Brazil: Normative Ruling regulates the option for the new transfer pricing rules in 2023

In brief

On February 24th, 2022, Normative Ruling RFB No. 2,132 (“IN”) was enacted, to regulate the taxpayer’s option for the early application, in calendar year 2023, of the new transfer pricing rules (“TP”) and royalty deductions provided for in Provisional Measure No. 1,152/2022 (“MP”). The IN reaffirmed the irrevocable nature of the option and regulated some of the aspects that needed regulation. Below we detail the most relevant ones.

More details

1) Anticipated effects of the MP still in 2023

The option for the application of the MP rules, for calendar year 2023, must be formalized between September 1st and 30th by:

• Filing a digital administrative procedure on the e-Cac Portal (Brazilian Federal Revenue digital platform);
• Attaching the option term contained in the Sole Annex of the IN, duly filled out with the name, address, email, and CNPJ of the taxpayer, email and CPF of the legal representative, and with a statement from the legal entity that it is aware that the option is irrevocable and that it will result in compliance with articles 1 to 45 of the MP and the effects of article 47, as of 01/01/2023.

The IN also addresses the deadlines applicable in cases of incorporation and liquidation of legal entities and beginning of activities.

2) Adjustments on the IRPJ and CSLL tax basis

The IN has provided some complementary provisions to those foreseen in the MP on transfer pricing adjustments. It is worth mentioning the regulations brought to the compensatory and voluntary adjustments:

a) Compensatory Adjustment  

According to article 7 of the IN, the compensatory adjustment must:

• be recorded in the legal entity’s bookkeeping domiciled in Brazil and of the other parties of the controlled transaction;  
• it must be grounded on the issue of debit or credit notes, or on tax and commercial documentation able to prove the nature and the amount of the adjustment; and  
• be ratified by a statement of the legal representative of the other parties of the controlled transaction stating the implementation of the corresponding adjustment abroad.

As already provided for in the MP, the IN confirms that adjustments aimed at reducing the IRPJ and CSLL calculation basis or increasing the amount of tax losses or negative CSLL calculation basis (“NOLs”) will not be admitted, except in cases of compensatory adjustment.

Finally, the IN makes it clear in article 11 that undertaking the compensatory or voluntary adjustments shall not automatically result in adjustments to the calculation basis of other taxes, including those levied on the importation of goods and services.

b) Secondary Adjustment  

Under article 6 of the IN, the voluntary adjustment must be made by the end of calendar year 2023 for the entire fiscal year, including months of calendar year 2023 prior to the exercise of the option. In cases of merger, amalgamation, spin-off, or liquidation of the business, the adjustment should be made on the date of the special event. Thus, the adjustment should not impact the monthly or quarterly estimate payments under the actual profit regime during 2023.

3) Royalties and Technical, Scientific, Administrative or Similar Assistance deductions

Article 8 of the IN replicates the rules of the MP regarding the non-deductibility of the amounts paid as royalties and technical, scientific, administrative, or similar assistance to:

I – legal entities resident or domiciled in a low-tax jurisdiction or that are beneficiaries of a privileged tax regime or;

II – related parties, when the deduction of the amounts results in double non-taxation, in specific outlined cases.

According to the caput of article 9 of the IN, for the months of 2023 prior to September (the month for the option), the taxpayer must adopt the provisions of the aforementioned article 8. However, if the taxpayer does not make the option for the early adoption of the MP timely, the sole paragraph of article 9 establishes that the taxpayer must amend the DCTFs filed and its accounting records to comply with the limits of deductibility of royalties provided for in the legislation in force before the issuance of the MP, such as Law No. 3,470/1958; Law No. 4,131/1962 and Law No. 4,506/64.

It is important that the taxpayers observe the non-deductibility rule since January if they intend to opt in September for the application of the MP with effects for the entire 2023 calendar year. We also note that the full non-deductibility rule provided for in the MP and reproduced in Article 8 of IN is questionable in cases where it can be proven that there is no situation of abuse or double non-taxation in the transaction.

Article 10 of the IN allows taxpayers who are not obliged to comply with the TP rules to apply the provisions of article 8 of the IN, provided that they make the option for the anticipation of the effects of the MP timely. By making the option, the revocations of article 47 of the MP, including, will apply to this taxpayer.

In this sense, the IN seems to address the option for the end of the limitation of deductibility also for payments made by a Brazilian company to a beneficiary located in the country, although the deductibility limits in this situation were already controversial.