Brazil's Federal Senate approved Provisional Measure No. 1,152/2022 (MP 1,152) on May 11, 2023. It was previously passed by Executive Power and in force pending full congressional approval and potential changes. The Chamber of Representatives made only few changes to the original "bill of law," and the Senate did not make any change in the version approved by the Chamber. It is now pending ratification by the President of the Republic.
The MP 1,152 revoked arts. 18 to 23 of Law nº 9.430/1996, which are the current transfer pricing legislation, in force since 1966 (with few structural changes). The new law, if ratified by the president, will enter into force in 2024, though taxpayers may opt in, applying the MP 1,152 in the current 2023 fiscal year.
While the current law has only few articles, the proposed MP 1,152 is forty articles long. The current law, which is claimed to be simple and practical, allows only for transaction methods. The CUP method is limited by law parameters, and the law defines fixed margins for the cost plus and resale price methods. The current legislation also does not allow for transactional methods or “other methods” and is extremely limited regarding issues such as intangibles, cost contribution arrangements and financial services. On the other hand, the proposed MP 1,152 is in fact a sort of “legislification” of the OECD Transfer Pricing Guidelines (TPG/OECD).
The length of the MP 1,152 is due to the fact that the methodology contained in, reflecting the (TPG/OECD), is much more complex and complete than the methodology of Law nº 9,430/1996, which can be considered obsolete in several ways. This legislative change stems from a project initiated more than four years ago, under the auspices of the OECD in collaboration with the RFB, with financial support from the UK. The result was a detailed report on the Brazilian methodology for transfer pricing and its transition to TPG/OECD rules (Convergence Report). MP 1.1.52 is the practical result of this process, which will be consolidated, if approved, by the publication of normative instructions by the Federal Revenue Service.
Despite of the length of the MP 1,152, there are many situations left to be regulated by the Brazilian Federal Revenue Service (RFB). For now, on February 24, 2023, RFB published Normative Instruction n. 2132/2023. It regulates taxpayers’ option to apply the new transfer pricing rules, for transactions occurring in the fiscal year of 2023.
It seems that some activities have advantages with the current system of fixed margins and safe harbors. In this sense, the changes promoted by MP 1,152 may affect more some economic sectors than others, especially those focused on exports, and they will not have due time to adapt to the new rules.
It is worth noting that the MP 1,152 brings the necessary elements to the intended alignment to the TPG/OECD. The legal text contains five chapters. The first, briefly, deals with the object that is the basis for calculating the two related taxes: IRPJ and CSLL (a social contribution levied on the net profit).
The second chapter brings the general provisions, divided into six sections, and coherently follows the TPG/OECD, dealing with the arm's length principle and how to apply it in general. While the text of the MP 1,152 is clearly based on the TPG/OECD, it does not explicitly quote or cite the TPG/OECD in the legal text. In the second chapter there is a relevant point, art. 2 of MP 1.152 clearly introduces the arm's length principle in the Brazilian legal system. Note that the title of the corresponding section brings the term “arm´s length” (ALP) in English, and the legislator did not dare to translate the term, which would be complicated; the option for the anglicism seems correct. Arm's length is a principle, and as such has a complex application, but the fact that it is now explicit in the text is a legal improvement for a civil law system. This Chapter of the “bill” also deals with what are the controlled transactions, which under the new legislation has a much broader scope than that of the legislation in force that is only restricted to transactions with tangible assets, some services and loan operations. Under MP 1,152, all transactions between related parties would be subject to adjustments if they do not comply with the ALP. Under current legislation, payments made abroad for intangibles and technical services have limited deductibility (based on legislation that is more than 60 years old) – these operations are currently not subject to transfer pricing adjustments. This distortion will no longer exist because MP 1,152 revokes the rules limiting the deductibility of royalties and technical services and subjects these transactions to transfer pricing rules.
Chapter three, called “specific provisions,” contains six sections that govern more specific topics, namely: transactions with intangibles; hard to value intangibles; intragroup services; cost-sharing contracts; business restructuring; and financial operations, in the same line the OECD/TPG does.
Chapter four deals with documentation and penalties. Current legislation, due to its limited scope and practicality, is not very demanding in terms of documentation. From now on, the documentation and its coherence in terms of data, sources and statements become more demanding. In the case of penalties, MP 1,152 adopts a more contemporaneous system, one that is adapted to each situation, and that favors the taxpayer who collaborates with the tax administration.
Chapter five refers to specific measures and legal certainty. Although the term is not expressly used, the first section of this chapter refers to the possible institution of so-called “safe harbors.” The Convergence Report recommends the use of safe harbors as a simplification measure, if they are well structured. The other important aspect is the introduction of Advance Pricing Agreements (APA), which is are allowed under current legislation. This is also in line with the Convergence Report. “However, the possibility of bilateral advance price agreements (BAPAs) is not clear in the MP text.” RFB will issue regulations regarding safe harbours and APAs. The MP 1.152 also regulates the Mutual Agreement Procedure in cases where a Double Tax Agreement (DTA) also applies. It should be noted that none of the of the Brazilian DTA’s present paragraph 2 of article 9 of the Model Conventions, but the new legislation tried to address the problem in articles 17-19 of the MP 1,152.
Chapter six brings the final provisions with adaptive dispositions in relation to other existent norms, in addition to the revocation of arts. 18 to 23 of Law No. 9,430/1996 and the deductibility limitation rules, it also introduces new wording to arts. 24 and 24-A of Law No. 9,430/1996 (that deals the concept of “tax haven” in Brazilian legislation), reducing the threshold for characterization as favored taxation from 20% to 17%, aligning with the current corporate tax rates around the world.
We are now only awaiting the president's final ratification of MP 1.152 for adoption into a federal law. It will be a sea change for the Brazilian international tax environment.
Marcos Valadão, S.J.D. is partner at Valadão, Capone & Reis Law Firm (Brazil) and member of the Subcommittee on Transfer Pricing of the UN Tax Committee. He has served on the committee since its creation, when he was also a Member of Committee, and was Chair of the 1st Section at the Brazilian Administrative Court of Tax Appeals (CARF) (with competence to decide transfer pricing cases). He also holds an LLM in International and Comparative Law and Masters Degree in Law. He can be contacted at firstname.lastname@example.org.
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