Brazil: The House of Representatives approved the Provisional Measure that provides for the new transfer pricing rules

In brief

On March 30, 2023, the House of Representatives approved Provisional Measure (“MP”) No. 1,152/2022, which addresses the new Brazilian transfer pricing rules.

The main amendments, upon comparing the original text of the MP presented on December 29, 2022 and the amended one just approved, relate to transactions with commodities, the secondary adjustment, and the deductibility of royalties.

The MP (with its amended wording) will now be analyzed and voted by the Brazilian Federal Senate. It is important to highlight that the Senate may or may not vote the MP, and if it does, the text of the MP as approved by the House of Representatives may be subject to changes.

If the MP is converted into law by June 1st, 2023 (as it is now), it will come into force on January 1st, 2024 (for those who do not opt for its early application in 2023).

Below we detail the changes introduced by the House of Representatives in the original text of the MP:

More details

1) Internal comparables and limitations to the application of CUP method in transactions involving commodities

For related parties transactions involving commodities, the Comparable Uncontrolled Price (“CUP”) will still be considered the best method whenever there is reliable independent price information.

However, the wording of the MP approved by the House of Representatives extends the list of reliable comparables, which was previously restricted to public prices, by including a reference to the use of internal comparables. In addition, it expressly rules out (i) the applicability of the CUP if adjustments to the identified comparables affect their trustworthiness, and (ii) the use of public prices if, due to extraordinary market conditions, it results in non-compliance with the arm’s length principle.

The MP also provides that, in addition to the facts and circumstances of the transaction, other elements such as assets, functions and risks of each entity in the value chain must be considered in determining the most appropriate method for transactions involving commodities.

2) Secondary adjustment removal

The text approved by the House of Representatives fully removed the provisions related to the “secondary adjustment”. According to the Reporting Congressman Da Vitória (PP/ES), the “secondary adjustment” was removed from the text submitted to the House of Representatives because it penalized the taxpayer by establishing a sort of credit due to related parties, subject to an annual interest rate of 12%.

3) Removal of the prohibition to deduct royalties paid to beneficiaries located in low-tax jurisdictions or subject to privileged tax regimes

The former wording of the MP provided in item I of article 45 that royalties paid to residents in low-tax jurisdictions or subject to privileged tax regimes were not deductible for income tax purposes.

The text approved by the House of Representatives excluded this provision, so that the deductibility of these transactions must follow the arm’s length principle standards and other conditions established in the legislation, including those listed in article 26 of Law 12,249/10.