On December 29, 2022, Provisional Measure (“MP”) 1,152/2022 was published, which changes the Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) legislation for legal entities in relation to the transfer pricing rules. MP is divided into subsections that deal with specific aspects of the new legislation. The main aspects are briefly discussed below.
The MP is an attempt to change the previous system with fixed margins (more objective) to the international standards established by the Organization for Economic Cooperation and Development (OECD) aiming to adequate it to the arm's length principle (more subjective). As consequence, transactions between related parties via management, control, or capital, should consider the same terms and conditions that were agreed between unrelated parties for non-controlled and comparable transactions. Therefore, the use of the new rules will require the delimitation of the controlled transaction and the analysis of its comparability with transactions with unrelated parties. Controlled transactions now consider all commercial or financial transactions (including intangibles/royalties) between related parties (previously only goods, services and rights were subject to analysis).
In addition to the methods already foreseen in the legislation (CUP, Resale and Cost-Plus methods), the MP included two other new methods in the Brazilian legislation: the Transactional Net Margin Method (TNMM) and Profit Split (PS). The MP no longer allows taxpayers to choose the method that is most favorable to them, but the one that best reflects the market value of a transaction between unrelated parties (best method).
Commodities maintain specific rules in their own subsection. The previous specific methods (PCI and PECEX) were adjusted within the CUP method, prioritizing its adoption and prices on commodity and futures exchanges, research agencies or government agencies (to be defined by the Federal Revenue of Brazil (“RFB”)). At first, the MP seems to bring greater flexibility to the rules, allowing determination of the CUP method based on the value of the commodities on the date or set of dates agreed by the parties for the transaction.
The possibility of carrying out adjustments during the calendar year was also introduced to ensure that the average value of prices practiced between related parties is in line with transfer pricing methods, a point of attention to be considered in current and future treaties to avoid double taxation signed by Brazil.
In addition, the MP brought specific provisions regarding transactions with intangibles, intangibles that are difficult to estimate its value, intragroup services, cost-sharing agreements, business restructuring and financial transactions (including debt contracting and treasury transactions, as well as insurance and guarantee), such as (i) the non-deductibility of royalties and technical, scientific, administrative and similar assistance due to beneficiaries in a tax haven or privileged tax regimes, related party when the deduction of amounts results in double non-taxation; (ii) the end of deductibility limits for royalty payments; and (iii) maintenance of the thin capitalization rules provided for in Law 12,249/2010.
Another novelty is the possibility of request advance price agreements (“APAs”) with the RFB to previously agree on the terms and conditions for the use of to the new rules for specific case of each taxpayer. Each APA will have a fee of R$80 thousand (equivalent to US$15 thousand) and will be valid for four years. In case of extension request, another R$ 20 thousand (equivalent to US$4 thousand) will be due. The amounts do not depend on the size of the company and there is no provision for secrecy of the information provided or the possibility of consultation by third parties.
Finally, it should be noted that the RFB will be responsible for regulating several points of the MP, such as the possibility of combining methods, comparability adjustments, ancillary obligations, documentation to be presented in case of inspection and possible safe harbors.
The initial term of validity of the MP is 60 days from January 1, 2023; and may be automatically extended for the same period if its analysis and approval is not concluded in both houses of the National Congress. In the specific case, considering the parliamentary recess in January, the deadline will end on June 1st. The use of the new rules is optional for 2023 and mandatory as of 2024. However, if it is not converted into law, the National Congress must regulate the legal effects that occurred during its validity, and the previous set of rules return.
On the topic of possible changes in transfer pricing rules in Brazil, partner Henrique Munia e Erbolato published a co-authored article in Bloomberg Tax entitled “Impact of Pillar One on Brazil’s Transfer Pricing Regime”, in August 2022; where the challenges for its alignment with the OECD transfer pricing guidelines were addressed (and are still applicable):
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