Category: Part D.1. Brazil Country Practices

D.1. Brazil – Transfer Pricing Practices

D.1. BRAZIL COUNTRY PRACTICES   D .1 .1 .       Introduction: General Explanation D.1.1.1.              Brazil introduced a law on transfer pricing, through Law n. 9430/1996, in 1996.137 The bill was proposed to deal with tax evasion through transfer pricing schemes, and in line with this proposal it adopted the arm´s length principle. D.1.1.2.              The methodology introduced by the law listed the traditional transaction methods (Cost Plus Method and Resale Price Method) but denied the use of transactional profit methods (the Profit Split Method and Transactional Net Margin Method) and formulary apportionment. Regarding the CUP Method, for exports or imports, the law introduced a methodology that is similar to OECD practices; and in addition Brazil also adopted the so called Sixth Method (which is the CUP method applied specifically for commodities). However, with regard to the Cost Plus Method and Resale Price Method, instead of making use of comparable transactions, the law established fixed margins for gross profits and mark-up. D.1.1.3.              In 2012 the law was changed by adopting different margins for certain specific sectors as applicable to the Resale Price Method (RSP). The Brazilian perspective is that the conventional use of the Resale Price Method and the Cost Plus Method implies some uncertainty and juridical instability, since they are implemented by the taxpayer without previous consent or summary review by the tax authorities. This affects stability and expectations in economic and fiscal relations. D.1.1.4.              Brazil’s Resale Price Method and Cost Plus Method with fixed margins are applicable to both export and import operations. In order to make them easier to understand they are presented in the following paragraphs disregarding practical distinctions. A more detailed explanation to differentiate the application to imports and to exports and how to deal with that will be discussed separately. This is because the Brazilian transfer pricing law details the application of the two methods (RSP and CPM) for exports and imports in separate sets of rules. There are also specific methods for tradable commodities and interest that are addressed in para. D.1.8.2. and following of this Chapter. D.1.1.5.              Brazil’s Resale Price Method and Cost Plus Method with fixed margins are not “safe harbor†methods. For these purposes, safe harbours mean provisions that apply to a defined category of taxpayers or transactions that relieve eligible taxpayers, at their own option, from certain obligations in pricing controlled transactions otherwise applicable under the arm’s length standard. The Resale Price Method and Cost Plus Method with fixed margins can be applied by the taxpayers as regular methods, not as safe harbours. The fixed margins are subject to modifications authorized by the Minister of Finance, based on the taxpayer´s request or ex officio, as discussed below. D .1 .2 Resale Price Method with Fixed Margins Explanation of the methodology D.1.2.1.              The mechanism of the Resale Price Method using fixed gross profit margins is considered by Brazil to be similar to the conventional Resale Price Method with margins, except that the gross margins are set out in the rules, rather than being based on comparables (see Figure D.1.1 below). In order to determine the transfer price (deemed arm´s length price, or parameter price, as it is called in Brazilian transfer pricing laws), the resale price that the reselling company (Associated Enterprise 2) charges to an unrelated customer (Independent Enterprise) is reduced by a fixed gross profit margin. The remainder is the acceptable transfer price between the associated parties (Associated Enterprise 1 and Associated Enterprise 2), which is the parameter price. D.1.2.2.              Reference is made below to two applications of how this method could be implemented for transfer pricing of products, including cases where the product is subject to manufacturing activities (value added costs) before it is resold. D.1.2.3.              The method is based on the participation of transferred goods in the product that is resold (which is 100% in a simple resale). Then the parameter price will be the resale price participation less a profit margin, fixed by law. Therefore, this methodology is also feasible to apply when other inputs (bought from independent companies) are combined with the inputs traded between associated enterprises and the final goods, manufactured from these different sources of inputs, are resold by a Brazilian enterprise. D.1.2.4.              Resale Price (without manufacturing) If the product traded between related parties is not subject to any manufacturing modifications the formula adopted will be the same and the participation ratio will be 100%, since the price of product A1 will be equal to the resale cost of product A: Figure D.1.1: Independent Enterprise Associated Enterprise 2 Associated Enterprise 1 Resale Price Method (without manufacturing) Product A’ Product A1 (Net) Resale Price                                                       = $ 10 000 Participation Ratio (of Prod. A1 in Prod. A’)       = 100% Participation Value (of Prod. A1 in Prod. A’)       = $ 10 000 Resale price margin (20%)                                      = $ 2 000 Parameter Price                                                         = $ 8 000 Appropriate Price? Price is Given     D.1.2.5.              In this case the calculation is simple as the parameter price (deemed arm´s length price) is the resale price of the same product (charged between independent parties) reduced by: unconditional discounts granted; taxes and contributions on sales; commissions and brokerage fees paid; and a fixed profit margin of, for example, 20% (according to current Brazilian law as at September 2016). TP (parameter price) = NRP— GPM x NRP, Where: Ø TP (parameter price) = transfer price determined by Brazilian law. The maximum price on imports or the minimum price on exports; Ø NRP = net resale price; Ø GPM = gross profit margin = the value of gross profit margin ratio, as determined by law or tax regulations (20% in this simplified example); and Ø TP (parameter price) = NRP—GPM x NRP = NRP—20% x NRP = 80% NRP. Hence: Ø (Net) Resale Price                                              $ 10,000 Ø – Resale Price Margin (20%)                              $ 2,000 ¾ = A1 Transfer Price under Brazilian law =      $ 8,000 D.1.2.6.              Resale Price (with manufacturing operation) In this methodology the transfer price would be calculated having regard to the