The rules stated by the Brazilian transfer pricing (TP) legislation are known for its complexity and for its model, which is quite different from OECD’s guidelines (international TP rules).
Nordic companies with related parties located in Brazil often find difficulties to adapt their intercompany policies to the Brazilian model and, as a consequence, face a great challenge to prevent their activities from becoming unfeasible in the country as a result of the internal TP legislation’s burden.
The major concerns of the Nordic companies – with regard to TP matters – when dealing with Brazil, are: (i) the predetermined profit margins, and (ii) the limitations on tax planning.
Predetermined profit margins
Most companies in Brazil perform their TP calculation by applying the legal methods that are based on profit margins predetermined by the law. The other legal methods – not based on predetermined profit margins – depend on information that, in practice, may not be available.
This scenario is burdensome for the companies to the extent that the required profitability differs from the real conditions of the market. It is worth mentioning that, under Brazilian TP legislation, the possibility of changing the predetermined profit margin used to be unfeasible due to the terms and conditions imposed by the law.
Tax planning – limitations of TP rules
It is usual for the companies to carry out a plan aiming to reduce the tax burden levied on their transactions. However, the Brazilian TP legislation severely limits this practice, due to its particularities, for example:
(i) the obligation to perform the calculation on an annual basis, by item and by supplier (or customer);
(ii) the impossibility of offsetting TP adjustments between different items; and
(iii) the mathematical formula provided by the legislation for the Resale Price Method (PRL), the most applied method for import transactions, that depends on variables that are conditioned on forthcoming events.
In short, these variables are: (i) acquisition cost; (ii) cost of item sold; and the (iii) sale price. Due to these variables being conditioned on forthcoming events, they can be in‑uenced by external factors (e.g. exchange rates and market conditions) that are beyond the companies’ control.
Alternative: periodic monitoring
Considering the particularities and limitations mentioned above, the companies should adopt a preventive behavior, i.e. they should periodically monitor their transactions from the standpoint of TP rules and identify the items that are generating TP adjustments and, also, the items that present favorable margin (“negative adjustment”).
The items with favorable margin are those that would continue without TP adjustment even if its practiced price (price traded with related party) is increased (import transactions) or decreased (export transactions), in both cases up to the limit imposed by the legal methods.
Therefore, the main focus of the analysis is on the prices of the items that are being traded with the same related parties abroad – during the tax year – which can be renegotiated.
Finally, the renegotiation mentioned above aims to offset the high prices – of the items that can generate TP adjustment – with the low prices – of the items with positive margins. The expected result is to reduce or even eliminate the TP adjustment.
Pedro Leonardo Stein Messetti is expert advisor at Pacheco Neto Sanden Teisseire Law Firm.
