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- Brazilian Transfer Pricing (TP) rules have been effective since January 1st, 1997 based on Law No. 9,430/96 amended by Law No. 12,715/12 and currently regulated by Brazilian Federal Revenue in the Normative Instructions No. 1.312/12 and its further changes.
- Brazilian TP rules apply in case of transaction involving, mainly, a Brazilian entity and: I) Foreign related party; and II) to transactions conducted by an individual or legal entity resident or domiciled in Brazil, with any individual or legal entity, which is unrelated, resident or domiciled in a country which does not levy income tax or which taxes income at a rate of less than 20% (twenty percent), or moreover, whose internal legislation imposes confidentiality related to the corporate composition of the legal entities or the ownership thereof.
- Nevertheless, Brazilian TP rules apply to importation and exportation of goods, services, rights and interest paid or received, associated with the loan agreements, and the taxpayer is allowed to select the most favorable method (lower or no fiscal adjustment).
- The Brazilian TP study is a comparison of two prices for each kind of product, service or right at the end of fiscal year: I) the actual intercompany price, which is the price effectively charged/received as shown in the Brazilian entity’s books; and, II) a parameter price, calculate according to any one of the Brazilian TP methods.
- For import transactions, if the actual prices are greater than the respective parameter price or maximum deductible cost, the difference will be a transfer pricing adjustment.
- For export transactions, it is just the opposite, i.e. if the actual intercompany prices are lower than the parameter price, the difference will be a transfer pricing adjustment.
- Additionally, a 5% (five per cent) of deviation margin is acceptable during the comparison.
- For larger groups (over R$ 2.260b or €750m) the Brazil has implemented CbCR (Country by Country Reporting) based on IN 1,681/2016. The Master File and Local File are not regulated by Brazil.
- Although the preamble states that the Brazilian TP rules were developed in accordance with the OECD guideline, it must be mentioned that the Brazilian TP rules is unique and does not follow integrally the terms of the OECD guidelines.
- In truth, Brazilian TP rules are considerably different from the rules set forth by OECD Guidelines. While OECD Guidelines are based on the arm’s length principle, Brazilian TP rules determine the benchmark price through the stipulation of fixed margins on transactions. And while OECD studies are based on the analysis of functions, risks, assets and other economic aspects of a basket of products, Brazilian Transfer Pricing is implemented on an item-by-item basis, and should be prepared in local currency (BRL).
- In other words, contrary to OECD standards, Brazilian law stipulates the manner to calculate a ceiling for deductible expenses on imports and a minimum gross income floor on exports in transactions carried out with related parties. The profit margins are pre-determined by the Law for all kind of transactions, and functional analysis is neither required nor necessary under Brazilian rules. There is no general arm’s length principle on which the transfer pricing rules are based.
For import transactions, deduction of costs and expenses on such transactions will be limited to the greatest benchmark price calculated under one of the following statutory methods.
- PIC Method is defined as the weighted average of prices charged by a related party or the Brazilian affiliate when buying/selling from/to third parties anywhere in the world.
- CPL Method is defined as the average cost of production of identical or similar goods, services or rights in the country where they were originally produced, plus taxes and charges on exports in said country and a 20% profit margin calculated on the pretax cost determined.
- PRL Method is defined as the weighted average of sale prices of imported goods, services or rights, less unconditional discounts granted, taxes and contribution on sales, commissions and brokerage fees paid and profits margin (20%, 30% or 40%) depending on the industry sector of taxpayer.
- PCI Method is defined based on daily average values of the price of the goods subject to public prices on internationally recognized commodities and futures exchanges. This method is mandatory for import transactions involving commodities.
On export transactions, revenue recognition on such transactions will be required to the lowest benchmark price calculated under one of the following statutory methods.
- PVEx Method is defined as the weighted average prices of (i) exports made by the Brazilian Company to unrelated parties or (ii) exports made by the other Brazilian exporters of similar or identical goods, services and rights under similar conditions of payment.
- PVA Method is defined as the weighted average Sales price in the wholesale market in the country to which the export is made, for identical or similar goods, under similar conditions of payment, reduced by (i) taxes included in the price levied in that country and (ii) a profit margin of 15%.
- PVV Method is defined as the weighted average Sales price in the retail market in the country to which the export is made, for identical or similar goods, under similar conditions of payment, reduced by (i) taxes included in the price levied in that country and (ii) a profit margin of 30%.
- CAP Method is defined as the weighted average cost of production or acquisition for the exported goods, services or rights plus taxes charged in Brazil and a profit margin of 15%.
- Pecex Method is defined based on daily average values of the price of the goods subject to public prices on internationally recognized commodities and futures exchanges. This method is mandatory for export transactions involving commodities.
Deduction of costs, expenses and charges referring to goods, services and rights imported from related parties domiciled abroad, for computing taxable income, is capped at the higher benchmark price determined under one of the import methods
Benchmark prices calculated under one of the import methods will be compared with the intercompany praticated prices. For those cases in which the actual intercompany price for higher than the respective benchmark price, the difference will be considered as transfer pricing adjustment.
Deduction of costs, expenses and charges referring to goods, services and rights exported from related parties domiciled abroad, for computing taxable income, is capped at the smaller benchmark price determined under one of the export methods.
Benchmark prices calculated under one of the export methods will be compared with the intercompany praticated prices. For those cases in which the actual intercompany price for smaller than the respective benchmark price, the difference will be considered as transfer pricing adjustment.
- Brazilian Transfer Pricing calculation must be calculated annually for all the operations undertaken with related parties abroad under that period. The calculation must be declared on the Income Tax Return (summary information) and the detailed calculation shall be bookkept during the statutory period (five years) as it might be requested in an event of a tax assessment.
- Master file and local file are not applied in Brazil.
- High risk business models include commissionaire and toll manufacturing.
- Limited risk distributor and contract services/ contract R&D arrangements could also potentially be affected, especially where significant people functions are in the UK.
- Persistent losses in a 'low risk' entity.
- Licensing payments to low tax jurisdictions.
- Business restructurings, or changes in TP model, can also trigger a challenge but needless to say, businesses can evolve, and if the previous TP method no longer appears the most appropriate, it should always be reviewed, rather than being ignored for the sake of maintaining consistency.
Failing to submit transfer pricing information in the income tax return documentation or submitting it the documentation with omitted, inexact or incorrect information is a tax infraction and expose the taxpayer to the application of penalties. The penalties regarding transfer pricing information documentation are the same as those applicable to corporate income tax (CIT) return, as follows:
- Penalty equivalent to 0.25 percent, for calendar-month or fraction, of the net profits before CIT, in the corresponding period, limited to 10 percent, relating to the legal entities that do not file or file the CIT return with delay; or
- Penalty of 3 percent, not lower than 100 reais, of the value omitted, inexact or incorrect.
The penalty of item (i) is limited to:
- 100,000 reais for legal entities that in the previous calendar year accrued total gross revenues equal or lower than 3.6 million reais; and
- 5 million reais for other legal entities.
The fine of item (i) is reduced by:
- 90 percent, when the CIT return is presented within 30 days as from the deadline;
- 75 percent, when the CIT return is presented within 60 days as from the deadline;
- 50 percent, when the CIT return is presented after the deadline, but before any tax audit procedure; and
- 25 percent, when the CIT return is presented within the term established by in notification.
The penalty of item (ii) is not due if the taxpayer corrects the omission or the inexact or incorrect information before a tax audit, and the penalty is reduced to 50 percent if the correction is made within the term established in the tax authorities’ notification.
- Not applied in Brazil.
- Not applied in Brazil.
- Not applied in Brazil.