In 2022, the Brazilian Federal Government published Provisional Presidential Decree (MP) No. 1,152/2022, changing the Brazilian transfer pricing (TP) rules. MP No. 1,152/2022 was aiming at introducing the Arm’s Length Principle into the Brazilian legal framework, as well as the five main methods for the TP calculations, amongst other changes.
Nevertheless, in accordance with the Brazilian legal system, MP No. 1,152/2022 had to be converted into law by the National Congress within a maximum of 180 days. Therefore, on June 15, 2023, Law No. 14,596/2023 was published, maintaining, in their majority, the alterations detailed in MP No. 1,152/2022. With this law, some of the main changes being implemented into the Brazilian TP rules also include:
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An expansion of the transactions that fall under the scope of the TP rules, as well as further detailing concepts such as “intangibles” and “related parties”;
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The adjustments may be spontaneous (directly on the IRPJ and CSLL calculation basis), compensatory (made by the parties until the end of the year in which the transaction is carried out) or primary (made by the Tax Auditor of the Brazil’s Federal Revenue);
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Targeted approaches have been implemented for intra-group services and cost-sharing contracts;
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The exclusion of a limitation on the deductibility of royalties paid to related parties, as long as they are calculated in accordance with the Arm’s Length Principle; and
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In operations regarding commodities, the comparable independent prices (PIC) method is to be maintained, except for situations in which the facts and circumstances of the transaction indicate that another method would be more appropriate.
This transition from formula-based rules to an arm’s length standard, through which functional and economic analyses of the controlled operations were introduced, will be mandatory for companies as of January 2024 onwards. Nonetheless, Law No. 14,596/2023 has provisioned that companies, intending to implement the changes in 2023, may do so through a digital proceeding, which will be available throughout September.
It is important to note that the Federal Revenue Secretariat of Brazil (RFB) has already issued Normative Instruction No. 2,132/2023 regulating the MP 1,152/2022. However, it is expected that the RFB will soon be issuing detailed regulations on the matter, given the conversion of the MP into law.
Given this change, companies will need to reassess their current business model, considering the impacts of the new legislation on their business in Brazil, adapting it to the direct and indirect tax implications on their operations.
