Transfer Pricing And International Trade In Brazil

The major step to be taken by the Brazilian government regarding its future tax reform is to raise awareness of the role it has to play in the globalized world. Despite all the efforts to import transfer pricing widely applied rules to Brazil, local tax policy does not seem to take law and business globalization seriously enough.

Brazil has struggled to improve its economic performance in a new healthy global trade order where India and China have had impressive growth. There are many reasons why Brazil economic performance is well below its desired level, but one of the most important is its taxation policy.

Transfer pricing in Brazil is strictly regulated. Although the applicable rules were inspired by OECD (Organization for Economic Co-operation and Development) models, local statutes adopted certain criteria and restrictions that are not available in the OECD rules that initially guided them. For example, it is mandatory to apply inflexible gross margins in order to calculate transfer prices under the methods described by the Brazilian legislation. Corporations generally agree that the application of these fixed standards margins to all taxpayers and their related parties abroad is like ignoring the different business interests that legitimately lead them to establish transfer prices that differ from average market prices. There are countless transfer pricing international transactions that do not have any comparable standard in the national market. The current law forces corporations to create risks they would otherwise avoid. If they adopt Brazilian margins they go against foreign rules, and in case they adjust to the more flexible rule of the country where they export, they will probably have their transfer prices questioned and disregarded by the Brazilian Treasury.

Although fixed profit margins are widely used in Brazilian transfer pricing rules, the legislation authorizes the use of different profit margins as long as the taxpayer proves they are based on publications, official reports or on statements1 from the government of the buyer or seller's country. The use of researches conducted by prestigious institutions and/or companies that hold a high reputation for its technical expertise are also accepted to justify the application of different profit margins, as long as they carefully discriminate the sector, the period, the companies taken into consideration and the margins found, as well as each company's data be identified. It...