Provisional Measure amends Brazil’s Corporate Income Tax legislation on transfer pricing rules

2022 Dec.29

Published today, December 29th, Brazil’s Provisional Measure No. 1.152/2022 amends the legislation on Corporate Income Tax and Social Contribution on Net Income on transfer pricing rules, in line with the standards adopted by the Organization for Economic Cooperation and Development (OECD).

An important point provided in the Provisional Measure is the express adoption of the Arm’s Length Principle (ALP), according to which the terms and conditions of a transaction between related parties must be similar to the terms and conditions of a transaction between unrelated parties.

In the application of the ALP for purposes for comparing operations between related and unrelated parties, the Provisional Measure requires that the outlining of the controlled transaction must take into account “realistically” available options. These could be construed as more advantageous options, which could be adopted by independent parties, including the non-performance of the transaction. Moreover, the comparability analysis of the transaction controlled from the selection of the “most appropriate method”, understood as the one that provides the most reliable determination of the terms and conditions.

In this way, the taxpayer loses the discretion to choose the least onerous method of calculating transfer prices (that is, the method that requires the least adjustment in the calculation basis of the Income Tax).

The Federal Revenue of Brazil must issue a normative instruction regulating the application of the Arm’s Length and establishing a hierarchy between the methods to be applied, in the same sense as the OECD Guidelines.

The methods indicated by the Provisional Measure are the Independent Comparable Price (PIC), the Resale Price less Profit (PLR), the Cost plus Profit (MCL), the Net Transaction Margin (MLT), Profit Sharing (MDL) and other methods that produce consistent results for comparison purposes.

The Provisional Measure regulates, albeit in general terms, the application of the Arm’s Length in operations: 

  1. with commodities;
  2. with intangibles (including those difficult to value);
  3. with intragroup services;
  4.  business restructuring;
  5. financial operations;
  6. centralized treasury management agreements; and
  7. of insurance contracts.

In Chapter V of the Provisional Measure, special simplification and legal certainty, measures are foreseen, such as specific consultation processes before the Federal Revenue Service and a mechanism for revising a potential tax assessment in order to implement the agreed result in dispute resolution provided for in an agreement or convention to avoid double taxation.

In addition to the general rules, the Provisional Measure also stipulates that the application of its provisions in operations with an unrelated party, resident or domiciled in a tax haven or in a country with a privileged tax regime – understood as that which tax income at a maximum rate of less than 17%.

Tax legislation was also amended by the Provisional Measure to mainly provide that amounts paid, credited, delivered, employed or remitted as royalties and technical, scientific, administrative or similar assistance to (i) entities resident or domiciled in country or branch with favored taxation or that benefit from a privileged tax regime or (ii) related parties when the deduction of amounts results in double non-taxation will not be deductible in determining the taxable income.

Finally, the Provisional Measure provides that the taxpayer will be able to opt for the application of the rules from January 1, 2023, on an irrevocable basis and must observe the changes that can be promoted in the articles. In any case, the Provisional Measure will apply from January 1, 2024.

From now on, the Provisional Measure will go to the National Congress for voting, and may undergo changes and even lose its validity.

The tax team at Rolim, Viotti, Goulart, Cardoso Advogados is available for any clarification related to the matter.

Related attorneys: Luis Felipe de Campos / Danilo Gomes Breve / Roberto Junqueira de Alvarenga Neto /