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Exclusive: Brazil’s draft TP legislation gives clarity on intangibles

Aerial view of Rio de Janeiro

A source who has seen the draft law said it brings clarity on intangibles and other areas of TP including tax planning.

Taxpayers in Brazil should expect a significant focus on intangible assets and loss-operating companies within the country’s draft transfer pricing legislation, a source close to the matter has told ITR.

The draft law was created by the incumbent government under Jair Bolsonaro, who lost the recent presidential election, but the timing is now up in the air.

The new president, Luiz Inácio Lula da Silva (known as Lula), has still not expressed any plans regarding the country’s TP regime. It seems unlikely that Bolsonaro will publish any draft legislation before Lula takes office in January 2023.

“They shared a portion of the wording of the upcoming law – the wording relates to the definition of intangibles,” said the source, a tax director who has seen a preview of the pending legislation, which aims to align with the OECD’s TP guidelines.

“My first impression is that it brings a lot of clarity that we don’t have today,” he added.

The director saw the legislation before Brazil elected its new president on October 30. As ITR reported afterwards, tax directors were concerned that the change in presidency could delay or even block the adoption of the pending law.

TP rules in Brazil do not follow the arm’s-length principle but rely on calculation methods through fixed margins.

They also offer no guidance on intangibles, but the new legislation introduces a clear definition of these assets. The definition is similar to that of the global intangible low-taxed income in the US, which imposes a minimum tax on earnings derived from a controlled foreign corporation.

“It’s defining intangible by exclusion – assets that cannot be defined as tangible,” explained the tax director. “It’s a broad definition that they are introducing but it brings clarity compared to the status quo today.”

The source added that it is “worrisome” that Brazil has no rules around intangibles today.

The new TP regime in Brazil could also ensure loss-operating companies pay their fair share of tax, which has been a historical problem, the source told ITR.

“They will no longer be able to operate at a loss,” said the tax director.

For years, Brazil has renewed its interest in adhering to the OECD, and the documents drafted by the tax authorities reiterate the country’s appetite for change.

However, it’s still not clear what the outlook for the draft law will be.

“It’s going to depend on the agenda of the next government – it’s such a sensitive topic. The TP changes might bring some increasing tax revenue,” said the tax director. “The president [Lula] will be able to push the reform forward, although he said the OECD membership wasn’t his priority.”

Next year will be decisive for the country’s direction towards OECD TP rules as Lula takes office.

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