Introduction
From the outset, Brazil’s transfer pricing rules, which took effect on 1 January 1997, have been very controversial. Contrary to the Organization for Economic Co-operation and Development (OECD) Guidelines, the transfer pricing rules introduced by Brazil’s do not adopt the internationally accepted arm’s-length principle. Instead, Brazil’s transfer pricing rules define maximum price ceilings for deductible expenses on intercompany import transactions and minimum gross income floors for inter-company export transactions.
Statutory rules
The rules require that a Brazilian company substantiate its inter-company import and export prices on an annual basis by comparing the actual transfer price with a parameter price determined under any one of the Brazilian equivalents of the OECD’s comparable uncontrolled price method (CUP method), resale price method (RPM) or cost plus method (CP method). Taxpayers are required to apply the same method, which they elect, for each product or type of transaction consistently throughout the respective fiscal year. However, taxpayers are not required to apply the same method for different products and services.
Other material differences from internationally adopted transfer pricing regimes include the Brazilian transfer pricing legislation’s exclusion of a best method or most appropriate method rule; accordingly, a taxpayer may choose the respective pricing method. In addition, the Brazilian transfer pricing rules explicitly exclude inter-company royalties and technical, scientific, administrative or similar assistance fees, which remain subject to previously established deductibility limits and other specific regulations.
Rules regarding imports of goods, services or rights
Deductible import prices relating to the acquisition of property, services and rights from foreign-related parties should be determined under one of the following Brazilian methods:
Comparable independent price method (PIC)
This Brazilian equivalent to the CUP method is defined as the weighted average price for the year of identical or similar property, services, or rights obtained either in Brazil or abroad in buy/sell transactions using similar payment terms. For this purpose, only buy/sell transactions conducted by unrelated parties may be used. The use of the taxpayer’s own transactions with third parties for purposes of applying this method will be acceptable only to the extent the comparable transactions are equivalent to at least 5% of the tested transactions; if necessary, transactions carried out in the previous year can be considered to reach this percentage.
Resale price less profit method (PRL)
TheBrazilian equivalent to theRPM is defined as theweighted average price for the year of the resale of property, services or rights minus unconditional discounts, taxes and contributions on sales, commissions and a gross profit margin determined in the tax legislation. As of 1 January 2013, a 20% gross profit margin is required for industries/sectors that are not specified in the legislation, calculated based on the percentage of the value imported over the final resale price. For the following industries/sectors a different mark-up is required:
Sectors where a 40% profit margin is required:
• Pharma chemicals and pharmaceutical products.
• Smoke products.
• Optical, photographic and cinematographic equipment and instruments.
• Machines, apparatus and equipment for dental, medical and hospital use.
• Extraction of oil and natural gas, and oil derivative products.
Sectors where a 30% profit margin is required:
• Chemical products.
• Glass and glass products.
• Pulp, paper and paper products.
• Metallurgy.
Transfer pricing methods – exports
The methods established by Brazilian legislation to calculate transfer prices on the export of goods, services or rights between related parties are:
(i) export sales price method;
(ii) wholesale price in country of destination less profit method;
(iii) retail price in country of destination less profit method; and
(iv) acquisition or production cost plus taxes and profit method.
The only recent change in respect to exports refers to the creation of a fifth method, which is destined to calculate transfer prices connected with the export of commodities: commodity exchange export price.
It is worth mentioning that companies falling within the safe harbour set forth in the applicable legislation are not required to prepare a study to demonstrate the legality of their transfer prices. If a given company has registered more than 10% of the export revenue in the transactions with related parties as profit, it is entitled to demonstrate the correctness of its transfer pricing control based solely on the transaction’s documentation (this percentage used to be 5%). However, please note that such safe harbour only applies if the net export revenue derived from transactions with related parties represents up to 20% of the total net export revenues.
Export sales price method (PVEx)
Under PVEx, transfer prices correspond to the average of the export sales price charged by the company to other customers or other national exporters of identical or similar goods, services or rights during the same tax year using similar payment terms.
Wholesale price in country of destination less profit method (PVA)
This is defined as the average wholesale price of identical or similar goods, services or rights in the country of destination under similar payment terms, reduced by the taxes included in the price imposed by that country and a profit margin of 15% of the wholesale price. Retail price in country of destination less profit method (PVV) This is defined as the average retail price of identical or similar goods, services or rights in the country of destination under similar payment terms, reduced by the taxes included in the price imposed by that country and a profit margin of 30% of the resale price.
Acquisition or production cost plus taxes and profit method (CAP)
This is defined as the average cost of acquisition or production of exported goods, services, increased by taxes and duties imposed by Brazil, plus a profit margin of 15% including exchange gain variation, calculated based on the sum of the cost and taxes.
Commodity exchange export price (PECEX)
Similar to PCI, transfer prices under PECEX are defined based on the average commodity exchange price for the concerned item on the date of the transaction. Positive and negative adjustments can be implemented based on the premium paid with respect to such item. For those products not negotiated in commodity exchanges, Brazilian legislation authorizes the use of prices obtained from reputable institutions.
Transfer pricing on intercompany loans
For many years, interest practiced in cross-border loans between related companies was only subject to transfer pricing rules when such loans were not registered with the Central Bank of Brazil. For these cases, interest should not exceed the Libor rate for six-month US dollar deposits plus a spread of 3%, otherwise the excess was not deductible by the Brazilian borrower. On the other hand, the same amount should be accounted as taxable income by the Brazilian lender.
As of January 2013, all intercompany loans are subject to transfer pricing control, including the loans signed before such date. The definition of a maximum interest expense for Brazilian borrowers or a minimal interest income for Brazilian borrowers is now defined based on the following rules:
• Transactions in US Dollars (USD) at a fixed rate: the transfer pricing rate shall correspond to the market rate of those Brazilian sovereign bonds indexed in USD issued by the government on the external market;
• Transactions in Brazilian Reais (BRL) at a fixed rate: the transfer pricing rate shall correspond to the market rate of those Brazilian sovereign bonds indexed in BRL issued by the government on the external market; and
• Other cases: the transfer pricing rate shall correspond to the LIBOR for six-month deposits.
On top of such rate, a spread rate will be added to determine the interest rate for transfer pricing purposes. The Treasury will define such spread rate periodically. In 2013, the IRS defined a spread rate of 3,5% for regular transactions and 2.5% for transactions entered into with residents in low tax jurisdictions.
Documentation and Disclosure Requirements
Tax Return Disclosures
Transfer pricing documentation is submitted annually, together with the annual corporate tax return. Transfer pricing schedules request information on identification of intercompany transactions, amount, company and country of the parties, nature of transactions, method and value of adjustment. Country-by-Country Report must be filed with the corporate tax return.
Deadline to Prepare Documentation
July 31, together with the corporate income tax return.
Deadline to Submit Documentation
Documents are not submitted. Disclosure is limited to reporting.
Country-by-country reporting obligation
The CbC Report must be submitted annually with information of the preceding year, through the filling of the corporate income tax return.
Content of the Transfer Pricing Documentation
The information required for filling the ECF should include a product-by-product approach with the following:
• the names and locations of the related trading partners
• description of the goods, services and rights;
• the total transaction values for the most traded products, services or rights
• the methodology used to test each transaction,
• the arm’s length price,
• the average annual transfer pricing
• the necessary adjustments (if any)
Contributing Advisors
Myles CulmerDirector, BDO Advisory Services