On July 3, 2023, the Brazilian tax authorities (RFB) published the Public Consultation nº 01/2023, to collect comments and suggestions regarding the draft of the Normative Instruction (IN) that will regulate the new transfer pricing system resulting from the publication of Law No. 14,596, of June 15, 2023. The Public Consultation is open until July 25, 2023.
Law 14,596/2023 provides for 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 controlling transfer pricing for transactions between related parties.
We emphasize that the provisions brought by the draft IN, object of the Public Consultation, deal especially with general provisions of applicability in the new transfer pricing rules and indicate that more specific regulations may be enacted about the following: transactions with commodities, transactions with intangibles, intragroup services, cost-sharing agreements, business restructuring, financial operations; as well as on the specific consultation process “APA”, among other measures.
We highlight below some of the relevant aspects of the draft of the IN:
- As confirmed by the text of the IN, the rules are valid for operations with (i) related parties, (ii) parties resident or domiciled in a country that does not tax income (or that taxes it with a maximum rate lower than 17%); or (iii) that benefits from a privileged tax regime. Furthermore, the IN expressly provides for the applicability of the new rules for legal entities subject to the actual, presumed or arbitrated profit regime (for corporate income tax purposes);
- According to article 1 of the IN, the guidelines of the OECD and its future amendments are subsidiary sources for the interpretation of the Brazilian transfer pricing rules, unless contrary to the terms of Law No. 14,596/2023 and the IN under Public Consultation;
- The IN provides (article 3) examples of controlled transactions such as: operations with tangibles, services of any kind, business restructuring, financial operations, any sale, assignment, loan and lease and, with special emphasis, transactions whose purpose is the transfer or sale of assets, including shares or other participations – which means that corporate reorganization between related parties or tax havens / privileged regimes are now subject to transfer pricing rules;
- The IN also provides a list of comparability factors that must be considered for the purpose of delineating the controlled transaction and the comparability analysis; providing details for each of them: (i) contractual terms of the transaction; (ii) functions performed by the parties to the transaction; (iii) specific characteristics of the goods, rights or services; (iv) economic circumstances; (v) business strategies and; (vi) other characteristics considered relevant;
- The possibility of disregarding a controlled transition was introduced, for cases when it can be concluded that unrelated parties, acting in comparable circumstances and behaving in a commercially rational manner, considering the options realistically available to each of the parties, would not have entered into the transaction;
- Regarding carrying out the comparability analysis, the IN indicates that domestic comparables should preferably be adopted; that is, identified in the geographic market where the tested party operates; but in the absence of domestic comparables, the use of comparable transactions from other geographic markets may be used, provided they are justified;
- The use of non-transactional data (data of the entity as a whole) is allowed for the application of the Net Transaction Margin method – MLT, when such data represent reliable comparables for the controlled transaction;
- Article 27 of the draft IN allows international offsetting so that a related party may offset the benefit provided to another related party in a controlled transaction against a benefit received from the other related party in miscellaneous controlled transactions, and the gain or loss net shall be computed in the determination of the corporate income tax basis;
- The IN set forth that spontaneous or compensatory adjustments do not automatically imply adjustments in the calculation basis of other taxes, including those levied on importation of goods and services;
- In addition to the methods provided for in accordance with OECD standards (PRL, MCL and MLT), the permission of applying other methods was maintained, if those provided for in the legislation are not reliably applicable;
- So far, the Safe Harbor rules have only been envisaged for operations considered as “low value-added intragroup services”, in which case it is enough to demonstrate that the gross profit margin of these transactions is 5%: a minimum margin of 5% for the provision of local service and a maximum of 5% for service provided abroad;
- The need to record information on export and import contracts for commodities, including amendments, was maintained up to the 10th day following the signing of the contract or amendment;
- The IN provides that the taxpayer will present the documentation and provide the information necessary to demonstrate that corporate income tax calculation bases related to its controlled transactions are in compliance with the arm’s length principle, through the electronic process of the RFB, in the same deadline set for transmission of the ECF ; considering, in addition to supporting documentation: (i) global file, containing information regarding the structure and activities of the multinational group; ( ii ) the “country- by -country ” file with information about the global allocation of revenues, assets and income tax by the multinational group; and ( iii ) local file, containing information related to controlled transactions and related parties. The lack of presentation or incomplete presentation will result in the application of penalties;
- Finally, the option to early adopt the new rules in 2023, which until then should have been made by September 31, can be formalized now between November 1 and 30, 2023 through the opening of a digital process through the E-CAC Portal.
The tax effects and impacts of Law No. 14,596/2023; as well as the current text of the draft IN, including any early adherence to the new rules, must be analyzed on a case-by-case basis and our tax team is available to further discuss and assist you.
By Philippe Jeffrey and Carla Tredici