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Transfer pricing has become more and more important to companies aiming to comply across national jurisdictions, making the most of their assets and departmental utilities. As such, it can be important to bring in specialists.

What is Transfer Pricing?

Transfer pricing refers to the sum or price used in accounting which is paid for the transfer of intangible assets, goods, use of money, services and comparable transactions from one entity to another. Countries use appropriate laws to control related party transfer pricing since inapt use can alter profits from one jurisdiction to the other. Governing authorities are especially anxious that entities can shift income from a higher taxed jurisdiction to a lower one in order to gain financially. Transfer pricing in Brazil is no different.

In theory, businesses are meant to be in full command of their transfer pricing issues. This is significant because if they do not position their transfer prices in compliance with the rules of each jurisdiction they interact with, they could risk penalties, high interest and underpaid fees.

Transfer pricing in Brazil is considered an intricate issue within the country’s tax law, and usually requires the application of a specialist. The law of transfer pricing is a method of financial tax planning that helps allocate revenue between various divisions, which in cooperation sell, develop and produce goods and services. At first instance transfer pricing structures were introduced to supply each division with the appropriate information for them to make the best choices for their organisation as a whole. In terms of best practice this means optimising company performance and softening the progress of determining divisional performances. The crucial principle is that the transfer price should be comparable to the price that would be charged if the goods were both, sold to external clients or purchased from outside sellers.

A large proportion of countries enforce tax laws that are based on the arm’s length principle as termed within the OECD. The arm’s length theory as adopted by Article 9 of the OECD Model Tax Convention serves the purpose of ensuring that transfer pricing between corporations of multinational businesses are established on a market value basis. These transfer pricing guidelines for multinational enterprises and tax administrations, limit how transfer prices can be set and ensure that each country gets to tax “a just and fair” share. Transfer pricing in Brazil has a unique set of rules, however, as they diverge significantly from the internationally accepted OECD guidelines.

Why do I need to know?

2011 was a year of change for Brazil with the much-celebrated election of Dilma Rousseff’s new federal government. But now the honeymoon period has passed, Rousseff has encountered a number of challenges that will require her to implement a string of much required tax reforms.

Transfer pricing in Brazil has been at the forefront of the country’s tax reorganisation as it continued to be a recurrent issue for the country’s succeeding governments up to now. A run of draft amendments has so far proven unsuccessful but the new president has upped the pace on reform by introducing a four-stage draft bill before Brazil’s National Congress. It entailed projected alterations to the administration which oversees taxes on products and services, as well as changes in import and export incentives relating to tax credits.

Transfer pricing in Brazil has been discussed at length within government. Contrary to the OECD guidelines, the US regulations on transfer pricing and the rules implemented by neighbouring trading partners Argentina and Mexico, transfer pricing in Brazil does not assume the globally established arm’s length principle. Multinational corporations which engage in Brazilian business transactions require an evaluation of their possible tax exposure in order to establish a unique transfer pricing plan to protect and optimise their global tax burden as a whole. As a substitute,  Brazil’s transfer pricing identifies the price ceiling for deductible expenses on inter company import transactions and the bare minimum gross income level for intra-company export dealings.

The law relating to transfer pricing in Brazil tackles the export and import of services, products and rights charged among the relevant parties. In addition, the transfer pricing law deals with intra-company financing matters which are not registered with Brazil’s Central Bank. This applies to any exports and imports between the legal entity and the individual based in Brazil, as well as the resident from either the low tax jurisdiction or the area, which has implemented legislation that requests confidentiality relating to corporate ownership, notwithstanding the affiliation. Companies preparing to conduct operations within the jurisdiction must carefully plan from the outset to circumvent any likely double taxation.

How does it work?

Simply put, there are no clear instructions relating to the pecking order when dealing with Brazil’s transfer pricing methods and what constitutes the most appropriate rule or best technique. When drawing up calculations founded on Brazilian transfer pricing laws, taxpayers can select the system that will offer the lowest fiscal amendment. When Brazilian companies initially consider transfer pricing documentation they will apply transactional processes that mostly use statutory gross profit margins. These vary for import and export transactions.

1) The Brazilian Resale Price less Profit Method (PRL) is one of the systems used for import transactions. PRL depends wholly on resale price data obtainable within the country, the cost of local production, and import rates. The PRL method seems to be a favoured one by Brazilian companies because they can bypass the request for information from foreign-linked suppliers. In addition, tax authorities appear to have developed a preference for the PRL method as it provides a dependable assessment of exposure to audit within transfer pricing in Brazil. It lays down a statutory gross profit margin of 60 percent for transactions of imported raw substances and 20 percent (PRL 20) for pure resale transactions where the distributor has no manufacturing activities in Brazil.

1.1) For the PRL 20 the comparable price is arrived at by calculating the typical resale price for transactions with unconnected purchasers. This, minus unrestricted reductions granted, taxes and contributions on commissions, as well as sales and brokerage charges that are laid out in addition to a profit scope of 20 percent on the resale cost. This method generally applies for distributors with no manufacturing activities in the country, making transfer pricing in Brazil appear slightly less significant.

1.2) PRL 60 is calculated via the average resale price for transactions with unrelated buyers, minus taxes, unrestricted reductions and social contributions on sale, commissions and price remunerated, in addition to a profit scope of 60 percent on the resale value after subtracting the worth added in Brazil.

2) The comparable uncontrolled price method, or PIC, uses the price of comparable or identical buying and selling processes between unrelated parties within Brazil’s market or that of other nations under like provisions.

3) The cost plus method, or CPL, applies production cost in the country of origin in addition to a profit margin of 20 percent.

The four processes for transfer pricing in Brazil relate to adjustment calculations in acquisitions and imports of assets, goods, services or rights:

  •  Comparable Independent Prices (PIC)
  • Resale Price Less 20 percent Profit (PRL 20 – for goods imported and resold without undergoing any industrial process in Brazil)
  • Resale Price Less 60 percent Profit (PRL 60 – for imported goods which undergo further industrialisation in Brazil)
  • Production Cost Plus Profit (CPL)

Tax authority and regulation

Over the past year there has been a few key landmark cases in transfer pricing in Brazil, as the country’s revenue service has decided to take a more forceful standpoint on the area. Experts such as Deloitte’s tax team welcomed these government changes because they mean enhanced clarity for clients in tax related areas. Deloitte’s tax group has been involved heavily in the most high profile cases and is known to appreciate the governments’ recent encouragement of in-depth communication between legal professionals, the revenue service and actual taxpayers. This, according to Deloitte has been one particularly positive change for Brazil’s transfer pricing regulations.

Controversial issues have been encountered encountered lately in matters relating to import transfer pricing transactions. These include the treatment of freight and insurance costs and the Brazilian import tax costs which are included in the total acquisition value weighed against the price calculated under the PRL method. But there is a common belief that the recently implemented changes combined with the newly found communication avenue will lead to a more collaborative rapport and further transparency between taxpayers and Brazil’s revenue service.

Legal authority Deloitte, which offers counsel to high profile clientele daily in the complex area of Brazilian transfer pricing, has also been closely following the developments in preparation of the new legislation to be introduced this year. The firm is particularly keen to see the effect these amendments will have on accounting practices within Brazil and internationally.

Transfer pricing rules must be adhered to by:

  •  Individuals or legal entities, who are resident or domiciled within Brazil and negotiate with related individuals or legal entities, resident or domiciled overseas. This applies even if the business is conducted by a third party;
  • Individuals or legal entities, resident or domiciled in Brazil that negotiate with related or unrelated persons or legal entities, resident or domiciled in a country where the taxed income is below 20 percent.

The Receita Federal do Brazil, or the Brazilian Revenue Service (BRS) governs Brazil’s transfer pricing. The area is specifically regulated to law 9,430/96, of which Article 2 within the regulatory instructions offered in-depth guidelines on related entities. But the law has since been amended by 9,950/00, which led to some challenges relating to their enactment. This is also partly the reason why regulations and guidance notes for transfer pricing are considered quite complex nowadays. All laws are linked to Normative Instruction (IN) 243/02 of the BRS, which often results in considerable transfer pricing corrections. Deloitte has proven time and again to be one of the foremost forces for Brazilian transfer pricing support as the firm provides counsel, helps plan, implement, as well as monitor legal changes on behalf of customers.

Specialists are well versed in the law governing transfer pricing. The use of Article 19 within 9.430/96 specifically for the initial application of the regulations on Brazil’s transfer pricing is one such law. Meanwhile, Article 18 provides experts with guidance as to the quality of the foreign entity and the operations between tax-favoured jurisdictions.

Industry experts

Deloitte’s tax consulting practice is one of the strongest in Brazil. Its volume, quality and expertise have been instrumental to this high profile distinction. There are over 480 professionals who offer solid know-how within a range of accounting-linked matters. These include around 24 partners who offer advice in a variety of areas that a taxpayer requires to stay on top of issues relating to the jurisdiction. There are around 45 transfer pricing professionals specifically available at Deloitte to service clients in all areas of the law within Brazil. Leader of the pack, partner Fernando Matos, whose experience and knowledge has hugely benefited the firm’s clientele, has achieved great triumphs on behalf of its prestigious client list. Cristina Arantes de Almeida Berry, another partner at Deloitte, is a standout individual, in charge of new tax technology for clients. Using newly implemented technologies in conjunction with transfer pricing has ensured clients are served more efficiently and proactively. In fact, Deloitte’s team has proven a major force in assisting to offset the reality that Brazil’s tax authorities’ services are increasingly going electronic now.

Moreover, Deloitte’s prominent transfer pricing group has extensive expertise in planning related transfer pricing matters. It is particularly proactive in devising effective transfer pricing arrangements as it identifies risk early on and is able to recommend the changes required prior to implementation. It also advises on policy development and governance procedures within the field.

On implementation, Deloitte helps execute tax efficient business operating models, offers counsel on intra group legal arrangements which help support Brazilian transfer pricing rules, and proffers guidance on policy, strategy and documentation issues. The Deloitte team has in-depth expertise in monitoring and identifying key legal changes.

It additionally offers proactive recommendations as to the appropriate response required on a gamut on issues while it keeps clients in the know on how transfer pricing is practiced in foreign jurisdictions. There will also be the instance where Deloitte is required to defend a client. The legal group at the firm has proven an asset in that area too, as it is capable of resolving disputes, offering advice on accounting provisions and appropriate defence strategies. It receives accolades also for its thorough preparation of economic analysis in aid of supporting transfer pricing policies.

Case study

Deloitte recently offered an invaluable insight into one of the most talked about transfer pricing formula disputes of recent times. In its ruling in December 2011 the Tax Counsel for Administrative Matters (CARF) came to the conclusion that a taxpayer should use the resale price minus profit formula as established by regulation 243/02 to calculate transfer prices under method PRL 60 percent, rather than the formula supplied by article 18, item II of rule 9,430/96. According to Deloitte this CARF decision challenges two recent rulings on the same topic including the introduction of Provisional Measure 478/09, which proposed to alter the formulas to resolving transfer prices under the PRL method. In both decision it was said that the formulas for the calculation of transfer prices were using the PRL method provided by IN 243/02, and were not prescribed in law.

Paulo Roscado of the CARF commented following the decision, saying that “…the Normative Instruction follows the Law in its purpose.” He insisted that Brazil’s Tax Code provides that the interpretation of tax legislation should strictly follow the language of the rule under analysis. In those instances when such interpretation is not possible, additional resources could be relied upon. In this case, the PRL formula is explicitly provided by article 18, item II of Law 9,430/96.

Following this landmark case, Deloitte published a statement in which it said that it is still too early to tell whether Semp Toshiba, the taxpayer affected by the CARF’s decision, will appeal its decision at the federal court level. However, the team at Deloitte feels that the case gives hope to the market regardless in connection with the legitimacy principle found within the Brazilian Constitution. Deloitte believes it will triumph over the Brazilian Revenue Service’s readiness to increase taxes which are exclusively based on normative acts established as rules from former decisions. Deloitte’s concludes by noting that its past technical expertise dictates that there is no need for a different interpretation of the PRL formula than the one provided by Brazil’s transfer pricing Law 9,430/96. It remains to be seen where this case will now take Brazil’s transfer pricing law.