The rules were introduced in Law No. 12.766 which took effect on December 28 2012, and are applicable to Brazil’s corporate income tax (IRPJ) and social contribution tax (CSLL).
The new rules replace those in Law No. 9.430 introduced in 1996, under which interest expenses were limited to amounts set forth in agreements registered with the Brazilian Central Bank (BACEN).
Without registration, the limit would be calculated based upon six-month Libor for deposits in US dollars, plus 3% per annum as the spread, prorated according to the period to which the interest referred.
Minimum interest revenue, on the other hand, would be directly subject to the LIBOR plus 3% parameter since the corresponding contract is not subject to registration with BACEN.
The new rules provide that minimum interest revenue and maximum interest expenses in controlled transactions shall observe the following criteria for calculating IRPJ and CSLL:
· for US dollar fixed-rate transactions occurring abroad, the parameter is the market rate for Brazilian treasuries issued in US dollars; and
· for Brazilian Real fixed-rate transactions occurring abroad, the parameter is the market rate of Brazilian treasuries issued in foreign markets in Brazilian Reais.
The use of Libor for six-month deposits is permissible in the other circumstances.
In cases involving Brazilian Real foreign floating-rate transactions however, the Ministry of Finance may fix the reference rate and may also reduce or reset the spread.
Law No. 12.766 applies to agreements executed on or after January 1 2013, based upon the date of the agreement.
Agreements dated earlier are governed by the previous law even if the related interest expenses or revenues accrue after January 1 2013.
Finally, to avoid manipulation, the new rules provide that renegotiation of agreements involving payable or receivable interest will result in such contracts being deemed new agreements.
On December 31 2012, the Brazilian Federal Revenue Service issued Normative Instruction 1,312, which updates local transfer pricing rules.
While these regulations cover many pending issues in the legislation, they surprisingly do not address interest rules – rather, they maintained the rules of Law 9,430.
It would therefore be fair to assume that the service will eventually consider reviewing the recently published regulations.
By principal Tax Disputes correspondent for Brazil, Luiz Ferraz (lferraz@mattosfilho.com.br), of Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados.
