KPMG report: Changes to Brazilian transfer pricing and royalty deduction rules, implications for U.S. multinationals

Provisional Measure No. 1,152 would introduce significant changes to the Brazilian transfer pricing system

A Provisional Measure would introduce significant changes to transfer pricing system

The government of Brazil on 28 December 2022, issued Provisional Measure No. 1,152, which would introduce significant changes to the Brazilian transfer pricing system—shifting from Brazil’s historical, formula-based transfer pricing rules to an arm’s length standard consistent with the OECD Guidelines.

Taxpayers must apply the new transfer pricing rules to their Brazilian intercompany transactions for taxable periods beginning on or after 1 January 2024, although the provisional measure allows taxpayers to elect application of the new rules for the 2023 taxable period.

The new rules would incorporate several very important features of the OECD transfer pricing framework including:

  • Transfer pricing methodology and valuation techniques
  • The possibility of testing related foreign parties to a Brazilian transaction
  • The OECD concept for cost contribution arrangements
  • Rules addressing internal restructurings
  • OECD standards for financial transactions control
  • Authority for the Brazilian tax authorities (RFP) to enter into advance pricing agreements and conclude mutual agreement procedures
  • Expanded BEPS Action 13 documentation requirements, including Master file and Local file

Besides adopting a transfer pricing system compliant with the OECD guidelines, the provisional measure would implement important changes to royalty deduction rules. Since the mid-20th century, Brazil has imposed severe restrictions for the deductibility of royalties, such as the deduction disallowance for royalties paid to a foreign shareholder or a limit (i.e., 1% to 5% of the net revenues) on royalties and technical assistance payments made to foreign parties. Those restrictions would be eliminated by the new transfer pricing system, which would introduce more reasonable, anti-abuse types of restrictions. If final legislation implements the provisions of the provisional measure, Brazilian companies would not be able to deduct royalties paid to persons resident in a tax haven jurisdiction or to related parties in double non-taxation scenarios.

The National Congress has 120 days from the issuance date of the provisional measure to approve the measure (i.e., until 2 June 2023, taking into account the Congressional recess period).

  • If Congress approves the measure in full, a “conversion law” is enacted, and in the case of a wholesale adoption of the measure, the rules are deemed valid from the issuance date of 29 December 2022).
  • If Congress approves the measure with changes, the modified rules are treated as valid in their original form, for the period between the issuance date and the enactment of the conversion law, and the modified rules take effect on the publication date of the conversion law. However, changes are subject to the rules on presidential veto (including partial veto) powers.
  • If Congress negates the measure entirely, the measure would be deemed valid during the period between the issuance date and the negation date, unless Congress enacts a legislative decree providing otherwise.

Read a February 2023 report* [PDF 59 KB] prepared KPMG LLP tax professionals that discusses implications of the provisional measure for U.S. multinationals

*This article originally appeared in Tax Management International Journal (3 February 2023) and is provided with permission.


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