Brazil finally adopts arm’s length principle
The introduction of significant transfer pricing developments in Brazil that will have a significant impact on MNEs with a business presence in such jurisdiction.
The President of Brazil signed Law no. 14.596 of 2023 adopting Provisional Measure no. 1.152 as law, which endorses and enacts relevant changes to the transfer pricing system in Brazil: it moves from a classical formula-based transfer pricing system (fixed margin regime) to the arm’s length principle in line with the OECD TP Guidelines (Article 2 of the Law).
The rules will come into force on 1 January 2024, but taxpayers can decide to apply these new principles with effect from 1 January 2023.
In particular, the new Law introduces:
- specific rules relating to supplies of intragroup (intercompany) services and intangible assets, cost contribution agreements, corporate restructuring, and the provision of financing and guarantees;
- the treatment of all transactions with parties based in jurisdictions that impose less than 17% income tax as if they were transactions with related parties;
- a safe harbour – it allows taxpayers to seek transfer-pricing specific rulings from the Federal Revenue Department (RFB) for up to four years; and
- penalties of up to BRL 5 million where taxpayers do not have the relevant documentation relating to a controlled transaction.
Although the RFB will publish detailed regulations in the future following a public consultation, these additional guidelines will not change the content of the Law and it is therefore essential that MNEs with a business presence in Brazil reassess their business model with professional experts in the field in order to identify possible risks and opportunities offered by the new regime.