Most companies face significant challenges in supporting their transfer pricing policies in Brazil due to the fact that the Brazilian transfer pricing requirements are not aligned with the global arm’s length principle. This difference often creates double taxation issues for taxpayers that do not proactively manage their transfer pricing policies.
However, despite the complexity resulting from this different criterion in Brazil, the Brazilian rules also provide for fixed profit margins that may be applied as “safe harbors” for taxpayers to use for their own benefit.
Also, under the Brazilian rules, taxpayers have flexibility when choosing the method. Moreover, taxpayers may change the method applied on a yearly basis without requiring any justification or approval.
Among the methods for testing the import price, the law provides the “Cost Plus Method” (production cost plus 20% “Profit Margin Method”), which authorizes the supplier / related party to allow up to 20% gross margin on sales to its affiliates located in Brazil, provided that the supplier is the manufacturer of the goods.
In instances when the 20% margin requirement is met, the taxpayer must concentrate its efforts on collecting documentation as evidence of the costs and margin tested.
New RFB ruling
The new ruling from the Brazilian tax authority (Receita Federal do Brazil—RFB) states that a report issued by an independent company is acceptable for evidencing the costs incurred by the tested party abroad.
The report will evidence the costs of production incurred by the supplier abroad and document the costs using data available data at origin.
Tax professionals have observed that with this new ruling, companies need to consider its application to their specific situations and revisit and possibly adjust their transfer pricing methodology as well as their approach to Brazilian transfer pricing, to align these with the company’s global transfer pricing policy.
For more information, contact a KPMG tax professional with KPMG’s Americas Center or with KPMG in Brazil:
202 533 5681
305 913 2789
55 11 218 33 216
55 11 218 33 288
Or contact a tax professional with KPMG's Global Transfer Pricing Services.