Brazil: Draft legislation to align transfer pricing rules with OECD Transfer Pricing Guidelines

At the end of calendaryear 2022, Brazilian government issued draft legislation by Provisional Measure (PM) 1152/22 to align Brazilian transfer pricing rules with the OECD Transfer Pricing Guidelines.
The draft legislation must be approved into law by the Brazilian parliament (congress and senate) with 120 days. Although it is not certain, it is expected that the new government and newly elected parliament will support the bill (The end of April/23).

After the new law, Brazilian Tax Authority should issue a Normative Instruction to regulate the new law and provide guidance on the new regulation. Even though it is possible to evaluate on an initial assessment, just after issuing the new law and regulation Brazilian taxpayers should be able to evaluate appropriately effects and consequences. For calendar year 2023, Brazilian taxpayers can choose between the current transfer pricing rules and the new OECD-based rules. Due to the lack of regulation, probably, Brazilian taxpayers will face hard barriers to evaluate the consequences of the new rules. As from January 1, 2024, if approved by Brazilian parliament, the new OECD-based rules will be mandatory.

Overview of proposed changes

The Provisional Measure draft the new regulation in six chapters:
▪ Chapter I: provide general
introduction to the new rules that
should reflect on the Income Tax
calculation.

▪ Chapter II: introduces Arm´s Length
Principle, OECD Transfer Pricing
Methods, including Transactional Net
Margin Method and Profit Split
Method, and Comparability analysis.

▪ Chapter III: introduces concepts to
evaluate intangible goods, intragroup
services, cost contribution
arrangements and financial
operations.

▪ Chapter IV: provides general
guidance on the expected Transfer Pricing documentation and penalties
in case of not compliance.

▪ Chapter V: provides guidance on the
administrative approaches to
avoiding and resolving transfer
pricing disputes.

▪ Chapter VI: amend tax legislation
that contradicts the proposed transfer
pricing rules.

In view of the Draft of new Brazilian Transfer
Pricing rules, it should be highlighted:

• Financial transactions, including
insurance and loan guarantee,
must be scope of transfer pricing
rules.

• The selected transfer pricing
method must be “the most
appropriated method” that best
meet the arm´s length pricing.

• Provision of the Transaction Net
Margin Method and Transactional
Profit Split Method.

• Comparability analysis, including
functions, risks and assets
analysis.

• Intangible goods should be a
critical area, requiring DEMPE
functional analysis (Development,Maintenance, Enhancement, Protection and Exploitation).

• Business restructuring must be
reviewed from the arm´s length
principle perspective. M&A active
should be a critical area.

• Different types of transfer pricing
adjustments (spontaneous by
taxpayer, imposed by Tax
Authority, calendar year end, precalendar year end) should be
possible. Here should a critical
area since to avoid double
taxation, taxpayers should be able
to adjust profit before calendar
year end between companies in
different jurisdictions.

• Provision of rulings and mutual agreement procedure (MAP).

We understand that it is more likely than not that the PM 1152/22 should be approved by the Brazilian Congress by the end of April/23. Since it is possible that PM receives amendment, it would be a good approach to wait the conclusion of legislative process to have a better picture of the scenario. In addition, as the last step, Brazilian Tax Authority must regulate the application of the new law via Normative Instruction. Even though it is possible to evaluate on an initial assessment, just after issuing the new law and regulation Brazilian taxpayers should be able to evaluate appropriately effects and consequences.
Should you have any question, we are prepared to assist you.

Bluemind | www.tpbluemind.com
Demetrio Barbosa | [email protected]
Juliana Campos | [email protected]