Executive order amending Brazil’s transfer pricing regime converted into law
Law No. 14,596/2023 will establish the arm's length principle for controlled transactions on a permanent basis as of 2024
Subjects
In a long-awaited development, Executive Order No. 1,152/2022 – which amends Brazil’s transfer pricing framework – was converted into Law No. 14,596/2023 on June 15, 2023 after receiving presidential assent. The Brazilian Senate previously approved the text based on a report by Senator Jayme Campos (União Brasil, Mato Grosso) in order to bring Brazil’s transfer pricing rules closer in line with those of the Organization for Economic Cooperation and Development (OECD). Although the rules will officially take effect in 2024, companies will still have the option to apply the new framework to transactions in 2023.
While in Congress, the executive order underwent specific changes regarding provisions that regulated transactions involving commodities, established secondary adjustments, and prohibited deductions of royalty payments to beneficiaries domiciled or resident in jurisdictions with favored taxation status or who are subject to privileged tax regimes.
Commodity transactions
In regard to transactions between related parties involving commodities, the Comparable Uncontrolled Price (CUP) method will be considered the most appropriate whenever there is reliable information on independent prices. As with other controlled transactions, the PIC method should not be used when it is established that another method is more appropriate for demonstrating the arm’s length principle, in accordance with the specific circumstances of the transaction.
The House of Representatives expanded the list of reliable information to include the use of the internal comparable transfer pricing – the previous version of the text was limited to public prices. Moreover, it expressly rejected the possibility of applying the CUP if adjustments to identified comparable elements affect their reliability, as well as the use of public prices if they are incompatible with the arm’s length principle due to extraordinary market conditions.
Having been amended by the House of Representatives and approved by the Senate, the text now also provides that other elements – such as assets, functions, and the risks for each entity in the value chain – should be considered in determining the most appropriate method for transactions involving commodities.
Secondary adjustments rejected
Congress also removed provisions regarding secondary adjustments from the final text of Law No. 14,596/2023. These provisions were excluded as they imposed tax treatments on credits granted to related parties in controlled transactions that exceeded the arm’s length principle – as well as establishing a 12% annual interest rate on outstanding amounts.
Royalty payments to beneficiaries based in favored tax jurisdictions or subject to privileged tax regimes
Article 45, item I of the original wording of Executive Order No. 1,152/2022 determined that for the purpose of establishing real profit, royalties would not be deductible if paid to entities resident or domiciled in favored tax jurisdictions or beneficiaries of privileged tax regimes.
The text approved by Brazil’s Congress removed this provision, meaning that the process of deducting remittances paid to such beneficiaries must follow the parameters for other royalty payments to related parties outside Brazil.
Next steps
The Brazilian Federal Revenue (RFB) has already announced that public consultations for a normative instruction to regulate the new legislation are set to commence shortly, with the publication of a final version expected by around August. The RFB also indicated the regulation would focus on the main chapter (Chapter II) of Law No. 14,596/2023, with the regulation of the remaining (more specific) chapters of the text to follow afterward.
For further information about tax developments and legislative news, please contact Mattos Filho’s Government Relations and Tax practice areas.