Recent Changes In The Brazilian Transfer Pricing Rules

On 3 April 2012, the Brazilian Federal Government enacted Provisional Measure n. 563 (published in the official gazette of 4 April 2012 - "MP 563") which, among other provisions, introduced changes in the Brazilian transfer pricing rules. In general terms, transfer pricing rules aim at avoiding undervaluation of export prices or overvaluation of import prices in transactions with related parties abroad (or non-related parties located in low-tax jurisdictions or subject to privileged tax regimes) as a way to transfer non-taxed profits from Brazil to other countries.

Some changes introduced by MP 563 originated from recurrent disputes between the Brazilian tax authorities and taxpayers and aim at reducing the potential for future litigation. Some of the changes introduced by MP 563 had been previously considered by provisional measure n. 478/2009, but it was not converted into law by the Brazilian National Congress.

We comment below on some of the most relevant changes in the Brazilian transfer pricing rules introduced by MP 563.

1. Amendments to the Resale Price Method - PRL

   1.1. Calculation Method

   MP 563 modified the calculation of the reference price for purposes of transfer pricing adjustments under the PRL method, making it very similar to the calculation method established by Normative Instruction n. 243/2002 ("IN 243" - the normative instruction enacted by the Brazilian Revenue Services which regulates the Brazilian transfer pricing rules).

   There are several tax litigation cases at the judicial and administrative levels regarding the calculation of reference prices under the PRL method as, in the view of the taxpayers, the calculation method set forth by IN 243 is illegal and not consistent with the one provided by Law n. 9,430/1996. MP 563 tends to eliminate similar discussions in relation to future periods.

   1.2. Profit Margins

   MP 563 also amended the profit margins for purposes of application of the PRL method. Traditionally, under the PRL method, imports of goods to be simply resold by the Brazilian importer were subject to a 20% profit margin, while the import of goods subject to industrialization in Brazil were subject to a 60% profit margin (the application of the 20% profit margin generally allows higher deductible costs for Brazilian importers). The 60% profit margin has always been considered by taxpayers as too high and disconnected with market conditions.

   According to MP 563 the profit margins for pure resale and industrialization operations performed by the Brazilian importer should be the same. Such profit margins are of 40%, 30% or 20% depending on the economy sector of the importer, as follows:

   40% for the following sectors:

   (i) manufacture of pharmaceutical and pharm-chemical products;

   (ii) manufacture of tobacco products;

   (iii) manufacture of optical, photographic and cinematographic equipment and devices;

   (iv) sales of medical and odontology machines, equipment and devices;

   ...