Finding a safe harbour in Brazil
TP Week correspondent Machado Associados reports on safe harbour rules in the Brazilian transfer pricing regime
Brazilian transfer pricing rules, which must be considered by Brazilian legal entities when calculating their Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL) provide the taxation of differences between:
the greater value resulting from the applicability of the import methods and the cost of acquisition of imported goods, services or rights;
the lowest value resulting from the applicability of the export methods and the export prices; and
interest rates calculated based on the LIBOR rate for deposits in US dollars for a six-month term, plus a 3% annual spread, adjusted for the term of the relevant transaction, and interest expenses or revenues, as the case may be.
Brazilian transfer pricing rules have a broad scope and reach transactions between related parties, which definition comprises not only transactions between associated enterprises (controlling and controlled or companies) but also transactions between a Brazilian company and (i) parties associated to it under specific arrangements (distribution agreements) and (ii) parties domiciled in tax havens, as defined by Brazilian tax laws.
In certain cases, the compliance with the Brazilian transfer pricing rules has been simplified or the taxpayers have been released from complying with such rules. Those exceptions, known as safe harbors, will be outlined below.
General safe harbour rules
Law no 9430/96 states that the transfer pricing rules are not applicable to:
imports of royalties and technical, scientific and administrative or similar assistance (the same rule has been extended to exports of royalties and exports of the same services, according to a Federal Revenue Service regulation – IN SRF 243/02); and
interest paid or credited to a related party if the corresponding agreement is registered with the Central Bank of Brazil. Price variations
The Brazilian Federal Revenue Service has clarified in article 38 of its regulation 243/02, that no transfer price adjustments are required, when calculating the IRPJ and the CSLL, in case of differences of up to 5% between the import or export price and the respective transfer price calculated according to one of the methods accepted by law.
Safe harbours for exports
Transfer pricing rules will only apply to exports if the average export price is lower than 90% of the average price of the same goods, services, or rights sold in the Brazilian market, during the same period and under similar payment conditions. For the applicability of such rule, only transactions involving independent parties can be considered.
From the Brazilian sales prices, the State Value Added Tax (ICMS), the Service Tax (ISS), the Contributions levied on revenues in general of Brazilian legal entities to fund the social security system (PIS and COFINS), unconditional discounts, and freight and insurance costs borne by the seller can be deducted. Freight and insurance costs borne by the seller shall also be excluded from export prices.
The Brazilian Federal Revenue Service regulation has also authorized Brazilian legal entities to prove the compliance with the transfer price legislation solely based on documents of the relevant transaction if they demonstrate that:
(i) their net export revenues (including exports to tax havens) in the calendar year do not exceed 5% of the total net revenues of the same period; or
(ii) their net profits from exports to related parties, before the CSLL and the IRPJ provision, are equivalent to, at least, 5% of the total revenues accrued in such transactions, considering the annual average for the current tax base period and for the two preceding years.
These two exceptions do not apply to exports to tax havens. The calculations described in item (ii) must be supported by profit and loss statements, evidencing the results of the relevant exercise, discriminating the revenues, cost and expenses related to transactions performed between related and unrelated parties. Common costs and expenses must be shared proportionally to net revenues accrued in the transactions involving related or unrelated parties (that is considering the weight of the net revenue in exports to related parties vis-à-vis the total net export revenues), unless those costs and expenses are properly individualized.
Furthermore, the tax reliefs in items (i) and (ii) above shall not prevent Brazilian tax authorities from investigating the relevant prices and issuing tax assessments whenever the applicability of those tax reliefs are deemed inadequate.
To mitigate the effects of the appreciation of the Real in the calculation of the weighted arithmetic average mentioned above, the Brazilian Federal Revenue Service has authorized that the export revenues in Reais are multiplied by 1.28 in 2007, 1.29 in 2006 and 1.35 in 2005.
Safe harbours in new markets
Finally, according to the Federal Revenue Service regulation, exports involving related parties with the purpose of entering new markets shall not be subject to transfer price adjustments, as provided by the law. However, this rule does not apply to exports to tax havens.
Those exports can be performed for average prices lower than 90% of the prices practiced in Brazil for the same goods, services of rights, as long as:
the goods, services or rights had not been traded in the country of destination, by the exporting company or any other company related to it worldwide;
the goods, services or rights are traded to consumers for a price lower than the price of any identical or similar good, service or right traded in the country of destination;
the transactions are part of an export plan, previously approved by the Federal Revenue Service;
the export plan above demonstrates that the related company in the country of destination shall not accrue profits in the relevant transactions and provides for a deadline for the Brazilian company to recover losses borne in the same transactions, if any.
The export plan must also describe:
the related company that shall be in charge of distributing the goods, services or rights in the country of destination;
the quantity of each good, service or right to be exported as part of the plan to enter the new market;
the form of distribution of the relevant goods, services or rights in the country of destination and local companies in charge of such distribution;
the percentage margin agreed with the foreign distributors;
the term for the execution of the export plan (including starting and termination dates), which must not exceed 12 months; and
a budget of the promotional and advertisement expenses in the country of destination.