On December 29, 2022, the long-awaited Provisional Measure (PM) No. 1,152/2022 was published, changing the Brazilian transfer pricing (TP) rules. The main changes introduced by the MP are as follows:
- Arm’s Length Principle: All transactions subject to TP control will observe terms and conditions in accordance with those that would be established between unrelated parties in comparable transactions;
- Controlled transactions: the new rules apply to any commercial or financial relationship between two or more related parties, whether directly or indirectly, including contracts or arrangements in any form and series of transactions;
- Expansion of the concept of related parties: the "influence" criterion was adopted to define the parties subject to TP rules. Therefore, it is applied when one of the parties is subject to influence, directly or indirectly exercised by another party;
- The definition of the controlled transaction is based on the analysis of the evidence of the conduct of the parties, considering the functions performed, assets, contractual terms, and risks assumed between the related parties;
- The taxpayer can no longer choose the method to be adopted. The “most appropriate” method must be adopted, with the Comparable Independent Prices (PIC) method considered the most appropriate method when there is reliable information of prices or benefits arising comparable transactions between unrelated parties, especially for commodities;
- Five methods are prescribed for the TP calculation, however, other methods may also be adopted, provided that the alternative methodology produces results consistent with those that would be achieved in comparable transactions carried out between unrelated parties;
- The TP adjustments will be made in the calculation of the IRPJ and CSLL, without altering the commercial documents;
- The concept of intangibles, whose results are now allocated based on the contributions of the parties and the functions performed by each of them and the risks associated with these functions, has been expanded, with specific treatment being applied to those which are difficult to evaluate;
- Specific approaches have been implemented for intra-group services and for cost-sharing contracts;
- Penalties: the MP provides that the taxpayer must submit the information and documentation supporting the calculation, under penalty of a fine;
- The concept of a country with favored taxation has been altered to "country that does not tax income or taxes it at a maximum rate lower than 17”;
- The former s to the restriction on the deductibility of royalties have been repealed. Only royalty payments and technical, scientific, administrative or similar assistance remitted to entities in a country or dependency with favored taxation or which are beneficiaries of a favored tax regime, or when the deduction of the amounts results in double non-taxation, are now non-deductible the IRPJ and CSLL tax basis.
In general terms, the PM follows the pattern established in the OECD Transfer Pricing Guidelines, however, many of the new terms introduced are subjective, which may represent a great challenge for its application. Note that, as this is an alteration introduced by a Provisional Measure, it will still have to be converted into law by the National Congress in the coming months for its effects to be confirmed.
