Several changes to benchmark settings published by the Intercontinental Exchange Benchmark Administration may have a direct impact on transfer pricing (TP) calculations performed for loans that are granted by and to Brazilian legal entities.
In 2021, the United Kingdom's Financial Conduct Authority announced these changes, which include the end of the publication of the euro London interbank offered rate (Libor) settings and the one-week and two-month US dollar Libor settings after 31 December 2021. The Financial Conduct Authority also decided to continue to determine and publish the six-month US dollar Libor settings at least until the end of June 2023.
The transactions involving interest must follow Brazilian TP rules and the thin capitalisation rules if they are carried out by Brazilian legal entities with:
- foreign related parties (as defined under Brazilian TP legislation);
- related or unrelated parties; or
- parties that are domiciled in tax havens or non-residents subject to privileged tax regimes.
In accordance with Brazilian TP rules, the interest expenses that a Brazilian legal entity incurs shall be considered deductible up to the amount that does not exceed the rates determined based on the following rules (the minimum interest revenues that Brazilian companies record shall be calculated based on the same rules):
Figure 1: deductibility rules of interest expenses for legal entities
As a result of the changes, Brazilian companies that used to apply the euro Libor to comply with the TP rules to calculate the benchmark for interest expenses (or revenues) will be forced to use the six-month US dollar Libor.
The impact on Brazilian companies may be verified by the comparable analysis of the historical variation of the six-month euro Libor versus US dollar Libor during 2021:
Figure 2: comparison of six-month euro Libor and six-month US dollar Libor variation in 2021
While the six-month euro Libor was negative and relatively constant for 2021, the six-month US dollar Libor was positive and had a slight fluctuation. In view of this situation, the replacement of the six-month euro Libor for the six-month US dollar Libor could result in two different scenarios:
- If the borrower is a Brazilian company, this change could, in principle, increase the maximum amount of interest to be deducted from the corporate income tax (IRPJ) and the social contribution on net profit (CSLL) basis.
- If the lender is a Brazilian company, this replacement could result in a corresponding increase of the minimum interest revenue that the Brazilian company can consider for IRPJ and CSLL purposes.
The Brazilian Federal Revenue Service has yet not announced any changes to the rules in view of these changes.
As such, Brazilian companies should evaluate whether it is necessary to adjust loan agreements that are currently in place, if they are based on the euro Libor settings, and verify whether additional adjustments to the loans are advisable under other methodologies that TP legislation provides.
Brazilian legal entities and multinationals that have loans with Brazilian companies should keep these changes in mind for future transactions.
For further information on this topic please contact Stephanie Makin or Gabriel Nassar Lacerda at Machado Associados by telephone (+55 11 3819 4855) or email ([email protected] or [email protected]). The Machado Associados website can be accessed at www.machadoassociados.com.br.