In January 2011 the OECD released the scoping document for its new project on the transfer pricing aspects of intangibles, which aims to develop clearer and consensus-based international guidance.
The OECD acknowledges the importance of intangibles as an economic contributor and believes that additional international guidance will help reduce the uncertainty on the treatment of intangibles for transfer pricing purposes.
In Brazil, there are several doubts and issues regarding transfer pricing of intangibles due to a lack of specific rules. However, in spite of the international trend, little attention has been given, until now, to this issue.
The Brazilian transfer pricing rules do not apply to all transactions that involve intangibles.
Law No 9,430 (1996), which introduced transfer pricing rules, has expressly excluded royalties and the compensation for technical, scientific, administrative or similar assistance, paid to foreign beneficiaries, from the scope of their application. The law states that such expenses remain subject to the corporate income tax rules that already regulate their deduction. Arguably, regulations issued by Brazilian tax authorities later extended this exclusion to such remuneration, when it comes from abroad.
Royalties
Royalties have been defined by an old tax law as any kind of consideration for the use or exploitation of rights, such as: (i) the right to extract vegetation and mineral resources; (ii) the use or exploitation of inventions, manufacturing processes and formulas and trade marks; and (iii) copyrights (except if earned by the author).
Technical, scientific, administrative, or similar, assistance generally refers to services that involve the transfer of technology.
In practice, doubts usually arise over whether certain payments qualify as royalties or remuneration for technical, scientific, administrative, or similar, assistance, mainly when related to agreements that are not registered with the Brazilian Trademark and Patent Office (INPI) (such as software licensing agreements). In these cases, it may be unclear if a taxpayer should observe the transfer pricing rules.
The transfer of the legal ownership of intangibles, however, must follow transfer pricing rules. There are no specific rules for intangibles and the same applies to assets, services and rights. In fact, this method seems to be mainly designed for transactions involving assets.
Practical problems and advantages
The lack of special rules applicable to intangibles may result in some practical problems, and certain advantages, for the taxpayer.
In practice, it is usually difficult to find, or to gain access to information on, transactions involving the sale of intangibles that are identical, or similar, to allow for the adoption of the Brazilian comparable uncontrolled price method. Also, in most cases, there is no resale of the intangible, which makes it impossible to use the resale price method. Therefore, frequently, the cost plus method (which considers a fixed profit margin of 20% for imports and of 15% for exports) is the only one that can be applied.
Considering the cost of intangible development is generally lower than its market value, the use of the cost plus method in import transactions may lead to the ascertainment of a low benchmark and, consequently, to a high amount of non-deductible expense. On the other hand, in export transactions, the low cost will also lead to a low benchmark, but this would result in low minimum revenue required in the sale of an intangible, to comply with transfer pricing rules.
Brazilian tax law is even more unprepared to deal with specific transactions, particularly those referring to the cost-sharing in developing such intangibles.
Few audits
Despite these difficulties, or perhaps because of them, we are not aware of many tax audits regarding intangibles. Thus, these issues also have not been analysed by administrative and judicial courts. The existing decisions mainly focus on transactions involving tangible assets. Furthermore, Brazilian tax authorities have issued few clarifications on this matter.
It is possible that this issue will become more important in the near future, when the system created by the government to control payments of imports and exports of services and intangibles (the International Service and Trade Integrated System referred to as SISCOSERV) becomes mandatory.
This system, still under development, will enable the government, including the tax authorities, to have information on transactions involving services and intangibles, carried out with individuals or entities residing abroad, which may result in a more intense surveillance and control of such activities.
Although the information released by the government on SISCOSERV does not refer to its use for tax purposes, it is possible that tax authorities may use the information available in the system to gather information on payments for intangibles, as a comparable transaction for transfer pricing purposes, as has happened before with a similar system developed to control tangible assets.
Cristiane Magalhães (cmagalhaes@machadoassociados.com.br) and
Ana Lúcia Castagnari Marra ( amarra@machadoassociados.com.br)
