Towards the end of last year, December 29, 2022, Brazil’s transfer pricing rules changed substantially with Provisory Measure (MP) 1.152/2022 as regards determination of transfer prices on controlled transactions carried out between Brazilian companies and their related parties abroad.

The new set of regulations, which was one of the requirements for Brazil to join the Organization for Economic Cooperation & Development (OECD), establishes new methods for determination of transfer prices, including on operations involving services and intangible items, always based on the international arm’s length principle:

  • Independent Comparable Price (abbreviated here as PIC);
  • Resale Price less Profit (PRL in Brazil);
  • Cost less Profit (MCL here);
  • Net Transaction Margin (MLT in Brazil);
  • Division of Profit (MDL); and
  • Other alternative methods that can be justified by the taxpayer.

Owing to adoption of the arm’s length principle, criteria based on arbitration of margins and/or interest rates have been replaced by comparative transactional methods, for purposes of IRPJ and CSLL deductibility.

Among other relevant aspects that can be noted, the following also deserve being highlighted:

  • The amount of the adjustment relating to transfer prices is to be reimbursed by the overseas related party to the Brazilian company, subject to updating at the rate of 12% p.a., for as long as it remains unsettled; and
  • The interest related to operations for supply of financial resources which, according to the criteria established by the Provisory Measure, may be considered as a capital operation, are to be considered non-deductible for IRPJ/CSLL purposes.

Besides the new transfer pricing rules, MP 1.152/2022 restricts deductibility of royalties and technical, scientific, administrative or similar assistance in cases of payments to: a) beneficiaries domiciled in states with favorable or privileged taxation rules (the so-called “tax havens”); b) related parties, in cases in which deduction of the expense results in double non-taxation; and c) when the amounts are intended to finance related parties resulting in the cases highlighted above.

Provisory Measure (MP) 1.152/2022 only takes effect as from January 1, 2024, though the new rules may be adopted already in 2023 at the taxpayer’s option.