Navigating Brazilian transfer pricing complexity
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Navigating Brazilian transfer pricing complexity

Brazil is one of the many non-member economies with which the OECD has strengthened its relationship over the last few years, but the country is still far from adopting much-needed tax policies that may contribute to economic growth. Carlos Ayub of Deloitte assesses the environment and look at what more could be done to attract investment and spur growth.

As one specific starting point, Brazil needs a standardised tax environment which ensures legal certainty and is more favourable to investors. Multinational groups would rather invest in jurisdictions with reasonable and certainty-providing tax practices than in a location that deviates greatly from international tax standards.

The Brazilian economy is going through its greatest downturn since the 1990s. Against this backdrop of economic hardship, the federal government is losing tax revenues. History has shown that when governments are unable to collect taxes due to slow economic activities, they tend to scrutinise taxpayers' affairs more closely. Multinational corporations engaging in multibillion-dollar intercompany transactions tend to be a favoured starting point.

The Brazilian revenue service (Secretería da Receita Federal do Brasil; RFB) helps the government meet aggressive budget targets, relying on high-end technology to do so. The RFB was one of the first tax agencies in the world to embrace the internet as a tax compliance, monitoring and collection tool.

The RFB has approximately 3,000 agents across the country and one of their tasks is to make sure multinational corporations engaging in intercompany transactions fully comply with the complex Brazilian transfer pricing rules. For that purpose alone, the RFB created a special team of tax auditors that monitors taxpayers engaging in cross-border intercompany transactions.

Through specific compliance systems such as SISCOMEX and SISCOSERV, which are acronyms for big database systems controlled by the RFB, the tax authorities have full visibility of every transaction of tangible goods, services, and licences (either inbound or outbound) entered into by local taxpayers. The RFB knows whether the buyer and seller, service recipient and service provider, payee and payor are part of the same economic group, or if any of the foreign parties is located in jurisdictions Brazil considers to be tax havens. The RFB also monitors whether transactions are usual or typical in the industry in which taxpayers operate.

In 2007, the RFB created the public bookkeeping system (SPED), whereby taxpayers must file their invoices and digital accounting records with the tax authority electronically. In 2014, SPED's scope was extended to include the electronic filing of tax books and records. With this significant change, Brazilian corporations no longer have to file annual income tax returns. Rather, they will simply provide the RFB with their electronic accounting and tax books (ECF), which will give the RFB full visibility of taxpayers' operations and taxes due. The ECF is due on the last business day of September, and includes transfer pricing disclosure forms in which taxpayers must summarise their intercompany transactions, transfer pricing method application, and results.

Local transfer pricing rules bear little (if any) resemblance to the transfer pricing methods available under the OECD transfer pricing guidelines. Of the methods available for inbound transactions, the resale price minus margin (PRL) method remains the most egregious offender. The PRL method went through significant changes when Brazil published new transfer pricing rules in late 2012, back when the economy was growing steadily. The transfer pricing rules have proven very efficient in discouraging taxpayers from entering into intercompany transactions at all. When applying the PRL method, for example, most taxpayers end up booking transfer pricing adjustments. While safe harbour rules are available for eligible outbound transactions, under the 2012 rules taxpayers find it hard to meet any of the available safe harbour criteria. Most taxpayers now need to earn a minimum return of 15% when selling goods, services, or rights to foreign related parties.

In this context, it should be noted that a significant number of multinational corporations operating in Brazil have been through a transfer pricing audit conducted by the RFB. Unfortunately, most of those audits resulted in an additional tax burden through transfer pricing adjustments. Transfer pricing adjustments, per se, represent double taxation. Ideally, multinational groups operating in Brazil would take into consideration the role local transfer pricing rules play before establishing their intercompany pricing policies for Brazil. Of course, external factors outside the taxpayer's control, such as foreign exchange rates, affect transfer pricing analyses.

Transfer pricing adjustments have historically been an important source of tax revenue for the Brazilian government. A report published by the RFB in March 2014 shows that transfer pricing assessments by the tax authorities constituted the second largest source of tax credits during that year. While in most jurisdictions multinational corporations do not expect to book transfer pricing adjustments yearly, this is not the case for those operating in Brazil. The good news is that it is possible to mitigate – and even reduce to zero – transfer pricing adjustments through proactive planning and monitoring.

Brazilian transfer pricing rules

Unlike the methods sanctioned by the OECD transfer pricing guidelines, the Brazilian transfer pricing rules follow a formula-based approach. Oblivious taxpayers believe they are compliant by simply following the application of a mathematical formula. However, the level of detail associated with the application of the Brazilian transfer pricing rules is enormous. The use of Excel spreadsheets or less sophisticated software typically creates more problems than solutions.

As a rule, the Brazilian transfer pricing legislation calls for the comparison of two prices: 'practiced prices' (the actual prices paid or received by the Brazilian taxpayer entering into intercompany transactions) and the 'parameter prices' (the prices derived from the application of one of the available transfer pricing methods). Whenever the parameter price is lower than the practiced price in intercompany inbound transactions, the difference represents an adjustment to the Brazilian tax basis. Conversely, whenever the parameter price is higher than the practiced price in intercompany outbound transactions, the difference represents an adjustment to the Brazilian tax basis.

The Brazilian transfer pricing rules provide three methods to analyse and document intercompany import transactions and four methods to analyse and document intercompany export transactions. Two additional methods are available and must be applied to assess transfer pricing in transactions involving commodity-type products. Below, we summarise the available transfer pricing methods.

Methods applicable to import transactions

The three specified methods applicable to import transactions are:

  • The comparable independent prices (PIC) method: Defined as the weighted average of uncontrolled prices of similar goods, services, or rights as calculated in the Brazilian market or in other countries, in purchase or sale transactions carried out under similar circumstances. The prices determined under the PIC method should be compared to the weighted-average intercompany price paid by the Brazilian taxpayer for similar goods, services, or rights. Application of the PIC method depends on the taxpayer's ability to obtain and document comparable third-party transaction prices.

  • The PRL method: Defined as the weighted-average resale price for goods, services, or rights, minus (i) unconditional discounts granted; (ii) taxes and contributions levied on the sales; (iii) commission and brokerage fees paid; and (iv) statutory gross margins that vary in accordance with the sector or activity in which the imported goods, services, or rights were applied. The statutory gross profit margins are 20%, 30%, and 40%.

  • The production cost plus profit (CPL) method: Defined as the weighted-average production costs of equivalent or similar goods in the country of origin, increased by the taxes and duties imposed on exports by the referred country, and by a gross profit margin of 20% computed on the identified cost base. To make the application of the CPL feasible, foreign related parties should obtain detailed information regarding the production costs of the items imported by the Brazilian taxpayer.

Methods applicable to export transactions

The four specified methods applicable to export transactions are:

  • The export sales price (PVEx) method: This method is a version of the comparable uncontrolled price (CUP) method applicable to export operations in that it requires comparison of the average intercompany export price to the average price charged in unrelated-party transactions entered into by the company itself, or by another Brazilian exporter of equivalent or similar products, under similar payment conditions.

  • The wholesale price in the country of destination minus profit (PVA) method: The PVA is defined as the average price of equivalent or similar goods in sales between unrelated parties in the wholesale market of the country of destination, under similar payment conditions, reduced by the taxes included in the price and charged by the respective country, and by a gross profit margin of 15% of the wholesale price.

  • The retail price in the country of destination minus profit (PVV) method: Similar to the PVA method, the PVV is defined as the average price of equivalent or similar goods in sales between unrelated parties in the retail market of the country of destination, under similar payment conditions, reduced by the taxes included in the price and charged by the respective country, and by a gross profit margin of 30% of the price.

  • The acquisition or production cost plus taxes and profit (CAP) method: Under this method, the basis for comparison is the average of the acquisition or production cost of exported goods, increased by taxes and contributions paid in Brazil and by a 15% gross profit margin computed on the aggregate of cost plus taxes and contributions.

Methods applicable to commodity-type transactions

The available literature and Brazilian tax law provide little guidance on what should be considered a commodity. In general, commodity is a term used to refer to products based on raw material or with a small degree of industrialisation, nearly uniform quality, produced in large quantities, and by different producers. These 'in natura' products are usually from vegetable or mineral origin and can be stored for a certain period without significant loss of quality. These products are typically priced based on commodity exchange prices or based on specific industry publications.

The 2012 transfer pricing rules introduced two additional methods to the existing Brazilian methods: the stock exchange import price (PCI) and the stock exchange export price (PECEX) methods for inbound and outbound transactions in commodities, respectively.

Under the two methods, the basis for comparison is the average stock exchange price for the relevant items adjusted for any applicable upward or downward spreads. The stock price that should be used corresponds to the average price on the date of the transaction. In cases in which no stock price exists for the relevant date, the analysis should be based on the average stock price for the most recent date before the transaction date. The PCI and PECEX are mandatory for intercompany transactions involving commodities. In other words, taxpayers cannot apply any of the remaining methods to assess the reasonableness of their transfer prices.

The Brazilian government provided a list of products that qualify as commodities for transfer pricing purposes. The list fails to focus on the true nature of commodity-type products. For instance it includes, among several products, entire standard classification group codes, such as industry code 76 for aluminium. Aluminium is an important component for many industrialised byproducts, such as soda cans. A soda can, ordinary as it is, has a significant level of technology involved in its manufacturing process. It differs from the aluminium in natura, but for the purposes of RFB classification it falls into the same basket.

Recently, the RFB formally answered a couple of questions posed by a taxpayer that develops, manufactures, and distributes industrialised products based on iron ore, iron silicate, calcium silicon barium, and other similar materials. The taxpayer explained the nature of its business, the level of research and development associated with its products, as well as the manufacturing processes involved. Regardless of the taxpayer's arguments, the RFB concluded that its products qualify as commodities despite the significant research and development and manufacturing process they go through.

What to expect in the transfer pricing area for 2015 onwards?

Over the last 12 months, during the downturn, the Brazilian currency (Brazilian reais; BRL) lost approximately 55% of its face value in relation to the US dollar. While this is good news for exporters, it represents a difficult situation for importers of goods, services, or intangibles such as rights. Because most cross-border transactions are negotiated in US dollars, purchase costs and customs duties (when applicable) therefore increased. Taxpayers are unable to increase their price to customers to account for foreign exchange devaluations and certain non-recoverable taxes due on inbound transactions.

From a transfer pricing perspective, the application of the PRL method will increase the chances of transfer pricing adjustments. The PRL method has historically been the most adopted method to analyse and document intercompany inbound transactions. This is mostly because application of the PRL method does not require taxpayers to obtain data from foreign parties (either related or third parties). Further, under the old transfer pricing rules (applicable until December 31 2012), taxpayers were able to rely on the application of the PRL method as per Law 9,959/00, which typically resulted in unwelcome but acceptable transfer pricing adjustments.

Everything has changed now. The economy is in a dire state and the new PRL formula tends to escalate transfer pricing adjustments. The table below demonstrates the role foreign exchange devaluation plays when applying the PRL method:

As shown in Table 1, the purchase price in USD in August 2014 and August 2015 was set at US$100. Due to foreign exchange devaluation, the local currency price during the same period increased from BRL 227 to BRL 352. The COGS [cost of goods sold] line also reflects the price increase. Assuming the taxpayer is unable to increase the price to customers, application of the PRL method will generate transfer pricing adjustments that were not due in 2014. Consider that transfer pricing adjustments are calculated at the product level (stock-keeping unit (SKU)) and multiplied by the total quantity consumed during the year.

Table 1

PRL – Law 12.715/2012

August 2014

August 2015

(A) Imported product (FOB value in USD)



(B) Foreign exchange rate (USD to BRL)



(C) Imported product (FOB value in BRL)



(D) COGS for the finished product where the imported component is applied



(E) Net sales



Parameter price calculation

(F) Ratio (C/D)



(G) Basis for PRL (E×F



(H) PRL margin (G×20%)



(I) Parameter price (G-H)



Transfer pricing adjustment

(J) Adjustment (C-I)



Brazilian taxpayers should work closely with their related-party suppliers and tax advisers to assess the applicability of the PIC and/or CPL methods to analyse and document their intercompany pricing.

Assuming that intercompany pricing is consistent between controlled and uncontrolled parties, the PIC method should not result in transfer pricing adjustments. The same applies to the CPL method. The CPL method allows the manufacturer to earn an overall return of up to 20%, which is generous considering publicly available data for original equipment manufacturers based in all continents. If the manufacturer of the goods sold to a Brazilian taxpayer is part of the same economic group, there is a good chance the CPL method will not result in transfer pricing adjustments. It is important to remember that application of the CPL method requires a significant level of detail to support the foreign-party cost base. The question is, would a taxpayer rather reconsider its intercompany price policy and documentation or stick to the same old PRL?



Carlos Eduardo Ayub

Tax partner – transfer pricing

Deloitte Touche Tohmatsu

R. Henri Dunant, 1383

4th to 12th floor

São Paulo – SP – 04709-111

Tel: +55 11 5186 1227

Fax: +55 11 5181 3693; +55 11 5181 2911

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

He provides services to local, European, Asian, Latin and North American clients operating in various industries such as automobiles, chemicals, pharmaceuticals, and electronics, among others.

Carlos has more than 25 years of professional experience, also including accounting audit, corporate tax and 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.

He has authored various articles on transfer pricing for reputable magazines, newspapers and other publications of national and international circulation.

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

He has been recently quoted as one of the best references in transfer pricing in the Brazilian territory by the renowned publication Expert Guides.

Carlos is registered at the CRC Accounting Regional Council, as well as being a coordinator of the tax commission for the French-Brazilian Chamber of Commerce and a member of the transfer pricing technical group of the Federação das Indústrias do Estado de São Paulo (FIESP).

Carlos holds a bachelor's degree in accounting from the Faculdade de Ciências Econômicas de São Paulo – Fundação Álvares Penteado, achieved in 1993; MBA controller – Fundação Getúlio Vargas (2004); and a law degree from the Universidade Paulista (2008).

On top of his native Portuguese, Carlos speaks English and Spanish.

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