At the Senate session held on May 10, 2023, the Conversion Bill No. 8 of 2023, originating from Provisional Measure No. 1.152/2022, which addresses Transfer Pricing rules, was approved. The bill maintained the text approved by the Chamber of Deputies and now proceeds to the President of the Republic for signature.
Provisional Measure No. 1.152/2022, which introduces changes to Transfer Pricing rules, was published on December 29, 2022, following an extensive joint effort between the Brazilian Federal Revenue Service (RFB) and the Organisation for Economic Co-operation and Development (OECD).
Among the key changes introduced by the new Transfer Pricing legislation, affecting Brazilian legal entities that transact with parties located abroad, the following stand out:
Arm’s Length Principle: determines that the terms and conditions of a transaction between related parties must be consistent with those established between unrelated parties.
Elimination of fixed margins: all new methods adopt the comparison of transactions between unrelated parties, and margins will now reflect market conditions. Previously, margins were pre-defined by Brazilian legislation.
Method selection: the new rules require the selection of the most reliable method for the transaction, and it is no longer permitted to choose the methodology that results in the smallest adjustment.
Calculation methodology: the traditional methods currently used, such as the Comparable Uncontrolled Price (CUP), the Resale Price Method (RPM) and the Cost Plus Method (CPM), will no longer be applied separately for imports and exports, and will instead apply to both types of transactions. In addition, two new methods are introduced, known as the Transactional Net Margin Method (TNMM) and the Profit Split Method (PSM), which were not previously provided for in Brazilian legislation.
Tested party: it will be possible to select only one of the related parties to conduct the transfer pricing analysis, taking into account the availability of more reliable data and the assurance that the method can be applied appropriately. Under the current rules, all transactions had to be analyzed by the Brazilian entity.
Adjustments to the tax base: when the terms and conditions of transactions between related parties differ from those that would be established between independent companies, adjustments to the tax base will be made for tax purposes. The new rules establish three forms of adjustment: a spontaneous adjustment made by the taxpayer in calculating the Corporate Income Tax (IRPJ) and the Social Contribution on Net Income (CSLL), a compensatory adjustment made between related parties during the calendar year under analysis, and a primary adjustment made directly by the tax authority in cases of identified non-compliance or to avoid double taxation during a potential audit.
Commodities: preferential application of the CUP method, unless it can be established, in accordance with the facts and circumstances of the transaction and with the other elements (including the functions, assets and risks of each entity in the value chain), that another method is more appropriately applicable.
Royalties: expansion of the concept of intangibles, including royalties within the scope of the new transfer pricing rules. Under current legislation, royalties are not subject to transfer pricing rules.
Business Restructuring: restructurings that result in the transfer of potential profit (goodwill, functions, activities, people, assets and risks) or losses to any of the parties, and which would generate remuneration if carried out between unrelated parties, will be subject to transfer pricing analysis.
Financial Transactions: in addition to loans, intragroup guarantees, centralized treasury management agreements and insurance contracts are incorporated into the concept of financial transactions, subject to transfer pricing rules.
Penalties: in the event of non-compliance with the rules established by Provisional Measure No. 1.152/2022, the taxpayer may be penalized with fines ranging from a minimum of BRL 20,000 to a maximum of BRL 5,000,000.
It is important to note that we await additional clarifications, particularly with regard to the databases to be used for the analysis of comparable transactions, which are to be established through the regulation of the new standard.
The application of the new rules will be mandatory from January 1, 2024, but the standard provides for the option of early adoption for the 2023 calendar year. In this case, the legal entity must complete the form contained in the sole annex of Normative Instruction No. 2.132/2023 and attach it via digital process in the e-CAC portal, between September 1 and 30, 2023.
By Raphaela Marcon and Verônica Teixeira
