Transfer Pricing in Brazil

By Georgios Theodoros Anastassiadis[1]

1. Brief Introduction to the Brazilian Transfer Pricing Legislation

   The Brazilian transfer pricing rules were introduced into the local legislation by means of Law 9,430, from 1996, coming into force in 1997. Having been inspired by the US legislation, these rules' main goal is to prevent the shifting of taxable profits from Brazil to other jurisdictions, be it via overvaluing imports or undervaluing exports carried out with affiliated companies abroad and entities established in low taxation countries.

   The underlying principle of this mechanism is to set a parameter price, for each operation subject to the legislation, that reflects market conditions practiced by independent parties without any favoring situation, which is also known as the arm's length principle. In this context, methods were created to calculate the parameter prices, based upon this principle, for both import and export operations.

   In the case of imports, the following methods have been established: (i) Comparable Uncontrolled Price ("PIC"), based on the criteria of comparability of identical or similar goods, services and rights, transacted between independent parties; (ii) Resale Price Minus ("PRL"), calculated using the sales price of the imported item minus a pre-fixed profit margin of 20%, 30% or 40%, depending on the industry sector; (iii) Cost Plus Method ("CPL"), consisting of the production cost plus a fixed margin of 20%; and, at last, (iv) the Commodities Method ("PCI"), for the cases of import of commodities subject to quotation in internationally recognized exchange markets.

   On the other hand, in the case of exports, the following calculation methods have been created: (i) the Comparable Uncontrolled Price on Exports ("PVEx"), as described above; (ii) the Resale Price Minus, using 15% and 30% fixed margins, in the case of wholesale and retail markets abroad, respectively; (iii) Cost Plus Method, using a 15% fixed margin; and, at last, (iv) the Commodities Method, which uses the quotation of exchange markets as a comparison basis.

   Having been briefly and preliminarily considered the overall framework of transfer pricing in Brazil, we shall now explore this subject from the standpoint of the joint effort that many jurisdictions have been recently employing towards a higher efficiency of these rules, in the context of BEPS and its action plans, more specifically Action Plan 13, which establishes the Country-by-Country...