New Brazilian transfer pricing rules can already be used by companies as from fiscal year 2023
At the end of 2022, the Brazilian Federal Revenue Bureau (RFB) published Provisory Measure (MP) 1152/2022, which altered the nation’s transfer pricing rules, bringing them more into line with the rules applicable under the Organization for Economic Cooperation & Development – OECD.
The alterations brought about in Brazil’s transfer pricing rules may already be applied this year for such controlled transactions in fiscal year 2023, although they are only mandatorily required as from the start of 2024.
Accordingly, on February 24, 2023, the RFB published Normative Instruction IN RFB 2132/2023, which regulated the manner, period, and terms for early application of the MP in question.
Taxpayers interested in taking advantage of this early adoption of the new transfer pricing rules in relation to their 2023 operations are to formally express such intention through a digital process. This involves filling out an affidavit made available on the Internet by the RFB between September 1st and 30th of this year.
Brazilian Federal Supreme Court (STF) makes a “final unappealable decision” a relative matter, in a controversial ruling
On February 8, 2023, Brazil’s highest court, the STF, ruled that decisions favorable to taxpayers on a “final unappealable basis” (in rem judicatam) will be automatically annulled if, in a subsequent ruling, the same court upheld the constitutionality of the tax or contribution under discussion.
In the appeal to the STF, the concrete case involved the declaration of unconstitutionality of the federal Social Contribution on Net Income (CSLL), obtained by a taxpayer in the 1990’s, during which period the decision involved a final unappealable one. Subsequently, in 2007, the STF ruled that the CSLL requirement was in fact constitutional. Thereupon, there ensued a discussion about what precisely would be the effect of the declaration of CSLL constitutionality in individual cases involving concentrated control (direct appeal to the STF – ADI 15 – hence, affecting all taxpayers) that were decided on a final unappealable basis in favor of taxpayers.
Hence, without there being any need to file an action to overrule a final judgment, the STF declared that there will be automatic annulment of the effects of any such final judgments that are contrary to a subsequent ruling regarding the constitutionality of government tax claims. This controversial ruling would affect all taxes and contributions, not being restricted to the CSLL specifically discussed in such case.
In this context, such decision could impact taxpayers who have “final unappealable decisions” in other cases involving any taxes and contributions, such as, for example, the levying of the federal Excise Tax (IPI) on the resale of imported products.
Moreover, there are several doubts among taxpayers as regards application of this decision that probably will be covered by appeals requesting clarification thereof, at which time hopefully the market will have better clarifications with respect to this wide-ranging and controversial matter.
Senate approves treaty for exchange of tax information between Brazil and Guernsey
The Brazilian Senate has passed the Treaty between Brazil and Guernsey for the Exchange of Information Related to Tax Matters.
Guernsey is an island and bailiwick (county) in the English Channel that is not a formal part of the United Kingdom. Together with the bailiwick of Jersey, which is larger and closer to the French Coast, it forms the Channel Islands.
The treaty aims to combat fraud and tax evasion, as well as curb the room for practices that are considered tax avoidance schemes and abusive tax planning transactions. It also seeks to strive for greater transparency and enhanced cooperation between the tax administrations of both Brazil and Guernsey.
The Treaty will take effect after issuance of a Presidential Decree by Brazil’s President Lula.
STF suspends decisions that cut in half rates for federal PIS and COFINS contributions on financial revenues
Brazil’s highest court, the STF, suspended the effectiveness of court decisions that either expressly or tacitly did away with application of a Presidential Decree that re-established the rates of the federal contributions known as PIS and COFINS Social Security Contributions, levied on the financial revenues of companies subject to the non-cumulative system.
On the final working day of last year (December 30, 2022), the nation’s former Vice-President, Hamilton Mourão, who was then serving as the acting President, issued an executive fiat (Decree) that cut the PIS and COFINS rates in half on taxation of companies´ financial revenues. The PIS was reduced from 0.65% to 0.33% and the COFINS from 4% to 2%. The new rates were to have taken effect immediately, which means they were applicable as from January 1st, 2023.
Nevertheless, as soon as he took office on January 1st, 2023, incoming President Lula published a new, immediately effective decree that revoked the previous one and maintained the same rates paid by such corporate taxpayers ever since 2015 (0.65% and 4%).
Lula’s decree was upheld by the STF based on a restraining order (preliminary injunction) granted in the case of Declaratory Constitutionality Suit 84, which is still subject to a vote by the Supreme Court’s plenary sitting.
Alteration of taxation on fuels and institution of Export Duty
Brazil’s tax rules have changed substantially this year, particularly as regards fuels. For instance, at the beginning of last month (March 1st, 2023), the federal government laid down Provisory Measure (MP)1163/23, which established the following tax exemptions: (i) suspension until June 30th, 2023, of payment of the contributions known as the PIS/COFINS-importation on operations involving jet fuel (kerosene) and natural gas for vehicles (known in Brazil as GNV), and (ii) suspension of payment until December 30th, 2023, of the PIS/COFINS contributions on petroleum imports by the nation’s refineries.
Furthermore, this new MP kept the rate of the federal tax on fuels (CIDE, formally known as the Contribution for Intervention in the Economic Domain) on gasoline and its by-products, except jet fuel, initially set for February 28th, 2023, which was extended until June 30th, 2023.
In addition to the exemption measures, the new norm called – with immediate effect and through June 30th, 2023 – for the levying of an Export Duty on operations involving the exportation of crude oil at the hefty rate of almost ten per cent (9.2%). Brazil’s O&G market was taken aback by the sudden institution of such a steep export duty rate, given that export operations carried out by companies operating here have traditionally been exempt and the agreements already signed with overseas counterparts have no clauses covering the financial impact of this surprising tax measure.
Given this startling turn of events, many of the nation’s political parties joined forces with the Brazilian Association of O&G E&P Companies (ABEP) and filed direct unconstitutionality appeals to the STF against MP 1163/23. They alleged in their suit that the Export Duty is merely an “extra-fiscal” tax aimed at maintaining the government’s economic equilibrium and that institution thereof on oil is solely intended to offset the government’s losses given the exemptions granted with respect to fuels. None of the appeal actions have been considered yet by the Supreme Court.
Reduction of AFRMM rates
At the close of the Bolsonaro administration, on December 30th, 2022, yet another severe federal tax rate cut was attempted by the outgoing government in the form of Decree 11.321/2022. This drastic measure would have reduced by half the rates of the Freight Surcharge for Merchant Marine Renewal (AFRMM). The latter contribution is levied on maritime navigation transport operations at rates ranging from 8% to 40% of the amount thereof, depending on the modus operandi contracted.
The reduction would be significant, though the new administration of President Lula swiftly enacted Decree 11.374/2023 to revoke this and other norms on as from the first day of this year 2023.
Nevertheless, the AFRMM is a contribution that must obey the Annuality Tax Principle, which determines that taxes can only be collected in the year after their creation or increase, or at least, 90 days thereafter. Thus, the re-establishment of the rates brought on by Decree 11.374/2023 may only be required in the next fiscal year, that is as from January 1st, 2024.
Therefore, there are good legal arguments for pleading in court to uphold the AFRMM discounts until the end of this fiscal year (December 31st, 2023), in case it represents a material opportunity for companies subject to this contribution.
