Brazil has recently enacted Provisional Measure 1,152/2022, which is intended to align the country’s transfer pricing legislation with the OECD guidelines. If approved, the proposed legislation is expected to be mandatory for taxpayers starting in 2024. Taxpayers can also opt to apply the new rules already in 2023—and regarding this option, there has been a new development.
Taxpayers’ Option to Apply the New Rules in 2023
Last month, the Brazilian Revenue Service enacted a regulation dealing with the option for taxpayers to apply the new transfer pricing rules in 2023. In addition to the procedure and deadline for taxpayers to opt for the new regime, the regulation explained the different types of adjustments on the taxpayers’ taxable base and provided details on the deductibility of royalty and technical assistance payments.
The regulation gave taxpayers from Sept. 1 to Sept. 30 this year to opt to apply the new regime in 2023. It may seem odd that taxpayers can only choose the new regime in the second half of the year, but the underlying idea seems to be to allow Brazil’s Congress time to vote on the new rules. According to the legislative procedure applicable to provisional measures, it has up to 120 days from resuming after its recess last February to vote.
If approved, Congress will immediately sign the measure into law. If rejected, the rules would have worked as a temporary law, unless Congress says otherwise. But it can also approve the measure with changes. During the legislative procedure, house and senate representatives can propose amendments. If approved with amendments, the president still has to sign it into law. That means the new rules will most likely only be known next June.
Brazil’s New Transfer Pricing Rules
The new regime incorporates the profit split method and transactional net margin method in addition to the traditional methods already in place. It also moves away from statutory pre-fixed margins for cost plus and resale minus. Moreover, the new legislation ends taxpayers’ choice of method, providing that taxpayers should select the most appropriate method based on aspects including the circumstances of the case and the availability of comparables.
The new rules also enlarge the scope of the country’s transfer pricing rules, as they would apply to all types of transactions between related parties and end the deductibility cap for royalty and technical assistance payments. Further, the proposed legislation includes sections on intangibles and hard-to-value intangibles, intragroup services, cost contribution arrangements, business restructurings, and financial transactions that reflect updates in the Organization for Economic Cooperation and Development guidelines.
However, the new transfer pricing rules aren’t set in stone yet, as they need congressional approval and are subject to amendments. It is important to note that there have been more than 100 amendments to Provisional Measure 1,152/2022, dealing with different aspects of the legislation. Thus, the transfer pricing rules eventually approved by Congress may be quite different from the rules as originally conceived.
Who Can Benefit From the New Rules in 2023?
In principle, adopting the new rules for 2023 could be advantageous for taxpayers with statutory pre-fixed margins higher than their real mark-up and US multinationals with Brazilian subsidiaries, after the US Treasury issued stricter rules for foreign taxes to qualify for US credit. Anticipating the adoption of the new rules for 2023 can also benefit taxpayers with royalty payments in excess of the deductibility cap as new rules end the cap.
However, even those taxpayers have reasons to be reluctant, because the rules may come out of Congress with significant changes. Moreover, the recent regulation didn’t address all of taxpayers’ concerns and most likely will have to be supplemented after the vote by Congress. To top it all, the option is irrevocable, and taxpayers will only have a few months after knowing the approved rules to choose, leaving little time for them to consider all the implications. All this makes taxpayers opting to adopt the new regime already in 2023 unlikely.
Bottom Line
To sum up, Brazil has recently enacted new transfer pricing rules to align its legislation with the OECD guidelines. The new rules are mandatory for 2024 and optional for 2023. Although some taxpayers could benefit from anticipating the adoption of the new regime for this year, it is unlikely that they will actually do so as the new regime’s final contours depend on congressional approval, which will most likely be known only a few months before the deadline for their option, leaving little time for the taxpayers to consider the implications.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Phelippe Toledo Pires de Oliveira is a tax attorney at the Office of the Attorney General for the National Treasury in Brazil (PGFN) and a lecturer at IBMEC-Brasília.
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