The Brazilian government has issued new transfer pricing (TP) legislation based on the arm’s length principle, in accordance with guidelines from the Organisation for Economic Cooperation and Development (OECD). The move was prompted by recent changes to the US tax code, which no longer recognizes taxes paid in Brazil as a credit due to deviations from the arm’s length principle in Brazil’s TP system.
The new legislation, Provisional Measure 1152/2022, was published in the Official Gazette on 29 December 2022 and will come into effect on 1 January 2024. Its application is optional for calendar year 2023, but mandatory starting in 2024. The legislation includes the following provisions:
- A definition of the arm’s length principle (ALP) and definitions for key concepts such as controlled transactions, related parties, and comparable transactions.
- Rules for the application of the ALP, including guidance on the structure of controlled transactions and comparability analysis.
- Transfer pricing methods based on those of the OECD, including the Comparable Uncontrolled Price, Cost-Plus, Resale-Minus, Transactional Net Margin, Profit Split, and other methods that produce results consistent with those of comparable transactions between unrelated parties. The legislation also provides guidance on the combination of these methods to ensure their proper application.
- Coverage of commodities and ancillary obligations, tested parties, intangible assets and hard-to-value intangibles, intragroup services, cost sharing, business restructuring, transactions involving debt, intragroup guarantees, centralized treasury management, and insurance.
- Documentation and penalty provisions, a specific consultation process for TP, and a mutual agreement procedure for TP purposes.
In addition, various other articles of Brazilian legislation will be revoked as of 1 January 2024. Provisional measures are issued by the President of Brazil and are valid for a 60-day period, which may be extended for another 60 days. After this period, they lose their effect unless they are approved and converted into law by the National Congress.
