PM published amends transfer pricing rules

Provisional Measure No. 1.152/2022 (“PM”), published on December 29, 2022, amends the Brazilian transfer pricing rules applicable to transactions controlled by related parties abroad, in an attempt to align Brazilian standards with those used by countries that are now members of the Organization in the Organization for Economic Co-operation and Development (“OECD”).

We highlight below the main points brought by the PM:

Concept of related parties: the PM considers related parties when one of them submits to the influence of the other, directly or indirectly, to the point that the terms and conditions of a transaction differ from those that would be established in similar transactions between unrelated parties.

Article 4 of the PM lists several parties considered related, in a non-exhaustive list, with emphasis on parties with corporate ties and family relationships between directors, partners, among others.

In order to increase the scope, especially with regard to depersonalized foreign entities, the PM replaced the term “legal person” with “entity”.

Delineation of the operation: the controlled transaction must be delineated based on the analysis of the facts and circumstances involved, considering:

  • contractual terms;
  • functions performed by the parties, considering the assets used and economically significant risks assumed;
  • specific characteristics of the goods, rights and services object of the controlled transaction;
  • economic circumstances of the parties and the market in which they operate;
  • business strategies and other characteristics considered economically relevant.

When dealing with the outlining of the operation, the PM argues that the options realistically available to each of the parties to the controlled transaction will be considered, attributing to the inspection the right to disregard or replace the transactions with an alternative, when it is concluded that unrelated parties, acting under comparable circumstances and behaving in an economically rational manner, would not have carried out such a controlled transaction as outlined.

Comparability analysis: must be carried out in accordance with the objective of comparing the terms and conditions of the controlled transaction, after being duly outlined, considering the economically relevant characteristics, date of the transaction, availability of information, selection of the best method and financial indicator, any uncertainties in pricing and existence of group synergy effects.

Best method rule: the best method rule was named by PM as “selection of the most appropriate method”. Until then, the taxpayer can always exercise the discretion to apply any method provided by law. In selecting the most appropriate method, it will be necessary to observe which method best measures and represents the arm’s length standard.

In determining the best method, factors such as the degree of comparability between controlled and non-controlled transactions, as well as data and assumptions considered in the analysis are relevant. For this reason, the previous comparability analysis is essential in determining the best method to be applied.

Methods: of the methods already provided for in the current Brazilian legislation until the publication of the PM, the Resale Price Less Profit Method (“PRL”), the Cost Plus Profit Method (“MCL”) and the Independent Comparable Price (“PIC”) remained. In addition to these methods, the Transaction Net Margin Method (“MLT”) and the Profit Sharing Method (“MDL”) were added.

We emphasize that the MLT and MDL, commonly used in other jurisdictions, require the observance of economic and financial information of companies that operate in the same sector and under similar conditions.

The PM also provides for the adoption of other methodologies not described, provided that the result produced is consistent with what would be achieved in comparable transactions carried out between unrelated parties.

Still, the PM assigns to the RFB to discipline the application of methods, including with regard to the combination of methods, aiming to increase the reliability of the analysis, as occurs in the US and in other jurisdictions.

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Trading with commodities: in addition to providing a definition of a commodity, the PM determined that the most appropriate method for trading with commodities will be the PIC, unless, according to the facts and circumstances, another method is more appropriate to meet the arm’s lenght standard.

If there are differences between the conditions of the controlled transaction and the conditions between unrelated parties that determine the heart price that materially affect the price of the commodity, adjustments will be made to ensure that the economically relevant characteristics of the transactions are comparable.

Intangibles: in addition to conceptualizing the term “intangible” and “intangible that is difficult to value”, the PM determines that the allocation of the results of controlled transactions involving intangibles will be based on the contributions provided by the parties and, in particular, on the relevant functions performed in relation to the intangible and economically significant risks associated with these functions.

According to paragraph 1 of article 22 of the PM, the mere ownership of the intangible asset will not give rise to the attribution of any remuneration resulting from its exploitation.

With regard to intangibles that are difficult to value, consideration will be given to the pricing or valuation uncertainties existing at the time of the transaction, and whether such uncertainties were properly addressed as unrelated parties would have done so under comparable circumstances.

As for royalties from trademarks, patents and technical assistance, we highlight the revocation of the deductibility limitation of up to 5%. Such remittances, together with remittances of royalties as remuneration for copyright, will be subject to transfer pricing rules.

The PM also revoked the provisions that prevented the deductibility of royalties paid to partners, headquarters or parent company abroad.

However, new restrictions have been established so that royalties remitted abroad are deductible, namely (i) the payment of royalties to beneficiaries located in tax havens or beneficiaries of privileged tax regimes and (ii) related parties, when the deduction results in double non-taxation.

Intra-group services: the PM defines what are considered intragroup services as any activity carried out by a party, including the use or provision by the provider of tangible or intangible assets or other resources, which results in benefits for one or more parties.

Excluded from the scope of intra-group services are the activities of a partner or shareholder, direct or indirect, in their own interest, including those whose sole purpose or effect is to protect the capital investment or facilitate compliance with loyal, regulatory or reporting obligations of the provider.

Also excluded from the scope of intra-group services are activities that represent the duplication of a service already provided to the taxpayer or that it has the capacity to perform, except in cases where it is demonstrated that the duplicated activity results in additional benefits for the policyholder.

Cost-sharing: the PM brings a concept of sharing that differs from that commonly used in Brazil with regard to reimbursement of costs without adding a profit margin. Article 26 characterizes cost sharing as the arrangement in which two or more related parties agree to share the contributions to risks related to the acquisition, production or development of services, intangible or tangible, based on the proportion of benefits that each party expects to obtain.

Business restructuring: defined as commercial or financial changes between related parties that transfer profit or loss to one of the parties involved without observing the arm’s lenght standard, not to be confused with corporate restructuring.

Although foreseen in the PM, the matter of business restructuring did not receive detailed treatment, since it will be further explored in the Normative Ruling.

Adjustments: the PM provides for (i) spontaneous, (ii) compensatory, (iii) primary and (iv) secondary adjustment.

With regard to adjustments, special emphasis goes to the secondary adjustment, which, in accordance with the provisions of article 19 of the PM, will take place via a fictitious loan with an interest rate of 12% per year, reduced to zero if a part of the transaction reimburses the other with the “credit” within 90 days.

Secondary adjustment is not a reality in some jurisdictions, and in others it can occur in other ways. In the US, for example, in addition to the “presumed loan / fictitious loan”, the secondary adjustment can occur via “presumed dividends” or “presumed capital contribution”.

Financial operations: the PM expanded the scope of financial operations to cover not only debt operations, but also centralized treasury management agreements, insurance contracts and intra-group guarantees.

Advance Pricing Agreements (“APAs”): the taxpayer may consult the RFB on the adoption of methods, financial indicators and other analysis factors, as occurs in other jurisdictions that adopt the arm’s lenght standard. Such consultation process will be subject to a fee of BRL 80,000.00, without any distinction between companies due to their size.

The forecast is the validity for the consultation solution is up to four years, being authorized the extension upon request of the taxpayer and approval of the competent authority.

There is also provision for hypotheses in which the consultation solution may be rendered void, changed or revised.


Written by the Tax Planning / Transfer Pricing team at Drummond Advisors

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