Executive Measure (EM) 563, published on April 4 2012, introduced, among other provisions, important changes to Law 9430/96 (Law 9430), which is the main rule on transfer pricing matters in Brazil.
These transfer pricing changes will be in force from January 1 2013. However, taxpayers may choose to apply these new rules for the 2012 period, in accordance with pending regulation. Please note that this option is irrevocable and the taxpayer will have to observe all of the new rules, not being able to only use some of them.
According to the Brazilian Constitution, in order for an EM not to lose its effectiveness, it shall have to be analysed by the Federal Congress and converted into law in 60 days (deadline renewable for 60 more days).
We highlight below the main changes to the legislation.
1. New resale price less profit method (RPLP)
Article 38 of EM 563 amends article 18 of Law 9430, to provide for a new calculation of the RPLP.
Context
Before EM 563, there were two RPLP methods: (i) RPLP 20, applicable to goods or rights imported with the purposes of resale; and (ii) RPLP 60 applicable to imported goods, services or rights used/consumed in the production process. There were several disputes regarding the calculation of the benchmark according to RPLP 60, due to the differences resulting from the calculations provided by law and those of Normative Instruction (NI) 243, which regulates this matter.
New methodology
The methodology to calculate the benchmark according to the New RPLP method is similar to the one described in NI 243 for the RPLP 60. However, different predetermined profit margins apply according to the economic activity field of the company, regardless of the use given to the imported goods, rights or services.
The benchmark of the New RPLP Method shall be calculated as follows:
(a) net sales price: weighted arithmetic average of the sales prices of the goods, rights or services produced, minus unconditional discounts granted, taxes on sales, brokerage fees and commissions paid;
(b) share of the imported goods, rights or services in the total cost of the goods, rights or services sold: percentage ratio between the weighted average cost of the imported goods, rights or services and the weighted average of the total cost of the goods, rights or services sold, calculated according to the company’s cost spreadsheet;
(c) share of the imported goods, rights or services in the sales price of the goods, rights or services sold: share of the imported goods, rights or services in the total cost (calculated according to item b), multiplied by the net sales price (calculated according to item a);
(d) profit margin: predetermined profit margin (see below) multiplied by the share of the imported goods, rights or services in the sales price of the goods, rights or services sold (calculated according to item c);
(e) benchmark: difference between the share of the imported goods, rights or services in the sales price of the goods, rights or services (calculated according to item c) and the profit margin (calculated according to item d).
Predetermined margins
As mentioned above, the profit margins vary according to the economic activity field of the company, as follows:
(i) 40%: a) manufacturing of pharma-chemicals and pharmaceuticals; b) manufacturing of tobacco; c) manufacturing of equipment and optical instruments, photographic and cinematographic instruments; d) trading of machinery, devices and equipment for dental, medical and hospital purposes; e) oil and natural gas extraction; and f) manufacturing of oil by-products;
(ii) 30%: a) manufacturing of chemicals; b) manufacturing of glasses and glass products; c) manufacturing of pulp, paper and paper products; and d) metallurgy; and
(iii) 20%:for all other activities.
Should the company carry out more than one economic activity, the predetermined profit margin applied shall be the one related to the economic activity for which the good, service or right was imported.
Freight, insurance and taxes
Freight and insurance expenses are not included in the acquisition price of the imported goods for the purposes of the calculation of the weighted average cost under this method, as long as they are paid to non-related parties and to parties not domiciled in tax havens ((i) a country that does not tax income or that taxes income at rates lower than 20%, (ii) a country or location - within a country - which enforces the secrecy on the shareholding structure or ownership of legal entities, and (iii) any country or location which legislation does not allow the identification of the actual beneficiary of the income paid or credited to a non-resident) or beneficiaries that are not subject to a privileged tax regime.
Other customs clearance expenses and taxes paid on the import are also not included in the acquisition cost of the imported goods. Tax authorities aim to eliminate, with these changes, the frequent disputes regarding this matter.
2. Comparable independent prices (CIP)
This method is applied when comparing transactions under transfer pricing control with other transactions carried out by the company with non-related third parties and/or carried out by third parties with non-related parties.
If the taxpayer uses its own transactions to calculate the benchmark, these transactions must represent at least 5% of the amount of the import transactions subject to the transfer pricing rules in a given tax period, by each type of imported good, right or service.
3. New Methods: Quoted price on import (QPI) and quoted price on export (QPE)
New methods were introduced to ascertain transfer pricing benchmarks for imports and exports of commodities, namely QPI and QPE, by which the practiced price shall be compared with the daily average prices published by internationally recognised stock exchanges, with certain adjustments.
Please note that the minimum export price of 90% of the average practiced price safe harbour rule does not apply to QPE.
The use of such methods shall be further regulated by the tax authorities.
4. Interest
All financial transactions performed with related parties shall be subject to transfer pricing control, regardless of whether the corresponding agreement is registered with the Central Bank of Brazil.
Interest expenses and revenues due by, or to, Brazilian legal entities must be calculated based on the Libor rate for six-month deposits in US dollars plus a spread, calculated on a pro-rata basis for the relevant transaction term. The mentioned spread will be determined year-by-year by the Ministry of Finance.
5. Other changes
Other changes introduced by EM 563 will be analysed in future articles in due time.
Cristiane M. S. Magalhães (cmagalhaes@machadoassociados.com.br)
Angélica T. P. Santos Torres (asantos@machadoassociados.com.br)
