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Brazil amends transfer pricing regulations for commodities

The Brazilian Federal Revenue Office (RFB) has enacted Normative Instruction (IN RFB) 1,395/2013, with the intention of amending and clarifying IN RFB 1,312/2012, which provided guidance on the PCI (price valuation on imports method) and PECEX (price valuation on exports method) methods.

Clarified definition of a commodity for transfer pricing purposes

For IN RFB 1,395/2013, enacted on September 17, a product should be considered a commodity for Brazilian transfer pricing purposes when one of following two conditions are observed:

· The products listed in Appendix I are also 1) listed on commodities and futures exchanges listed in Appendix II; or 2) subject to public prices in the internationally recognised research institutions as listed in Appendix III of IN RFB 1,312/2012; or

· The products are listed in commodities and futures exchanges listed in Appendix II of IN RFB 1,312/2012

This change clarifies that a product that is not listed in Appendix I or II but in one of the publications listed in Appendix III should not be considered a commodity and, therefore, be subject to the general transfer pricing methods. The same applies for products that are listed in Appendix I but not traded on a commodity exchange listed in Appendix II or quoted in a publication from one of the recognised research institutes.

Further guidance for pricing adjustments

IN RFB 1,312/2012 established that prices could be adjusted solely due to the costs of transportation and climate differences, in addition to premium and content adjustments. As shown below, IN RFB 1,395/2013 provides a more extensive list of potential adjustments:

· Payment terms

· Volume differences

· Climate influence on the characteristics of the imported good

· Intermediation costs on the sale and purchase operations executed between non-related entities

· Packaging

· Freight and insurance

Definition of the transaction date

IN RFB 1,395/2013 clarifies that the transaction date is the date when the price of the product is negotiated under normal business practice of the company with unrelated parties, or consistent with normal market behaviour. This clarification is intended to reduce the uncertainty that arose under the previous wording, which was unclear about whether the date of negotiation, date of entering into an agreement or date of shipment or delivery would be considered the transaction date.

Additionally, IN RFB 1,395/2013 establishes that if the intercompany price is calculated based on average quotations or indexes related to a period of days, determined in contract, the calculation of benchmark price (PCI or PECEX) should also take into consideration the same time period.

Choice of the commodities and futures exchanges and the possibility of using an internal comparable

For the PECEX method (export transactions), IN RFB 1,395/2013 provides two alternatives when there are differing quotations on various exchanges:

· The exporter should choose the quotation in the destination market, in the absence of a single quotation in a commodities and futures exchange; or

· The exporting legal entity may use a price of a good sold to a non-related party or a party not resident in a low tax jurisdiction or benefited by a privileged tax regime, in the absence of a quotation in the exchanges or research institutions or, if a quotation is available, and the product is significantly different in relation to the quotation in the market of destination

In the above mentioned case, IN RFB 1,395/2013 allows the possibility of using exports to third parties (internal comparable) instead of quotations in exchanges as a form of testing the export prices. In order to use internal comparables, the transactions must represent at least 5% of the value of intercompany export operations subject to transfer pricing, during the period under analysis.

Amendments to Appendices I and III

IN RFB 1,395/2013 amends the product descriptions of Appendix I and adds additional research institutions listed in Appendix III.

Werner Stuffer, Partner, , Tel. +55 11 2573 3902

Marcio R Oliveira, Partner,, Tel +55 21 3263 7225

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