The provisions are effective 1 January 2013 or, at the taxpayer’s election, may be applied retroactively from 1 January 2012, provided that the changes are fully adopted by the taxpayer.
The following discussion provides an overview of these transfer pricing changes.
Inbound and outbound commodity transactions must be tested exclusively using the following methods:
- Quotation price on imports (PCI) method 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, adjusted by the average premium.
- Quotation price on exports (PCEX) method 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, adjusted by average premium.
When the commodity is not recognized on an international futures and commodities exchange, the following sources can be used: (1) independent data provided by an internationally recognized industrial research institute (as defined by Brazilian federal tax authority); or (2) prices published in the official daily gazette by agencies or regulatory bodies for export transactions comparisons.
Normative Instruction 1,312/12 includes a list of products that must be considered to be a commodity for purposes of the transfer pricing law and also lists the international futures and commodities exchanges, research institutes, and publications that will be acceptable as source of market price.
The general rule allows a differential factor of 5% between the actual price and the comparable price. For commodities transactions, the permitted difference between the actual price and the quotation sourced by international futures and commodities exchanges, research institutes, and publications will be 3%.
The safe harbor rules that previously applied for export transactions were significantly revised.
To be eligible for the safe harbor, the net pre-tax profits on exports to a related party must be 10% (the prior rule required a 5% net profit). However the safe harbor relief will only be available when the export net revenue with related parties does not exceed 20% of the total export net revenue during the period.
Law 12,766/12 introduced new rules to be applied for testing the deductibility of interest on related-party loans. These new rules apply with respect to loan agreements as of 1 January 2013, as well as with respect to the renewal or re-negotiation of existing loan agreements.
The rules on interest and minimal revenue arising from related- party loans include the following:
- For loans in U.S. dollars (USD) at fixed rate, the parameter rate (i.e., the maximum or minimum rate depending on whether the transactions is inbound or outbound) is the market rate of the sovereign bonds issued by the Brazilian government on the external market, indexed in U.S. dollars
- For loans in Brazilian real (BRL) at fixed rate, the parameter rate is the market rate of the sovereign bonds issued by the Brazilian government on the external market, indexed in BRL. In instances of loans denominated in BRL at a floating rate, the Ministry of Finance will regulate the parameter rate price.
- For all other loans, the parameter rate is the six-month London Interbank Offered Rate (LIBOR). The spread rate may be determined by Brazil’s Ministry of Finance based on market conditions.
“Back-to-back transactions” involve the acquisition of goods abroad, by a Brazilian company, without the goods effectively entering Brazil or being subject to Brazilian customs clearance, followed by the subsequent resale of the goods to an entity located in a third country. The goods are then shipped directly from the foreign seller to the buyer in the third country, with the transaction being regulated by the Brazilian central bank (BACEN).
There had been an ongoing issue as to whether such “back-to-back transactions” are subject to Brazil’s transfer pricing rules when conducted between related parties, given that there was effectively no entry or exit of the goods into or from Brazil.
Normative Instruction 1,312/12 provides that import and export back-to-back transactions, when performed with related parties and/or with companies located in “low-tax jurisdiction” or in a country having a “privileged tax regime” should be tested separately by applying the import and export Methods.
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 the payment is made to 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.”
However, when calculating the PRL price, import tax or customs duties, freight and insurance should be proportionally deducted from the net revenue to apply the mark up established by the Law.
When a Brazilian entity uses its independent transactions as comparables (i.e., a purchase of the same or similar product in the domestic / local market) the third-party comparables must represent at least 5% of the amount of import transactions.
However, when the minimum sample of independent transactions during the period is not achieved, transactions from the preceding year can be used, provided that the foreign exchange effects are appropriately adjusted.
For more information, please contact a tax professional with KPMG in Brazil:
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