Taxing authority and tax law
Tax authority: Brazilian Internal Revenue Service (IRS)
Tax law: Internal Revenue Code by Decreto 3000, 26 March 1999 (RIR99)
Relevant regulations and rulings
- Ordinance No. 222/08 provides guidance with respect to requests for changing statutory profit margins
- Normative Instruction No. 243, promulgated 11 November 2002, changed application of Resale Minus 60%
- Law No. 9.959, enacted 27 January 2000, introduced the Resale Minus 60% method (applicable for raw materials)
- Law No. 9.430, enacted 27 December 1996, introduced transfer pricing rules in Brazil
Coefficients to compensate exports for Brazilian currency appreciation:
- 2009 coefficient: 1.00 (Normative Instruction No. 1010/10)
- 2008 coefficient: 1.20 (Normative Instruction No. 898/08 and Ordinance No. 310/08)
- 2007 coefficient: 1.28 (Normative Instruction No. 801/07 and Ordinance No. 329/07)
- 2006 coefficient: 1.29 (Normative Instruction No. 703/06 and Ordinance No. 425/06)
- 2005 coefficient: 1.35 (Normative Instruction No. 602/05 and Ordinance No. 436/05)
OECD guidelines treatment
Brazil’s transfer pricing rules deviate significantly from international standards (including the OECD guidelines) in that there are no profit-based methods. Intercompany transactions need to be documented on a strict transactional basis, and fixed statutory profit margins (generally not arm’s length) apply. No functional or industry analyses are required. Instead, the local subsidiary will have to document for each imported (or exported) product or service that it complies with at least one of Brazil’s statutory transactional methodologies (CUP, Resale Minus or Cost Plus).
Priorities/pricing methods
As a first step in the transfer pricing documentation process, Brazilian companies have applied the Brazilian Resale Price less Profit Method (Método do Preço de Revenda menos Lucro or “PRL”) to document a company’s transfer prices. Brazilian companies have started the documentation process with the PRL because the method relies entirely on import cost, local production cost and resale price information available internally, relieving the company of the burden of soliciting data from its foreign-related suppliers. In addition, since the PRL is the method favored by the Brazilian tax authority in the case of an audit, this approach provides a reliable estimate of Brazil’s potential transfer pricing exposure.
Transfer pricing penalties
Since there are no special penalties for transfer pricing, general tax penalties are applicable. The amount of the penalty may be up to 20% of the omitted tax (or 0.33% per day) if the taxpayer pays the related taxes late but before an audit. Meanwhile, if the tax authority assesses the taxpayer as part of a transfer pricing audit, the applicable penalties may range from 75% to 225% of the omitted taxes.
Penalty relief
Currently no penalty relief is available.
Documentation requirements
Brazilian taxpayers are required to document their international intercompany transactions on an annual basis. The Brazilian annual tax declaration (DIPJ) contains five specific forms that require taxpayers to disclose detailed information regarding their main intercompany import and export transactions. As part of these contemporaneous documentation requirements, taxpayers need to disclose the total transaction values for the most traded products, services or rights, the names and locations of the related trading partners, the methodology used to test each transaction, the calculated benchmark price, the average annual transfer price and the amount of any resulting adjustment.
Given the detailed transactional focus of the Brazilian regulations and the absence of any basket approach, taxpayers are required to document their transfer prices on a product code by product code basis, service type by service type and right by right. In this context, product code refers to a company’s internal product codes used for inventory management purposes and not the much broader fiscal nomenclature used for customs and indirect tax purposes.
Taxpayers are expected to have the calculations and documentation necessary to support the information filed as part of the annual tax declaration ready for potential inspection by the tax authority as of the declaration’s filing date (i.e., usually the end of June of the ensuing calendar year).
Documentation deadlines
The contemporaneous documentation required as part of the DIPJ usually has to be filed by the end of June of the following fiscal year. Taxpayers are expected to have the detailed calculations and documentation necessary to support the information filed as part of the DIPJ ready for potential inspection as of the declaration’s filing date.
Statute of limitations on transfer pricing assessments
A general statute of limitations applies, which is five years from the first day of the following fiscal year.
Return disclosures/related-party disclosures
The transfer pricing adjustments must be effected in December and reflected in the annual income tax return (usually due June of the next year), when the company will also have to disclose the transfer pricing methods chosen and any related information.
Audit risk/transfer pricing scrutiny
In an effort to expedite audits in Brazil’s data-intensive transfer pricing documentation environment, Brazilian audit teams have been equipped with new computers and specialized software applications, including internally developed systems capable of analyzing and auditing large volumes of accounting and transaction data.
The Brazilian tax authority expects the International Affairs Special Office (DEAIN) and the regional audit groups to continue to increase their numbers of specialized transfer pricing auditors. It is believed that the DEAIN and the regional transfer pricing auditors are becoming increasingly sophisticated in their audit approaches as they grow in number and experience.
There is a growing concern that many transfer pricing auditors, because of their particular training and tools, tend to rely on mechanical approaches to audits, while they ignore, or are unaware, of possible underlying business economics. While efforts are being made to increase auditors’ knowledge of economics, it is expected that this approach to auditing will continue for the next few years.
APA opportunity
APAs are not specifically addressed.
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