost sharing agreements, royalty payments, etc.).
In addition to the significant change in the transfer pricing rules, it should be noted that Law 14,596/2023 also revoked the current rules restricting the deductibility of royalties for IRPJ purposes.
The adoption of the new transfer pricing rules is mandatory as of January 2024 and optional for 2023. The Brazilian IRS (RFB) Normative Instruction No. 2,132/23 currently regulates the option for adopting the new rules – to be formalized in September 2023 by opening a digital process through its internet portal (E-CAC).
In any case, the application of the new transfer pricing rules lacks specific guidance on several aspects and new regulations by RFB are expected to be published soon.
In a Tax Alert published when the MP was converted into a Bill, we commented on the main changes promoted by the new transfer pricing legislation: https://news.fcrlaw.com.br/brazilian-transfer-pricing-legislation-is-about-to-converge-to-oecd-standards-conversion-of-provisional-measure-1142-into-bill-of-law-8-23/
The effects and tax impacts of Law No. 14,596/2023, including possible early adherence to the new rules, should be analyzed on a case-by-case basis, and our tax team is available to discuss the matter further.
By Carla Tredici, Julia Silva e Lima and Beatriz Januário