Brazilian Minister Finance Fixes The Spread Rate For Deductibility Purposes And For The Consideration Of Financial Income In Foreign Loan Transactions

Historically, only transactions not registered with the Brazilian Central Bank ("BACEN") were subject to transfer pricing control in Brazil. The transfer price on such transactions should not exceed the Libor rate applicable to US Dollar deposits for a period of six months, plus an annual spread equal to 3%. In other words, the minimum value charged by the Brazilian lender and/or the maximum amount deductible by the Brazilian borrower should respect such limits, which have/had not been changed since Brazilian transfer pricing rules were enacted in 1996.

Since the Brazilian transfer pricing rules were applicable only to those situations where the transaction was not registered with BACEN, the list of transactions in which such rules had to be observed was relatively small. For this reason, this subject never received the attention it deserved (by neither the taxpayers nor the tax authorities).

This scenario changed with the publication of Law nos. 12.715/2012 and 12.766/2012. According to this legislation, all foreign loans must observe Brazilian transfer pricing rules (regardless of their registration with BACEN). These changes brought such problematic to taxpayer's spotlight.

According to the provisions of Law 12.715/2012, no loan transactions made between related parties may exceed the Libor rate plus a 3% spread. This provision created a huge practical problem to the extent it so happened that the Libor rate was less than the interest usually charged in free market transactions. This is because when such limit was established in1996, the Libor rate fluctuated between 6% and 7%. However, by 2012, the same rate was fluctuating between 0.60% and 0.65%. In mathematical terms, this would mean that a Brazilian lender could only consider a maximum rate of 3.65% per year for income tax purposes.

In this context, Law 12.766/2012 was published, changing article 22 of Law no. 9.430/1996. According to the new provision of such article, the interest paid (or received) in consideration of foreign loans should observe the rate determined by the same article "plus a spread to be fixed by the Brazilian Finance Minister based upon the market average proportionately to the period to which it refers".

The...