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New challenges for Brazilian exporters

25 September 2017

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How can businesses optimise the use of the reintegra tax benefit in a transfer pricing context? Carlos Ayub of Deloitte Brazil takes a closer look.

On January 1 2013, Law 12.715/12 entered into effect. Since then, Brazilian entities engaged in exports subject to transfer pricing controls have been facing a new challenge.

Since the inception of the Brazilian transfer pricing rules in 1996, certain flexibilities have been granted to Brazilian taxpayers engaged in exports to related parties, including so-called safe harbours, which are categories of waivers of proof of the prices practiced in export transactions.

Prior to Law 12.715/12, a large proportion of the exporting entities were exempt from performing detailed calculations for each of the products, services or rights exported to related parties via the application of a mechanism more specifically known as the "safe harbour of profitability". To comply with the requirements of this mechanism, entities were only required to demonstrate, based on their accounting reports, a net profit margin attributed to export operations of at least 5%. Hence, several companies that exported to their related parties were relieved of the obligation of applying transfer pricing methods to justify their practiced prices and, therefore, were outside of potential transfer pricing adjustments on their taxable base.

After Law 12.715/12, however, this premise has been modified so that the waiver of proof under the "safe harbour of profitability" would only be allowed to taxpayers who demonstrate a net margin of 10% of their revenue export, in lieu of the prior 5% threshold. In addition, the taxpayers should show that their intercompany export revenue does not exceed 20% of their total export revenues.

This new rule caused taxpayers to face the burden of applying as many methods to determine the parameter price as possible, in order to select the method that resulted in the most favourable tax outcome to them, as permitted under Brazilian standards.

However, although domestic law grants the taxpayer the theoretic prerogative of choosing the method that results in the lowest possible taxable adjustment, in practice the calculation of price parameters under certain methods can be very constrained. This is mainly because of the difficulty in obtaining access to information from external sources, including from unrelated parties or from the related counter party.

Precisely because it depends on data that can be obtained exclusively based on the taxpayer's own accounting records, the cost of acquisition or production method plus taxes and profit (CAP) is the method most often adopted for calculation of parameter prices of export transactions.

Setting aside the details required by the domestic regulations for the application of the CAP method, it is defined as "the arithmetic mean of the acquisition or production costs of goods, services or rights exported, plus taxes and contributions charged in Brazil and profit margin of 15% over the sum of costs plus taxes and contributions" (Law 9,430/96, Art. 19, §3, Section IV).

As observed, the method imposes a simple mathematical equation pursuant to which companies with gross profitability lower than 15% on the costs of their exported products will incur a taxable adjustment. Under this rationale, the lower the cost of exported products, the lower the taxable impact of transfer pricing on this type of transaction.

In this context, the Special Tax Reintegration Regime for Export Companies, known as reintegra, has a very positive effect in addition to generating the tax benefit for which it was originally established.

But before demonstrating how the reintegra tax benefit can be optimised from the transfer pricing standpoint, it is necessary to comprehend its concept.

Reintegra is a tax benefit which has been in force since December 2011. It is applicable to legal entities producing goods in the Brazilian territory for export that meet the requirements set forth in the legislation, aiming to reinstate in whole or in part federal tax residues in their production chain with amounts corresponding to up to 3% of exports. Under the legal provisions, the beneficiary legal entity may offset the balance with its own debts related to the taxes administered by the Brazilian Federal Revenue or may request the benefit in kind.

Regardless of the treatment to be provided to the reintegra balance amount, whether offset with other taxes or obtained in kind, the entity's accounting should be recorded into an account reducing the costs of exports, which is the basis for applying the CAP method. This is the point that this article aims to elucidate.

The positive effects of using the reintegra benefit balance when excluded from the CAP method base can be better understood following the logic shown in the table below.

For illustration purposes, let us assume a scenario based on the following premises: a Brazilian entity exports to related companies, with an export net revenue of BRL 1,000.00 ($319), a cost of exported products of BRL 940,00 and an income tax rate (IRPJ + CSLL) of 34%. The percentage benefit is 3% and imported content below 40% (enough considering our example). It complies with the other requirements of the benefit (Law 13,043/2014 and Decree 8.415/2015).

See next page for table.

From our numerical example, one can see that the net effect (result after income tax) of the benefit of reintegra single-handedly is BRL 30.00 (row D). This amount can be used, as mentioned to compensate the taxpayer debits of federal taxes.

Moreover, it is also evident how this effect can be maximised when associated with the CAP method calculation. The benefit to the taxpayer, by the example above, is increased by another BRL 27.54 (difference from corporate tax "Effect of benefit" and "Optimised effect" scenarios in row I), mainly from the absence of the transfer pricing result, which was only possible by using the reintegra benefit as a variable to determine the CAP cost basis.

Interestingly, the information concerning the imported content employed in finished products (and the precision with which it must be identified) is essential for obtaining the reintegra tax benefit, with the same importance being in general observed in connection with the calculation of applicable transfer pricing on import operations, as well as for other tax obligations compliance.

Evidently, because the Brazilian Federal Revenue has unlimited access to such digital information and other content from different electronic files provided by the taxpayers, it is easy for the tax authority to cross-reference such strategic data in order to test their consistency.

In face of such a complex entanglement of digital information that Brazilian companies are required to provide to the Treasury, both to comply with periodic tax obligations and to obtain tax benefits, it is imperative that the companies resort to reliable databases and electronic extraction tools, as well as the indispensable expertise of trustworthy tax professionals, well-coordinated with IT professionals.

Table 1
Rationale
Effect of benefit (in BRL) Optimized effect (in BRL)
A Net revenue 1,000.00 1,000.00
B Cost of exported products 940 940
C = A – B Taxable result before adjustments 60 60




D = A × 3% Reintegra benefit1 30 30




Transfer pricing calculation

E Cost of exported products2 940 910
F = E + 15% CAP method (minimum revenue) 1,081.00 1,046.50
G = F – A Transfer pricing adjustment3 81 0




Corporate tax calculation

H = C + G Corporate tax calculation basis 141 60
I = H × 34% Corporate tax 47.94 20.4
1 According to Decree 8.415/15 Article 2 §5, the reintegra amount is not subjected to corporate tax
2 Scenario with optimised result considers the reintegra benefit as a diminishment of the cost for the purpose of transfer pricing analysis only.
3 If the difference between A and F is less than 5%, no transfer pricing adjustment will be required (See Art. 51 of Normative Instruction 1.312/12).

Carlos Eduardo Ayub

Tax partner – transfer pricing
Deloitte Touche Tohmatsu

Av. Dr. Chucri Zaidan, 1.240
4th to 12th floor
São Paulo – SP – 04711-130
Tel: +55 11 5186-1227
Fax: +55 11 5181-3693; +55 11 5181-2911
Email: carlosayub@deloitte.com

Carlos Ayub is a tax partner based in São Paulo, Brazil, focused on transfer pricing services.

He provides services to local, European, Asian, Latin and North-American clients operating in various industries such as automobile, chemical, pharmaceutical, electronic, etc.

Carlos has more than 27 years of professional experience, also including accounting, audit, and corporate tax besides transfer pricing services.

In 2001, Carlos Ayub was transferred to the Mexico City office to work with transfer pricing projects under the OECD approach, matching Brazilian and international rules.

Carlos is a member of the Brazilian transfer pricing group, which has been recognised by different institutions for several years as the best transfer pricing team in Brazil.

Associations

  • Registered at the CRC – Accounting Regional Council;
  • Coordinator of the Tax Commission for the French-Brazilian Chamber of Commerce;
  • Member of Transfer Pricing Technical Group of the Federação das Indústrias do Estado de São Paulo (FIESP).

Education

  • Bachelor's degree in accounting – Faculdade de Ciências Econômicas de São Paulo – Fundação Álvares Penteado (1993);
  • MBA controller – Fundação Getúlio Vargas (2004);
  • Law – Universidade Paulista (2008).
 






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