The following discussion provides an overview of the transfer pricing changes contained in Provisional Measure* (MP) Nº 563 of April 3, 2012.
*In Brazil, a Provisional Measure is an “act” issued by the president, with the authority of law until later approved by Congress. The Provisional Measure is effective as from its date of publication for 60 days, and it may be extended for an additional 60-day period (for a total of 120 days).
The provisions are effective beginning in 2013, or at the taxpayer’s election, for transactions entered into as from 1 January 2012.
Provisions in MP Nº 563 differentiate which profit mark-ups are required to apply the resale price methodology according to the taxpayer’s sector, whether or not the product was imported for use in domestic production or for resale. Under the resale price method (or “PRL method” as referred to in Brazil), a general 20% mark-up is required, except in the following instances:
- 40%—with respect to sectors involved in the manufacture of pharma-chemical and pharmaceutical products, tobacco products, optical equipment and instruments, and photographic and cinematographic equipment; machinery, apparatus, and equipment used for dental, medical, and hospital use; oil extraction and the production of natural gas and the manufacture of oil-derivative products;
- 30%—with respect to sectors involved in the manufacture of chemicals; glass and glass products; pulp, paper, and paper product; and metallurgy.
When a taxpayer performs activities that fall under more than one of the categories listed above, the mark-up percentage will be determined according to the industry sector for which the imported goods were destined.
MP Nº 563 aims to resolve uncertainty involving the “PRL Method 60”—which gave rise to dispute over the last decade concerning the legality of a formula imposed under Normative Instruction nº 243/02, and which will no longer apply for future transactions once MP Nº 563 is enacted into law.
Commodities transactions are to be tested in accordance with new transfer pricing methods:
- Quotation price on imports method (PCI)—applies for inbound transactions, and is based on the average daily price of goods or rights as recognized on an international futures and commodities exchange;
- Quotation price on exports method (PCEX)—applies for outbound transactions, and is based on the average daily price of goods or rights as recognized on an international futures and commodity exchange.
Also, a “safe harbor” benefit, that has been available when the average export price represented at least 90% of the domestic market average sales, is no longer available for commodities operations.
The application of these rules will be subject to regulation by the Brazilian Federal Revenue.
Interest paid or credited to a related party, arising from a loan agreement between the related parties, whether or not registered with the Central Bank of Brazil, is deductible for corporate income tax purposes only up to an amount not exceeding the LIBOR rate for six-month U.S. dollar deposits, increased by an annual “spread” to be defined by the Finance Minister.
MP Nº 563 imposes the following restrictions on the use of the comparable uncontrolled price method (“PIC Method” as known in Brazil):
- In general, only transactions between a Brazilian entity and third parties will be accepted as comparable, unless otherwise regulated;
- The comparable sample bases must represent at least 5% of the amount of import transactions;
- Absent comparable transactions during the period, transactions conducted in the prior year, adjusted for foreign exchange rate variations, are used (Note that under former law, a comparison with independent transactions conducted in prior or subsequent periods were allowed with no limitation in time).
A taxpayer cannot change its transfer pricing method after a tax audit is initiated. However if for any justified reason, the methodology is disregarded by the tax authorities, the taxpayer is given three days to present a new calculation based on another methodology, pursuant to the transfer pricing law.
MP Nº 563 also provides that import tax or customs duties, freight, and insurance paid on inbound transactions are not to be included in the import cost when testing the transaction, provided that the transaction is with an unrelated party or with a company or individual not domiciled in a listed “low-tax jurisdiction” or in a country having a “privileged tax regime.”
For more information, contact a tax professional with KPMG in Brazil:
Marienne Coutinho, +55 11 2183-3182, email@example.com
Eliete Ribeiro, +55 11 2183-3288, firstname.lastname@example.org
Henrique Conti, +55 11 2183-3278, email@example.com
Evandro Tiba, +55 11 2183-1824, firstname.lastname@example.org
Ricardo Roa, +55 11 2183-6596, email@example.com