Transfer Pricing in Emerging Economies: Brazilian Case

Transfer Pricing in Emerging
Economies: Brazilian Case
Marcos Aurélio Pereira Valadão
Background & Legislation
• Brazil adopted tax law imposing worldwide income taxation
in 1995. The change in the law that allowed the taxation on
a worldwide basis was made by means of the Federal Law n.
9.249, Dec. 29, 1995, that entered into force in Jan. 1, 1996.
• Transfer Pricing law was enacted in 1996, and entered into
force in Jan. 1, 1997 (Federal Law n. 9,430/96). Federal Law
9,430/96 was modified by Law n. 10,451/ 2002, and by
Federal Law n. 11,196/2005, which introduced a
modification to adjust exchange rate appreciation of the
Real against foreign currency.
• Brazilian regulations for transfer pricing must follow the
law, as approved by the Congress. It may be an
Administrative Rule (“Portaria”) issued by the Minister of
Finance or by the Federal Revenue Secretary, or an
Normative Rule (“Instrução Normativa RFB”), similar to
Treasury Rulings, issued by the Federal Revenue Secretary,
that are detailed regulations.
Background & Legislation
• Current transfer pricing rules are detailed in
Normative Instruction SRF No. 243, issued in
November 11, 2002, modified by Normative
Instruction SRF No. 321, issued in April 14, 2003,
and Normative Instruction No. SRF nº 382, issued
in Dec, 12, 2003.
• There are other Regulations dealing with
adjustments to exchange rate appreciation (issued
in 2005, 2006, 2007, 2008 and 2011).
• Law and regulations are available at:
to/PrecosTransf.htm (Texts in Portuguese)
Legislation Analysis
• Brazilian legislation seeks to adopt the arm's length principle. If
this principle is not observed, the law authorizes tax authorities
to reallocate income for income tax and social contribution
collection purposes (in Brazil there are two taxes on income:
Income Tax and Social Contribution) Lack of compliance may
result in tax penalty of 75% or 150% based on unpaid tax.
Transactions examined under Brazilian Transfer Pricing
Regulations are transactions between related parties, that are
juridical persons (legal entities) or individuals that have
common interests in accordance to a set of rules established by
tax legislation. In addition, all transactions with parties
established in low tax and non transparent jurisdictions and
those enjoying‘‘privileged tax regimes” are subject to
transfer pricing rules. There is a list of jurisdictions.
Legislation Analysis
• Transactions examined under Brazilian
Transfer Pricing Regulations include:
imports and exports of goods, services, and rights
with related parties, payments or credits for
interest paid or received on loans with related
parties not registered with the Central Bank of
Brazil. However they are not applicable to
royalty payments, technical assistance, and
scientific and administrative fees (when it
represents payments for technology transfer).
These expenses are subject to limited deduction.
They are also subject to withholding tax.
Methods adopted by Brazilian TP Regulations
• There are two set of methods for goods, services an rights
(in general):
– For import transactions:
• Comparable Uncontrolled Price Method (PIC) (CUP)
• Resale Price Method (20% or 60% mark up margin) (PRL) (RPM)
• Cost Plus Method (20% mark up margin) (CPL) (Cost Plus)
– For export transactions.
• Comparable Uncontrolled Price Method (PVEx) (CUP)
• Wholesale Price in the Country of Destination Less Profit Method (15%
margin) (PVA) (RPM)
• Retail Price in the Country of Destination Less Profit Method (30%
margin) (PVV) (RPM)
• Cost Plus Method (15% profit margin) (CAP) (Cost Plus)
There is no preferable method, taxpayer may use the one
that better fits (or works) to his/her operation, but cannot
use other methods such as Profit Split and CPM.
Methods adopted by Brazilian TP Regulations
v. OECD Recommendations
Comparable Uncontrolled Price (CUP)
•PRL – PVA/PVV Resale Price Method (RPM)
Cost Plus Method
• N/A
Transactional Net Margin Method (TNMM)
Profit Split Method
Formulary Apportionment
Methods adopted by Brazilian TP regulations
• Compulsory profit margins are set between 15 and 60
percent, depending on the Transfer Pricing Method,
and they differ for inbound and outbound
transactions. The law specifies minimum and
maximum profit margins and grants the Ministry of
Finance the authority to change these margins, under
special circumstances.
• In other words, the profit margins are statutorily set
in the Transfer Pricing regulations and are not
dependent on comparable, uncontrolled transactions,
for each specific case.
• It is also important to point out that the law foresees
the possibility of modifying those margins through an
individual request submitted by the taxpayer or a
taxpayer association.
Methods adopted by Brazilian TP regulations
• The remarkable feature of the Brazilian methodology is the
so called “fixed” or “predetermined” margins. These
margins that are set in the law are used for the Resale Price
and Cost Plus Methods in import and export operations.
This methodology overcomes the difficulty to find a
comparable for every single operation. It brings simplicity
and predictability to the application of TP regulations. It
prevents complex litigation, and makes the law and he
regulations simpler. This simplification also applies to TP
• This aspect, i.e., the use fixed margins will be part of the
Manual of TP for Developing Countries the Committee is
preparing (Chapter 7 in the very last version).
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