Provisional Measure alters transfer pricing rules

On December 29, 2022, the Official Federal Gazette made public Provisional Measure No. 1,152 (MP 1152), which introduces changes to the legislation on Corporate Income Tax (IRPJ) and Social Contribution Tax on Profit (CSLL), providing for new transfer pricing rules.

MP 1152 aims to align the country’s rules with international standards. The measure results from an overall process of attempts to approximate and adapt Brazilian standards to those recommended by the Organization for Economic Cooperation and Development (OECD). To this end, there was an adaptation to the arm’s length principle and changes in transfer pricing rules which used to be exclusive to Brazil.

These are the main provisions of MP 1152:

New and general provisions

Arm’s Length

MP 1152 adopts the Arm’s Length principle for determining the basis for calculating the taxes dealt with in operations subject to Transfer Pricing rules. Under this principle, the terms and conditions of a controlled transaction will be established based on the same terms and conditions that would be established between unrelated parties in comparable transactions.

In this sense, its application requires the delimitation of the controlled transaction (ie, the transaction subject to Transfer Pricing rules) and the comparability analysis of the controlled transaction with transactions to unrelated parties (ie, non-controlled transactions).

Adoption of the methods

The MP brings a set of existing and, to a certain extent, revamped methods already known in international practice but unheard of in Brazilian law. They are:

• Independent Compared Prices (PIC), which compares the value of transactions involving identical or similar products carried out, after adjustments, between independent parties. The MP carries a presumption that this method would be applied for transactions with commodities;
• Unlike similar methods in the current system, the Resale Price and Cost Plus (RPL and MCL) methods do not operate with fixed margins but depend on the analysis of uncontrolled transactions. They determine the need to adjust earned gross margins in resale and production based on the comparison between them;
• The Net Profit Margin and Profit Sharing methods (MLT and CDM), based on the comparability of net margins earned by the different players in the production and distribution chain.

Related parties

Although most of the criteria are for determining who would be the related parties (called “partes vinculadas” in the previous system), MP 1157 brings a new criterion considering as related: “the entities included in the consolidated financial statements, or that would be included if the controlling final shareholder of the multinational group of which they are a part prepared such statements if their capital was traded on the securities markets of their jurisdiction of residence”.

Adjustments to the IRPJ and CSLL basis

In line with international practices, MP 1157 also clarified, separated, and classified possible adjustments to the IRPJ and CSLL calculation bases in order to, among others, provide for secondary adjustments, considering those made by the counterparty in the controlled transaction and the compensation, considering the difficulty of making individual adjustments in each of the transactions during the calendar year.

Specific Provisions

MP 1152 also innovates by bringing express provisions regarding transactions with intangibles, hard-to-value intangibles, intragroup services, cost-sharing contracts, business restructuring and financial operations.

Concerning these specific transactions, the MP brings several considerations that, together with the methods described above, allow for more clarity regarding the nature of the adjustments.

In these cases, the MP also points to:

• The end of the old deductibility limits for payment of royalties;
• Non-deductibility of royalties and technical, scientific, administrative and similar assistance due to beneficiaries that are (i) located in a tax haven or privileged tax regimes, or (ii) related parties when the deduction of amounts result in double non-taxation;
• Maintenance of thin capitalization rules.

In addition, measures are planned to increase legal certainty and facilitate the process of consultation and dispute resolution with taxpayers.

Validity and effectiveness

• Effectiveness: the MP becomes effective after its publication, but it is applicable from January 1, 2023, only for taxpayers who opt for applying the new rules set out in article 46 of MP 1152. For others, from January 1, 2024;
• Processing period: under the terms of the current rules, the National Congress has up to 120 days to approve the provisional measure into law with the alterations deemed pertinent – this period does not run during the parliamentary recess in January. If not approved into law, the National Congress must regulate the effects of the legal relations formed during its term.

The provisions of MP 1,157 fundamentally change the application of transfer pricing rules in Brazil and, although the Executive Branch has sought to address the main operations in detail, the rule still depends on detailed analysis to map its developments and decisions by the taxpayers about its adoption as early as 2023.

For further information about this topic, please contact Mattos Filho’s Tax practice area.