Brazil: OECD-aligned transfer pricing rules signed by president

The president on 14 June 2023 signed Law No. 14,596, adopting Provisional Measure No. 1,152, which enacts 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.

The government of Brazil issued Provisional Measure No. 1,152 on 29 December 2022, and the Brazilian parliament (both the Chamber of Deputies and the Senate) then had 120 days to transpose the draft legislation into law. Read TaxNewsFlash

Following publication of the measure, the Brazilian tax authorities (Receita Federal do Brasil—RFB) published a first Normative Instruction (Instrução Normativa)* No. 2,132 (17 February 2023) providing guidance on the new rules. Read TaxNewsFlash

The Chamber of Deputies passed Provisional Measure No. 1,152, on March 30, 2023 (read TaxNewsFlash), the Senate passed the measure on 10 May 2023, and yesterday the president signed the measure.

In addition to introducing the arm’s length principle to Brazil’s transfer pricing system, the new law establishes new transfer pricing methods and documentation requirements, and considerable changes to the treatment of intangible assets, financial transactions, and business restructuring. Read TaxNewsFlash

The final bill includes the following changes (which were included in the version passed by the Chamber of Deputies) from the original text of provisional measure 1.152/2022:

• Royalties paid to related parties in low-tax jurisdictions and operating under special tax regimes (as defined by Brazilian law) are deductible as long as they are in accordance with the arm’s length principle.
• Tax authorities cannot perform a secondary adjustment in case transfer prices are deemed not in accordance with the arm’s length principle.
• For commodities, the comparable uncontrolled price (CUP) method remains the most appropriate method unless the facts and circumstances of the transaction, as well as functions, risks, and assets vis-à-vis other group companies in the value chain, render another transfer pricing method more appropriate.

• The RFB is set to issue guidance (detailed regulations) shortly, probably after some public consultation. Though this new guidance should not change the content of the law, its importance cannot be underestimated.
• RFB has already issued guidance for those that are considering early adoption of the new rules (for 2023). This is an election that should be well considered and modeled prior to any decision.
• Finally, companies may need to immediately start reassessing their business model involving Brazil so as to identify potential risks, opportunities, and how to adapt to the new circumstances, knowing that the new rules would impact not only the profit allocation (corporate income tax), but likely other indirect and transactions tax (given the specificities of the BR tax environment).

For more information, contact a KPMG tax professional in Brazil:

Ericson Amaral | eamaral@kpmg.com.br

Edson Costa | edsoncosta@kpmg.com.br

Henrique De Conti | hconti@kpmg.com.br

Sebastian Hoffmann | sshoffmann@kpmg.com.br