On the 14, June 2023, Ordinary Law no. 14,596/2023 was published, introducing new regulations for transfer pricing in Brazil, which align with the OECD (Organization for Economic Cooperation and Development) standard. This law addresses critical aspects of international taxation, including the regulation of cost sharing agreements, the Arm’s Length principle, difficult-to-value intangibles, Financial Operations, the Risks & Functions concept, and formalizes all intragroup transactions that were previously conducted by Brazilian multinational companies, even in the absence of clear rules.
The new legislation emerges in a context where Brazil is pursuing entry into the OECD, as well as exploring the potential for signing new treaties to prevent double taxation, including the recent treaty signed with the United Kingdom – which is pending internalization.
For the purpose of comparison, we have summarized the key changes in the transfer pricing legislation in the table provided below:
|Current Rules||New Rules|
|Arm’s Length Principle||While drawing inspiration from the principle, it is not formally adopted.||Explicit adoption of the principle, which aims to compare operations as if they were conducted between unrelated parties.|
|Calculation Format||Fixed margins are adopted, utilizing a mathematical calculation methodology.||Benchmark-based methods are adopted, primarily focusing on comparing transactions conducted in the market.|
|Adoption of the Method||The methods are adopted based on the taxpayers’ discretion, with specific methods being mandatory only for commodities.||The most suitable method is adopted, giving priority to the Comparable Uncontrolled Price (CUP) method, including for transactions involving commodities.|
|Calculation Method||Methods for import and export transactions are provided, along with specific methods tailored for commodities.||
Only the Comparable Uncontrolled Price (CUP) method has been retained, with the addition of other methods such as Resale Price minus Profit (RPM) without fixed margins, Cost Plus Profit (CPL), Net Transaction Margin (NTM), and Profit Split (PS).
In addition to the points highlighted above, the new legislation regulates transactions involving services and financial operations between related parties.
As to the other aspects covered by the legislation, we would like to highlight the following ones:
- Concerning cost-sharing agreements, the legal regulation for this subject was formerly and only addressed through Advance Tax Ruling Requests and other pronouncements by the Federal Revenue. This includes the provision of services with an additional profit component, which will be subject to transfer pricing rules.
- Transactions involving intangibles are now subject to transfer pricing rules, with the allocation of their results based on the contributions made by the parties, particularly the functions performed in relation to the intangible and the economically significant risks associated with these functions.
- Financial operations are now subject to transfer pricing rules, ensuring control over the amounts involved.
- Implementation of Advanced Pricing Agreements (APAs) to prevent double taxation.
- Possibility of advance consultation with the Federal Revenue regarding the chosen transfer pricing method.
The new regulations will take effect from January 2024, and multinational companies will need to demonstrate adaptability, particularly in identifying operations and preparing the necessary documentation for calculations. It is also important to note that it is possible to adopt the new rules for calendar year 2023, and once the decision is made, it cannot be reversed.
Undoubtedly, the new clearer rules bring significant benefits to Brazil, providing legal certainty for both Brazilian and foreign multinational companies operating within the country.
The new law is currently awaiting finalization by the executive branch, which will issue specific regulations for its effective implementation. It is anticipated that the Brazilian Revenue Services will release a draft of these regulations for a public consultation process, expected to begin in early July, whereas the early adoption of the new law is scheduled for September 2023.
Martinelli’s team of specialists will closely monitor the ongoing development of the legislation in the upcoming months to provide enhanced assistance to Brazilian and foreign corporations.