Brazil to Adopt the Arm’s Length Principle and OECD-aligned Transfer Pricing Rules
At the 90th minute (or 11th hour to those in the U.S.) of 2022, the Brazilian government issued draft legislation to align Brazil’s transfer pricing regulations with the international standards set by the OECD Transfer Pricing Guidelines.
Provisional Measure no 1.152 of December 29, 2022 (MP 1152) alters portions of the Brazilian laws on Corporate Income Tax (Imposto sobre a Renda das Pessoas Jurídicas – IRPJ) and Social Contribution on Net Profit (Contribuição Social sobre o Lucro Líquido – CSLL) and introduces significant changes. Some of the most notable include the:
- Explicit adoption of the arm’s length principle and the inclusion of any type of related-party financial or commercial transactions under the scope of transfer pricing rules. Brazil’s current legislation on transfer pricing focuses primarily on the transfer of tangible goods and on a limited scope of services. Intangibles and financials transactions are only considered for tax deductibility purposes;
- Transfer pricing documentation to cover functional analysis of the controlled parties and its intercompany transactions (including Development, Enhancement, Maintenance, Protection and Exploitation (DEMPE) of intangibles), and comparability analysis with uncontrolled (independent) parties or transactions;
- Choice of the most appropriate method, including the Comparable Uncontrolled Price/Transaction method (CUP/CUT), Transactional Net Margin Method (TNMM aka Comparable Profits Method in the U.S.) and profit split;
- Adoption of statistical intervals of profit indicators to establish the arm’s length range, including quartiles. Brazil’s current legislation revolves around the use of fixed margins and safe harbors; and
- Availability of Advance Pricing Agreements (APA) and Mutual Agreement Procedure (MAP).
The MP 1152 must be approved by both houses (Congress and Senate) of the Brazilian Parliament and be transposed into law in the next 120 days. With the newly elected government and parliament, the future of the bill is uncertain, but there are high expectations that after more than four years of discussion involving the Brazilian Federal Revenue Office (Receita Federal do Brasil – RFB), OECD, HMRC and other entities, the time has come for this much-anticipated convergence.
The RFB will have to provide specific guidance and issue regulatory instructions (instruções normativas) on many aspects of the draft legislation (and future law, if transposed) implementation. This is a tall order for RFB to fulfill, especially within the timetable established by the draft legislation. In the meantime, we will all be waiting (and watching closely) for scenes from the next chapter.