The Brazilian Federal Senate approved on May 10th, 2023, Bill of Law n. 8, which stems from Provisional Measure n. 1.152 (“MP 1.152/22“).
The below changes were introduced following the approval of the Provisional Measure n. 1.152 (“MP 1.152/22“) by the Chamber of Deputies on the 30th of March, 2023:
- OECD’s Cost-Plus Markup, Resale Price Less Markup and Compared Uncontrolled Prices (preferred) methods will replace the previous mathematical Formulary Apportionments;
- Comparability and functional analysis are required;
- Intercompany transactions must be supported with a benchmark;
- Rulings, APAs, and MAPs would become part of the Brazilian system;
- Special chapter for financial and insurance transactions now in scope (currently controversial);
- The provisions related to the “secondary adjustment” are removed;
- Royalties to be paid to related parties in low-tax jurisdictions with special tax regimes, can be deducted if they follow the arm’s length principle;
- Hard-to-value (HTV) intangibles as well as DEMPE functions concepts are incorporated in the Brazilian TP system.
- Introduction of penalties for non-compliance.
- Value Chain Analysis required, taking into account the key value drivers, as well as the ownership of the intangibles and the relevant affiliates’ risk profiles.
Key reasons for change
- There was no direct reference to the Arm’s Length Principle;
- The related party definition extended beyond common ownership and control;
- Covered intercompany transactions included only the import and export of goods, services, and rights;
- Specific methods for the export and import of commodities and interest on intra-group loans were allowed; and
- Both transactional profit-based methods, transactional net margin, and profit split methods were excluded from consideration.
New Penalties
- The MP Introduces specific Transfer Pricing penalties, with a minimum of BRL 20,000 and a maximum of BRL 5 million.
- Failure to timely file a return or similar obligation would incur a penalty of 0.2% of gross revenue per month;
- Filing inaccurate or incomplete information or omitting information would be subject to a penalty of 5% of the transaction value or 0.2% of the multinational group’s consolidated revenue;
- Filing a return that does not meet the statutory requirements for filing an ancillary obligation would be subject to a fine of 3% of gross revenue;
- Failure to timely submit information or documentation during an audit would be subject to a penalty of 5% of the value of the transaction.
Effective date
Upon being subject to presidential sanction, the Bill of Law n. 8, resulting from MP 1.152/22 will be mandatory effective 1 January 2024. Companies do have the option of adopting the MP in already in 2023 or choosing the already existing rules. The normative instruction provides that the option to adopt the new Transfer Pricing rules for the calendar year 2023 must be formalized in the period from 1 September to 30 September 2023.
For entities that begin operations or for a newly created legal entity that result from a merger or spin-off during the period from September to December 2023, the election must be formalized in the first month of activity. Conversely, for entities that cease activities during the period from January to August 2023, the election must be formalized in the closing month.
For further consultation on Brazil’s Bill of Law n. 8, contact one of our professionals.
Author: Dimitrios Garantziotis, Junior Associate, TPA Global