Text modifies rules for setting prices used in transactions in order to adapt national standards to those practiced by the OECD
The Senate will analyze the Provisional Measure (MP) 1,152/2022which modifies rules for setting prices used in transactions between related companies, in order to adapt national rules to those practiced by the OECD (Organization for Economic Cooperation and Development) and to avoid practices aimed at reducing the payment of taxes.
Published at the end of the Bolsonaro government, the text was approved by the Chamber on Thursday (30.mar.2023) in the form of a substitute presented by the federal deputy Josias Mario da Vitoria (PP-ES). The substitute changed aspects related to the prices of commodities and sending royalties.
The new rules provided for in the MP will be effective from January 1, 2024, but the interested taxpayer may choose to apply them from this year.
According to the proposition’s explanatory memorandum, this would be the case of US multinationals that, due to changes in that country’s legislation in January 2022, by making this option could once again count on the deduction in the tax payable by the parent company , the tax paid by related companies and collected in Brazil.
The condition for the continuity of this benefit is that transactions are made with countries that adopt the rules now proposed by the MP. According to the arguments presented by the government at the end of 2022, this could maintain or increase investments in Brazil.
Another argument for the change is the preparation of Brazilian legislation to continue the process of joining the country in the OECD, which requires the standardization of procedures of this nature.
Fiscal paradise
The text also reduces from 20% to 17% the income tax rate below which the country is considered a tax haven. The justification is that most countries reduced tax rates on income from 2000 to 2020, making, in the case of the OECD, an average rate of 23.9%.
The maintenance of taxable income in a tax haven implies the loss of “benefits” of tax legislation, such as deduction of interest in case of indebtedness exceeding 30% of the net worth of the legal entity residing in Brazil and the impossibility of relying on encouraged tax treatment (exemption of capital gains) for investments by non-residents on the stock exchange and similar.
Principle
The MP establishes criteria for transactions between legal companies domiciled in Brazil and other companies related to them abroad to follow the same terms and conditions of transactions that would be made with unrelated companies (third parties).
Called, by the English term, principle Arm’s Lengththis concept tries to prevent companies from using current loopholes in the legislation to carry out tax planning in order to pay less tax.
Due to the lower income tax in other countries (such as Austria or Switzerland, where it is 20%), companies based in Brazil sell their products to related companies based in these countries at a price close to cost.
These companies abroad then sell the product to the final recipient and can also count on local benefits or accumulated losses to deduct the tax payable in these countries, levied on the profit from the resale operation.
Additionally, in Brazil, when incorporating the profit obtained from the final sale, the difference in tax payable (34% of the Brazilian tax burden minus the 20% for the country abroad) can also be reduced with existing regional incentives and exemption on payment of interest on own capital, leading even to zero the tax.
Related parts
These transactions are known as controlled transactions, as they are not derived from negotiations with completely independent companies, which would follow criteria of competitiveness in establishing the price.
As the sale affects gross revenue, the taxes involved in the new rules are the Corporate Income Tax (IRPJ) and the Social Contribution on Net Income (CSLL).
MP 1,152/2022 expands the concept of companies that can be considered a related party in this type of transaction, removing the term from the legislation “linked company”which presents restrictions due to the variety of business arrangements that currently exist.
Thus, in this concept, in addition to the clearer cases of shareholding control (direct or indirect, parental controllers or minimal participation in profits), the text also encompasses, for example, voting agreements to control corporate deliberations. This is true for any entity (individual or legal entity and other contractual or legal arrangements).
Comparison
To determine the price of this type of transaction (which will impact the amount of taxable income obtained), the company must adopt the listed criteria using terms of the transaction contract, characteristics of the goods or rights traded, economic circumstances of the parties and the market in who operate and business strategies, among other items.
In any situation, realistically available options for implementing the transaction should be considered, as if it could be done with an unrelated party.
After adopting all the parameters, the transaction must be compared with a transaction of the same type that could occur with a non-related company, in order to guarantee the application of the defined principle (Arm’s Length).
The main price determination method to be considered in general is that of comparing the price paid with that of similar transactions between unrelated parties, known as Independently Comparable Price (PIC). The adoption of other methods must be justified by the company, contrary to what happens today.
Commodities
In relation to commodities — which include the main products exported by Brazil (grains and ores, for example) — the PIC will be applied when reliable independent price information is available, including quoted prices published by exchanges and indices published by price agencies.
On this topic, deputy Josias Mario da Vitoria proposed that prices practiced with unrelated parties may also be used, including public prices, except in extraordinary market conditions that lead to a result incompatible with the principle postulated in MP 1,152/2022.
For another method to be applied, the text approved by the Chamber allows other factors to be considered, such as the assets, functions and risks of each entity in the value chain.
The provisional measure also provides that an alternative method may be applied when the reliability of the PIC is affected to the point of justifying a different method, even after adjustments to arrive at a comparable price between controlled and uncontrolled transactions.
Settings
Due to the complexity of various types of operations, MP 1,152/22 allows the taxpayer to make a spontaneous adjustment in the tax calculation basis when it is lower than that which would be calculated in transactions between unrelated parties. It also allows a compensatory adjustment to be made until the end of the calendar year.
The text provides that these adjustments may not reduce the calculation base found or increase the amount of the IRPJ tax loss or the negative CSLL calculation base, except if carried out in the manner and within the period stipulated by the Federal Revenue within the scope of solution mechanisms of dispute provided for in international agreements or conventions to eliminate double taxation.
If the taxpayer does not make any of these adjustments when necessary, the Federal Revenue inspector will make the primary adjustment ex officio, adding the amount to the calculation base.
taxable interest
Another change in the text, included by the rapporteur of the matter in the Chamber, Josias Mario da Vitoria, excludes the so-called secondary adjustment, foreseen to deal with the consequences of the undue transfer of profits to other jurisdictions because of the erroneous calculation basis.
These consequences occur because, although there is a correction to the allocation of profits for tax purposes, this does not change the fact that the transferred profit remains located and registered in another country.
According to the original text of MP 1,152/2022, this amount would be considered a credit granted to related parties involved in the transaction and remunerated at an interest rate of 12% per annum. This interest should be added to the IRPJ and CSLL calculation basis. If the taxpayer chose to repatriate the amount, the interest would not be taxed. “The figure of the secondary adjustment ends up having the nature of a punitive adjustment to the taxpayer”said Josias Mario da Vitoria.
With information from Senate Agency
#Senate #analyzes #taxation #companies #business