In a complex business scenario, where business relationships between related entities can significantly influence the tax burden, understanding adjustments to the tax base under current regulations is essential. The RFB (Receita Federal do Brasil – Internal Revenue of Brazil/Brazilian IRS) Regulatory Instruction No. 2161, issued on September 28, 2023, in Brazil, provides a detailed framework for these transactions in Section V. Below, we explore in depth the key provisions of this regulation to provide a complete understanding of this significant process.
Transfer Pricing Adjustments: A Comprehensive Overview
Transfer Pricing, which regulates trade-related party transactions, becomes actually essential for tax authorities due to possible mismanagement. Brazilian regulations establish three main categories of adjustments to address this challenge:
- Spontaneous Adjustment: The company domiciled in Brazil voluntarily carries it out when calculating its tax to incorporate results similar to independent party transactions, following the arm’s length principle.
- Compensatory Adjustment: The parties involved in the controlled transaction may adjust up to the closing of the calendar year of the transaction. It aims to adjust the value of the transaction to be consistent with those of independent-party transactions, following the Arm’s Length Principle.
- Primary Adjustment:This is employed by the tax authority to increase the taxable base for income tax and social contribution on net income. It seeks to reflect the results obtained by the company if they were from independent party transactions, following the Arm’s Length Principle.
Conditions and Restrictions: Understanding the Nuances
It is crucial to understand the conditions and constraints set by the regulations to ensure the proper application of adjustments:
- Spontaneous or compensatory adjustments are required when the terms and conditions of the controlled transaction differ from those of comparable independent-party transactions, as specified in Article 49.
- The regulations prohibit adjustments reducing the taxable base of the tax or increasing the value of the tax loss of the corporate income tax or the negative basis of calculation of the CSLL (Contribuição Social sobre o Lucro Líquido – Social Contribution on Net Profits), except in exceptional circumstances, such as compensatory adjustments established in Article 50 or settlement mechanisms of international disputes.
- Spontaneous and primary adjustments must be considered based on the calculation of the corporate income tax and CSLL for periods ending on December 31, unless for special events, such as incorporation, merger, spin-off, or termination of activities.
- Adjustments do not apply if the taxpayer opts for the actual annual benefit.
Compensatory Adjustment: Detailed Procedures
The compensatory adjustment is particularly subject to a set of specific procedures as set forth in Article 50:
- It must be symmetrically and definitively carried out in the accounting records of all parties involved.
- It must be supported by the issuance of debit or credit notes or other tax and trade documentation.
- It must be ratified by a declaration of the legal representative of the other parties involved.
- It does not apply to transactions carried out by companies domiciled in Brazil with entities characterized by law.
Impact on Other Taxes: Additional Considerations
It should be noted that spontaneous or compensatory adjustments do not automatically imply adjustments to the taxable base of other taxes. Each tax, including those levied on the importation of goods and services, must be determined under applicable law.
Conclusions: Towards an Efficient Tax Management
In summary, Brazilian regulations establish a clear and detailed framework for adjustments to the taxable base in Transfer Pricing. These regulations aim to ensure that taxation adequately reflects related party transactions, thus avoiding tax base erosion and tax evasion. Hence, companies can optimize their tax management and comply comprehensively and transparently with legal requirements.
