Global Tax Alert (News and views from Transfer Pricing) | 1 February 2013

Brazil issues new Normative Instructions that clarify the application of safe harbor provisions and interest rate pricing on intercompany financing transactions

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On 18 January 2013, the Brazilian tax authorities issued Normative Instruction (IN) 1.321/13 and IN 1.322/13, which provided further guidance on two issues related to the recently enacted changes to the Brazilian transfer pricing rules:

  • Modifications to safe harbor provisions effective starting 2013; and
  • Deductibility of intercompany interest based on the Law 12.766/12.

As we commented in our previous Tax Alert, Brazil amends transfer pricing rules: New rules for deductibility of intercompany interest and new normative instruction, dated 9 January 2013, Law 12.766/12 introduced further changes to the Brazilian transfer pricing rules for interest paid to related parties, and IN 1.312/12 issued on the same day did not reflect these changes. IN 1.312/12 significantly changed the safe harbor rules, and there was ambiguity for which year the changes would apply.

Safe harbor analysis

IN 1.322/13 clarified that for calendar year 2012, the former safe harbor rules, as described by IN 243/02, should be applied. IN 243/02 established as the profitability safe harbor, that the Brazilian taxpayer must earn a net profit before income taxes of 5% on export revenues to related parties. IN 1.321/13 also allows the option of applying either a three-year analysis (current year and two previous years) or a one-year analysis using the relevant year under consideration.

Therefore, the changes to the safe harbor rules introduced by IN 1.312/12 are effective starting January 2013. The changes include:

  • Increasing the net profitability threshold required on exports to related parties from 5% to 10% and;
  • Introducing a cap whereby intercompany export transactions cannot exceed 20% of the total net export transactions.

Intercompany interest

As described in our previous Brazil amends transfer pricing rules: New rules for deductibility of intercompany interest and new normative instruction, dated 9 January 2013, the Brazilian tax authorities amended the regulation related to the application of the new transfer pricing rules for intercompany interest. IN 1.312/12, issued on the same day, did not reflect the changes to the law. IN 1.322/13 clarifies the effective date for the new interest rate rules.

Based on IN 1.322/13:

  • Intercompany agreements entered into before 31 December 2012, will follow the previous rules (Law 9,430), whereby the interest, paid or received by Brazilian taxpayers registered with the Brazilian Central Bank are not subject to transfer pricing rules. If the agreement is not registered, then taxpayers will be subject to the limitation of Libor with deposits in US dollars for 6 months plus 3%.
  • Intercompany agreements entered into as of 1 January 2013 or after will be subject to the new Law 12.766/12 that differentiates interest rates depending on the underlying currency of each agreement and also allows for a variable spread to be issued by the Brazilian Ministry of Finance. Please note, that the renewal or re-negotiation of existing agreements should be considered as a new transaction and, therefore, subject to the new regulations.
  • Brazilian taxpayers who opt for the application of the new transfer pricing rules of Law 12.715/12 — e.g., reduced profit margins on the application of the Brazilian “resale minus method” (PRL method) should then, in the opinion of the Brazilian tax authorities, be subject to the limitation of 6 month USD Libor plus a spread of 3%, regardless of the registration with the Brazilian Central Bank. This interpretation is not included in the Law and therefore subject to different interpretations.

For additional information with respect to this Alert, please contact the following:

EY Serviços Tributários S.S., São Paulo
  • Werner Stuffer
    +55 11 2573 3902
    werner.stuffer@br.ey.com
  • Demétrio Barbosa
    +55 11 2573 3486
    demetrio.g.barbosa@br.ey.com
  • Janaína Costa
    +55 11 2573 3734
    janaina.costa@br.ey.com
  • Caio Albino de Souza
    +55 11 2573 3301
    caio.albino@br.ey.com
EY Serviços Tributários S.S., Rio de Janeiro
  • Marcio R.Oliveira
    +55 21 2109 1418
    marcio.r.oliveira@br.ey.com
EY Serviços Tributários S.S., Campinas
  • Leandro Cassiano
    +55 19 3322 0574
    leandro.cassiano@br.ey.com
EY Serviços Tributários S.S., Porto Alegre
  • Felipe Mauer
    +55 11 2573 3017
    felipe.mauer@br.ey.com
EY Serviços Tributários S.S., Curitiba
  • Aline Weiss
    +55 11 3593 0770
    aline.weiss@br.ey.com
Ernst & Young LLP, Brazilian Tax Desk, New York
  • Mariano Manente
    +1 212 773 2744
    mariano.manente@ey.com
Ernst & Young LLP, Brazilian Tax Desk, London
  • Ricardo Moura
    +44 20 7951 6907
    rmoura@uk.ey.com

EYG no. CM3180