Global Tax Alert (News and views from Transfer Pricing) | 9 January 2013

Brazil amends transfer pricing rules: New rules for deductibility of intercompany interest and new normative instruction

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Executive summary

On 28 December 2012 the Law 12.766/12 introduced further changes to the recently enacted changes to the Brazilian transfer pricing rules for interest paid to related parties. Also, Normative Instruction (IN) 1.312/12 was published the same day to consolidate Brazil's transfer pricing legislation and revoked all previous Normative Instructions related to transfer pricing, mainly IN 243/02. In addition, IN 1.312/12 provides guidance on the application of Law 12.715/12. As we commented in our previous Tax Alert (20 September 2012), the intention of Law 12.715/12 is to simplify compliance, reduce areas of controversy and attract more investment.

More specifically, IN 1.312/12 provides guidance on how to apply Law 12.715/12 mainly related to:

  • Imports:
  • Minimum requirement for the application of the Brazilian uncontrolled price method (PIC) using internal comparables
  • Minimum statutory gross profit margins from 20% to 40%, depending on the company's industry, required for the Resale Price Method (PRL)
  • Intercompany price to be tested under PRL method
  • Exports:
  • Changes to safe harbor conditions by increasing the profitability safe harbor to 10% and introducing a new threshold
  • Transfer pricing methods for commodities (Quotation on Imports - PCI and Quotation on Exports - PECEX):
  • Specific transfer pricing method for import/export transactions with publicly traded commodities
  • List of commodities, stock exchange markets and authorized institutions
  • Reduced the deviation margin to 3% in the case of transactions involving commodities
  • Safe harbor analysis (known as Dispensas de Comprovação) is not applicable for exports of commodities
  • Procedural changes:
  • Determination of the time/form to make the selection of the transfer pricing method applied
  • Transfer pricing analysis for back to back transactions
  • Interest:
  • New Law 12.766/12 introduced further changes to the deductibility of interest for financing transactions, providing new benchmark rates depending on the currency and mentioning that the Ministry of Finance will establish spread based on a market average

The changes listed above regarding Método dos Preços Independentes Comparados (PIC), Método do Preço de Revenda menos Lucro (PRL), PCI/PECEX methods enter into force as of 1 January 2013. However, taxpayers are still eligible to adopt the new rules for calendar year 2012. The new rules for interest as specified in Law 12.766/12 enter into force as of 1 January 2013. From a formal perspective, the safe harbor changes and the procedural changes entered into force for 2012. However, there is a certain level of debate on whether it is applicable only from 2013 forward.

Requirement for the application of the Brazilian uncontrolled price method (PIC) for internal comparables

The Brazilian uncontrolled price method (PIC) is the weighted arithmetic mean of the prices of identical or similar goods, services, or rights in the Brazilian market or other countries, in purchase or sales transactions made by the foreign related party or the Brazilian taxpayer with unrelated parties or established between unrelated third parties, under similar payment terms.

The required amount of uncontrolled transactions has always been a topic under discussion due to the lack of provisions on that matter. With the new language of Law 12.715/12 and IN 1.312/12, the Brazilian tax authorities intend to reduce the level of controversy. IN 1.312/12 states that uncontrolled transactions to be considered as a basis for determining the PIC comparable price should be at least 5% of the total value of the controlled import transaction during the same year. If there are no uncontrolled transactions or if the total value of uncontrolled transactions is lower than 5% of the controlled transaction during the same year, the previous year third party transactions may be used.

If the taxpayer makes use of the immediate prior year uncontrolled transactions, the import amounts should be adjusted by the exchange variation during the period, observing the mathematical formula described in IN 1.312/12.

The 5% threshold should be individually considered for each good, service or right imported from related parties, and it is only applicable when the Brazilian taxpayer compares intercompany prices with its own prices charged to unrelated parties.

Please note that, the new 5% threshold rule does not apply to other parameter prices based on external information regarding purchase and sales transactions provided by other parties.

Statutory gross profit margin required when applying the Resale Price Method (PRL), for the import of goods, services or rights, range from 20% to 40% depending on the company's industry

The Resale Price Method was significantly affected by the changes. Before Law 12.715/12, this method had two versions: one for simple resale of imported goods, services or rights – PRL20% - and another for goods imported and applied in production – PRL60%. Each version had its own calculation methodology and minimum profit margin (20% on the gross resale price for finished goods and 60% on the net resale price for raw materials/components/parts).

The Resale Price Method has always been an area of concern for taxpayers as pre-determined profit margins are applied regardless of the company's industry. Therefore the previous legislation required, either 20% margin for pure resale, or 60% margin for imports undergoing further processing had to be adopted.

Another area of controversy for the PRL was two differing interpretations on how to calculate the resale minus 60% parameter price – PRL 60% since the issuance of IN 243/02 in 2002.

Additionally, taxpayers were uncertain whether to apply the 20% margin or 60% margin for imported products that undergo a “light” manufacturing process in Brazil (e.g., repackaging, small assembly, etc.). Taxpayers usually applied the resale price version, with the 20% gross margin, and the authorities applied the production version with 60%.

Law 12.715/12 has removed the 20% and 60% margin requirements and instead requires minimum statutory profit margins that vary according to the company's industry sector. The calculation criterion is now described more precisely in the Law 12.715/12 and also in IN 1.312/12, and it is applied the same way for imports regardless of whether the products are intended for pure resale or further manufacturing. The new statutory profit margins are:

  • Forty percent (40%): pharmaceutical/pharma-chemical products; tobacco products; optical, photographic and cinematographic equipment and instruments; dental, medical and hospital equipment and instruments; extraction of petroleum and natural gas; and petroleum-related products;
  • Thirty percent (30%): chemical products; glass and glass products; pulp, paper and paper products; and metallurgy; and
  • Twenty percent (20%): for all the other businesses.

It is important to highlight that the list above is exhaustive with respect to the industry sectors considered in the 40% and 30% gross margins basket. Therefore, all other sectors, whenever applying the resale minus method, fall into the 20% margin. In cases where the same legal entity performs activities in different industry sectors, the calculations for the imported products should be separated according to the respective industry sector. In cases where the same imported goods are used in two or more industry sectors, the final comparable price should be the weighted average of the respective industry sector prices.

IN 1.312/12 does not provide guidance on how to determine the correct industry sector. As an example, for the industry sector called “metallurgical” there is no reference if it is related just to the heavy industry or if it is a broad definition that might include a broad range of companies. The law 12.715 and IN 1.312/12 state that the margin to be selected must correspond to the activity to which the purchased good was addressed in a production process or final destination.

With regard to calculation mechanics, the new resale minus method is very similar to the calculation set forth by previous Normative Instruction (IN 243/02) for importation of raw materials/components applied in production. Please see the example below:



Net sales price to third parties



Import cost of product (FOB cost)



Total cost


(D) = (B)/(C)

Ratio FOB cost x total cost


(E) = (A)x(D)

Net sales proportional to FOB cost


(F) = (E)X20%

20% margin


(G) = (E)-(F)

PRL Method (comparable price)


IN 1.312/12 clarifies that taxpayers must use the total cost of goods sold (COGS) for computation of the ratio between the intercompany price and COGS as demonstrated in item “D” above.

Intercompany price to be tested under PRL purposes

In order to determine the purchase price on imports to be tested, the previous regulation issued by the tax authorities stated that import cost should include international freight, insurance and non-recoverable import duties. Taxpayers have questioned whether or not any amount other than FOB should be considered as part of the tested price. The question arises because the other expenses, including non-recoverable taxes, are not paid to related parties and, therefore, should not be tested for transfer pricing purposes.

In that respect, the recent law changes regulated by IN 1.312/12 stated that the following amounts must not be included in the intercompany price on imports for PRL analysis purposes:

  • International freight and insurance, when engaged with third parties, with companies not domiciled in low tax jurisdiction nor with privileged tax regime
  • Taxes on imports
  • Other expenses on imports

Changes to safe harbor conditions

IN 1.312/12 maintained the two safe harbors originally described in the previous Normative Instruction (IN 243/02). However, IN 1.312/12 raised the profitability threshold from 5% to 10% required on exports to related parties, considering a three year analysis (current year and two previous years).

In addition, IN 1.312 introduced a cap that the intercompany export transactions amount cannot exceed 20% of total net export transactions. This limitation did not previously exist.

From a formal perspective, the safe harbor changes entered into force already for 2012. However, there is a certain level of debate on whether it is applicable only from 2013 forward.

In addition, IN 1.312/12 clarified that the two safe harbor conditions (profitability and representativeness) do not apply for export of commodities.

Transfer pricing method for import/export of commodities traded publicly

According to the Law 12.715/12, intercompany imports and exports of commodities must be tested using PCI (quotation on imports) and PECEX (quotation on exports) methods, respectively. The Law authorizes the Brazilian tax authorities to determine what will be considered as commodities and which commodity exchange should be recognized for applying the newly introduced methods.

IN 1.312/12 expressly listed the commodities for PECEX and PCI purposes in its Appendix I and stock exchange markets listed in its Appendix II. Therefore, both methodologies will rely on internationally accepted commodity quotations from international commodity exchanges listed in IN 1.312/12.

PECEX and PCI are both defined as the quotation of daily average values of assets or rights in internationally known futures or commodity markets, and the prices used will be adjusted to more or less the market average premium, on the date of the transaction or the latest known transaction. IN 1.312/12 also describes possible adjustments on prices based on variation of quality, characteristics of products, content of products, among others.

In the case that the date of the transaction is unknown, the taxpayer can use the date of import documentation or date on shipment of products for exports purposes.

In the case where there are no internationally recognized spot or futures quotations, the price of imported and exported goods can be compared with the prices obtained from independent data sources provided by internationally recognized research institutions. In that case, IN 1.312/12 expressly listed in its Appendix III the acceptable research institutions/sources.

As stated in the Law 12.715 and regulated in IN 1.312/12, related party import or export transactions of commodities must follow PCI or PECEX, therefore, the other transfer pricing methodologies such as the Comparable Uncontrolled Price, Resale Price or Cost Plus methods will not be applicable to analyze the commodity intercompany price. However, there are several additional issues to be addressed, including whether these new methods are mandatory or not for commodities without quotation. The literal interpretation of IN 1.312/12 opens the opportunity for taxpayers to select the most favorable method and not be bound to PCI or PECEX.

IN 1.312/12 maintained the 5% deviation margin analysis for differences between intercompany prices and parameter prices, which is calculated using the transfer pricing methods on imports and exports. However, IN 1.312/12 reduces the deviation margin to 3% in the case of imports and exports of commodities.

Change to the previously selected methodology

Under the law 12.715/12, starting from fiscal year 2012, the transfer pricing method elected by the taxpayer cannot be changed once the tax inspection has been initiated. However, the taxpayer will have the possibility to select another method in case the tax auditor disqualifies the first option during a tax inspection.

IN 1.312/12 clarifies the position of the tax authorities that the taxpayer is expected to present the transfer price calculation based on the same transfer pricing methodology as elected in the Corporate Income Tax Return. Once presented, the taxpayer cannot change the selected method.

In the case the taxpayer opts to apply the changes listed above regarding Método dos Preços Independentes Comparados (PIC), Método do Preço de Revenda menos Lucro (PRL), PCI/PECEX methods already for calendar year 2012 such option must be made with the filing of the Corporate Income Tax Return.

Back-to-back operations subject to transfer pricing analysis

According to IN 1.312/12, back-to-back operations should comply with Brazilian transfer pricing rules. Back-to-back operations are those in which the purchasing and selling of goods occurs without their physical departure or entry in Brazil. The good could be purchased from a foreign country and sold to another country without the physical entry in Brazil. It is necessary to demonstrate that the margin of profit of the entire transaction between related parties is consistent with the margin practiced in operations between independent parties.

IN 1.312/12 states that two parameter prices must be calculated in order to analyze the purchasing and selling transactions, observing the legal restrictions on the use of each transfer pricing method.

Changes to the deductibility of interest

Law 12.766/12, published on 28 December 2012, amends the transfer pricing analysis for interest, paid or received, by Brazilian taxpayers.

The law revokes the general rule (recently amended by Law 12,715/12), which stated that the benchmark for the interest expenses would correspond to the LIBOR rate for US deposits of 6 months plus an annual spread of up to 3%.

The calculation of the maximum amount of deductible expenses and minimal revenue arising from interest subject to transfer pricing regulations should observe the following:

  • In case of transactions in US dollars (USD) at a fixed rate, the parameter rate is the market rate of the sovereign bonds issued by the Government on the external market, indexed in USD
  • In case of transactions in Brazilian real (BRL) at a fixed rate, the parameter rate is the market rate of the sovereign bonds issued by the Government on the external market, indexed in BRL
  • In case of transactions concluded abroad in BRL at a floating rate, the Ministry of Finance will determine the parameter rate; and for all other cases, the parameter rate is the London Interbank Offered Rate (LIBOR)

The subsequent obtained parameter rate can still be increased by an annual spread to be established by the Ministry of Finance based on a market average (the previous 3% limitation is now revoked).

Law 12.766/12 expressly provides for the application of the new rules for agreements as of 1 January 2013. The renewal or re-negotiation of existing agreements should be considered as a new transaction and, therefore, subject to the new regulations.

Note that the text of the law specifies that the agreement contracting date should be observed in order to determine the applicability of the new rules. In this sense, agreements contracted prior to 1 January 2013 would fall out of the scope, even if interest payments are made in 2013.

It is important to mention that the Normative Instruction 1.312/12 used the limits stated in the Law 12.715/12, not considering the changes made by Law 12.766/12. Therefore, our expectation is Brazilian tax authorities will amend the regulation related to this matter, in order to incorporate these changes to IN 1.312/12.

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
  • Demétrio Barbosa
    +55 11 2573 3486
  • Janaína Costa
    +55 11 2573 3734
  • Caio Albino de Souza
    +55 11 2573 3301
EY Serviços Tributários S.S., Rio de Janeiro
  • Marcio R.Oliveira
    +55 21 2109 1418
EY Serviços Tributários S.S., Campinas
  • Leandro Cassiano
    +55 19 3322 0574
EY Serviços Tributários S.S., Porto Alegre
  • Felipe Mauer
    +55 11 2573 3017
EY Serviços Tributários S.S., Curitiba
  • Aline Weiss
    +55 11 3593 0770
Ernst & Young LLP, Brazilian Tax Desk, New York
  • Mariano Manente
    +1 212 773 2744
Ernst & Young LLP, Brazilian Tax Desk, London
  • Ricardo Moura
    +44 20 7951 6907

EYG no. CM3127