By Pedro Castellanos Orsi
The recent trip of the president of the Republic of Brazil to the United Arab Emirates shed light on the development of an important Brazilian trade relation. As reported by the Brazil-Arab News Agency (ANBA), following a series of years of steady growth, in 2022, Brazil-Arab League trade reached its highest level: USD 32.78 billion. The magnitude of this relationship also adds to the importance of an impending change in the law that will particularly affect the Brazilian trade with the UAE, Oman, and Bahrein.
On May 5, 2023, the Brazilian Federal Senate passed Provisional Measure 1,152/2022 in the form of the Bill of Conversion 8/2023, which is still to be signed by the president. The innovation comes with the stated purpose of adjusting the Brazilian Transfer Pricing legislation to the requirements established by the Organization for Economic Co-operation and Development (OECD). Depending on the case, this could translate into a sizeable increase in the tax rate on the profit and/or imports.
Under the terms of the provisional measure, the changes will be optional for 2023 and mandatory for 2024. The regulations will apply to (i) operations carried out between binding parties and (ii) operations carried out with entities based in jurisdictions with favored taxation and/or legislation that doesn’t allow the assessment of the corporate structure. The jurisdictions encompassed in the second group are listed in the 1st article of the Normative Instruction 1,037/2010, including the UAE, Oman, and Bahrain.
Transfer pricing rules seek to avoid manipulation of transaction values. For this reason, laws are created to identify what their price would be if practiced in an operation carried out between third parties under market conditions, that is, with each party trying to achieve the value that benefits them the most. This distance between third parties, considered ideal from a tax point of view, is known as “arm’s length” and represents the impossibility of one party controlling the pricing policy of the other.
Since the emergence of this type of legislation, different ways of calculating the arm’s length value of an operation have been developed by different countries. As a rule, countries with developed economies opted for regulations that, although more complex and demanding, were closer to the actual market value of a transaction, taking into account several economic factors and using statistical methods. On the other hand, jurisdictions with less robust economies opted for more simplified methods, which, although more straightforward and easier to monitor, resulted in a lower level of accuracy and, sometimes, severe distortions of the actual market value.
Brazil followed, in general terms, the second trend. On several occasions, the system currently in force uses fixed percentages applicable to the cost or sales value to determine the transaction’s base price (the price to be considered for tax purposes). These percentages may be close to actual market values, but there is also the possibility of a large gap.
These distortions can generate revenue losses for the country that applies them and those with which companies in that jurisdiction do business. Hence the interest in changing this legislation. The OECD requires member countries to adopt a series of guidelines on transfer pricing, which, unlike those currently in force in Brazil, use more complex pricing criteria. The changes brought by Provisional Measure 1,152/2022 seek to make the Brazilian system compatible with these guidelines.
Historically, this legislation has been used in Brazil to adjust the calculation basis of taxes levied on profits; however, the transfer pricing system has recently been used to determine the customs value. According to normative ruling 2090/2022 and a recent Administrative Tax Appeals Council (CARF) decision, the transfer pricing legislation is currently also used in cases where a relationship between importer and exporter is verified or presumed. This can happen, provided other methods are not suitable for measuring the value of the operation.
The possibility of using a system closer to actual market values is positive insofar as it means a lower chance of the taxpayer being burdened with generic indicators. However, this comes at a cost. The current pricing system is far from simple, and its correct operation often requires hiring a specialized consulting team. That said, the proposed new methodology is considerably more complex.
Taking these considerations into account, we understand that the approval of Provisional Measure 1,152/2022 may represent a vital tax advance for Brazil-Arab trade. But for this to materialize, it is essential that taxpayers understand and correctly use the peculiarities of this new system.
Pedro Castellanos Orsi is a tax lawyer at Rossi, Maffini, Milman & Grando Advogados (RMMG Advogados)
Translated by Guilherme Miranda & Elúsio Brasileiro
