Brazilian Government publishes Provisional Measure adopting arm’s-length principle

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EY Global

30 Dec 2022
Subject Tax Alert
Jurisdictions Brazil

After several years of joint work between the Brazilian Federal Revenue Service (RFB, acronym in Portuguese) and the Organisation for Economic Co-operation and Development (OECD), on 29 December 2022, the Brazilian Government published Provisional Measure (PM) No. 1,152 which introduces new transfer pricing (TP) rules in Brazil.

The PM is a type of Decree, signed and published by the President, with the power of Law that needs to be approved by the Congress within 60 calendar days from publication (that is extendable by another 60 calendar days) to be enacted as law. As disclosed by the General Secretariat of the Presidency of the Brazilian Republic, this measure stems from the observation of existing gaps and weaknesses in the current Brazilian TP laws and issues arising from those laws’ misalignment and interactions with the minimum standard established by the OECD. This impacts the (i) business environment for taxpayers conducting business in Brazil; (ii) Brazil's insertion in global value chains; (iii) legal certainty; and (iv) effective collection of tax revenues.

Implementation of this new TP legislation seeks to:

  • Adopt the arm's-length principle to rule all cross-border intercompany transactions
  • Avoid double taxation outcomes, as well as double non-taxation
  • Facilitate the inclusion of Brazil in the global economy principles and increase Brazilian multinational enterprises competitiveness
  • Remove one of the main obstacles to the recognition of tax credits, in the United States, of the income tax paid in Brazil

Among the main points addressed by this PM, key highlights include:

  • Introduction of the arm's-length principle following international principles stated by the OECD
  • Definition of related parties subject to the TP rules
  • Selection of the tested party based on the most reliable data and best method rule
  • Application to this new TP system to all cross-border intercompany transactions
  • Inclusion of all cross-border transactions over Intangible property:
    • Introduction of Intangible property definition
    • Adopting the arm’s-length principle to determine royalty payments, thus eliminating the royalty’s deductibility limitation
    • Inclusion of the DEMPE concept and its relevancy to determine appropriate arm’s-length remuneration
    • Introduction of Cost Contribution Agreements
  • Inclusion of cross-border intercompany services and TP methods for pricing those transactions
  • Inclusion of all cross-border financial transactions such as intercompany loans, guarantees, centralized treasury functions, and insurance transactions
  • Implementation of TP methods according to the OECD standard:
    • Comparable Uncontrolled Price Method
    • Resale Price method
    • Cost Plus Method
    • Transactional Net margin method
    • Transactional Profit Split Method, and
    • Other or unspecified method
  • The PM indicates the CUP method as the most appropriate method when reliable comparables are available for cross-border transactions of commodities; however, taxpayers may apply other methods based on the appropriate facts and circumstances

  • Establishing the need for a functional (risks, functions, and assets) and economic analysis for the application of the new TP documentation rules

  • Introduction of penalties for the lack of TP documentation that is now required for compliance purposes

  • Introduction of unilateral TP agreements with the RFB (similar to Advance Pricing Agreements) and Mutual Agreement Procedures

  • The new TP rules come into effect on 1 January 2024, but can be adopted, as an option, as early as 2023

Additional details are expected to come through a Normative Instruction. Future Alerts will cover developments with respect to the PM including technical considerations and relevant concepts for Brazilian taxpayers.


For additional information with respect to this Alert, please contact the following:

EY Assessoria Empresarial Ltda, São Paulo
  • Gustavo Carmona
  • Marcio R. Oliveira
  • Caio Albino
  • Daniel Biagioni
  • Leandro Cassiano
  • Janaina Costa
Ernst & Young LLP (United States), Latin American Business Center, New York
  • Lucas Moreno
  • Pablo Wejcman
  • Aline Milla
  • Victor Asfora
  • Enrique Perez Grovas
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific
  • Raul Moreno, Tokyo
  • Luis Coronado, Singapore
Ernst & Young LLP (United States), International Tax and Transactions Services, Transfer Pricing
  • Ryan J. Kelly, Americas ITTS Tax Controversy Leader, Washington, DC
  • Katherine Pinzon, Americas & US West Transfer Pricing Leader, Houston

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.