Considering that Law no. 9430/96, which introduced the Brazilian transfer pricing rules, allowed the taxpayer to choose the most favorable method among those authorised by law, to determine the benchmark that will be compared to the weighted arithmetic average of import and export prices subject to transfer pricing control, doubts have arisen regarding the method to be applied by the tax authorities in case the taxpayer failed to indicate the method or provide support documentation to justify the benchmark obtained by means of the selected method.
Should the tax authorities apply the most favourable method to the taxpayer or would the method choice be the taxpayer’s prerogative that would not bind the tax authorities?
Normative Instruction no. 243/02 (NI 243), which regulates the transfer pricing rules, indicates that the election of the most favourable method is a taxpayer’s right and that the tax authorities can, based on the available documentation, elect any applicable legal method in case: (i) the elected method was not indicated by the taxpayer; or (ii) the presented documentation is insufficient. Note that the NI 243 merely allows the tax authorities to elect a method and does not oblige them to choose the most favourable method to the taxpayer.
However, in view of the lack of legal provision regarding the matter, the discussion reached the Administrative Court.
The court consolidated the position that the election of the most favourable method, to calculate the benchmark, is a taxpayer’s choice but is not the tax authorities’ obligation.
Therefore, the tax authorities are free to calculate the benchmark by any available method, if the taxpayer does not choose the most suitable one, or, upon request, is not able to prove the transfer pricing calculations.
Executive Measure no. 563/12, converted into Law no. 12715/12, included article 20-A in Law no. 9430/96 to settle the discussion regarding the adequate moment for the taxpayer’s option for one of the transfer pricing methods and the eventual disregard of this option by the tax authorities.
This provision states that the taxpayer shall choose one of the legal transfer pricing methods to calculate the benchmark for the calendar year and that such option cannot be amended after a tax inspection begins, unless there is a justified disregard of the method by the tax authorities. In this case, the taxpayer may submit, in 30 days, a new calculation in accordance with other transfer pricing methods.
However, if the taxpayer fails to present a new calculation, the tax authorities are entitled to calculate the benchmark according to any of the methods provided by the legislation, based on the documentation available.
Law no. 12715/12 also provided for a specific method to be applied to commodities’ import and export transactions. Considering that the only method provided therein is mandatory, in this case the taxpayer does not have the right to choose the method considered as the best one.
Please note that the option for one of the methods is valid for all the year and must be applied to all similar products and/or services and that the tax authorities may only disregard the method chosen by the taxpayer in cases where such method is not consistent with the documentation available. Therefore, it is important that the taxpayer keeps all data and documents that support the benchmark calculation according to the chosen method (in that, they must report detailed information on the transactions subjected to transfer pricing control; value of the relevant transactions in foreign and local currency; taxes paid on imports and exports; invoices related to the transactions; report of a reliable and independent third party confirming the transfer pricing calculations).
By principal TPWeek correspondents for Brazil, Cristiane Magalhães (cmagalhaes@machadoassociados.com.br) and Carla Cardozo (ccardozo@machadoassociados.com.br) of Machado Associados.
