Brazilian government amends transfer pricing legislation

International Tax News

Brazil has published Provisional Measure #563 amending its transfer pricing rules.


A provisional measure is (as its name says) a “provisional” piece of legislation issued by the president which must be analyzed by Congress in order to become a law. Despite its temporary nature, a provisional measure has the same power as a law and starts producing effects as of the date of its publication, save for express exceptions in the text of the act itself.  Provisional Measure #563 was published on April 4, 2012.


The Brazilian Congress must vote and approve the matter within 120 days from the publication date (a 60-day term renewable for another equal term); otherwise, the proposed amendments will not come into force.


Provisional Measure # 563 was announced as the heart of a new Brazilian government development program that introduces several benefits and reduces payroll taxes for certain industry segments.  Almost hidden in some of the articles of the Provisional Measure are several changes to the Brazilian transfer pricing rules.


The relevant changes to the transfer pricing legislation are summarized below.


Changes to the “comparable” method (PIC) for imports restrict its use


Based on this method, the parameter price is the weighted arithmetic average price of identical or similar goods, services or rights assessed in sale transactions under similar payment conditions. The prices of imports from related companies must be compared to the prices of similar or identical goods, services or rights (a) sold by the same exporting company to unrelated legal entities resident or not in Brazil; (b) acquired by the same company (importer) from unrelated legal entities resident or not in Brazil; or (c) practiced in sales transactions between other unrelated legal entities resident or not in Brazil.


The proposed amendment determines that in case the taxpayer uses the method based on its own transactions (see (b) above), the transactions used for such purpose must represent at least five percent of the amounts of import transactions subject to transfer pricing controls in the base period, per type of good, service or right.


It also determines that, in any case, the transactions compared must correspond to independent prices practiced in the same calendar year as the imports subject to transfer pricing controls. In case there is no independent price in the same year, the taxpayer may use the independent price used in transactions carried out in the previous year, adjusted by the exchange variation of the period.


Changes to the “resale” method (PRL) for imports


This method focuses on the weighted arithmetic average of the resale prices of goods, services and rights after subtracting the unconditional discounts, the taxes levied on sales, the commissions or brokerage paid and the profit margin. Since Brazil enacted transfer pricing rules, the applicable profit margins have been 60 percent (when the imported goods, services or rights are applied in the production of other goods, services or rights) or 20 percent (in the case of mere resale of goods, services or rights).


While maintaining the system of statutory profit margins, the Provisional Measure eliminates the distinction between acquisitions for resale and acquisitions for industrialization and the very high profit margin of 60 percent which had been heavily criticized by taxpayers. The new legislation now provides for different percentages, depending on the segment of activity of the importer, as follows:


  • General rule: 20 percent
  • Manufacturing of chemical products, glasses and glass products, cellulose, paper and paper products, metallurgy: 30 percent
  • Manufacturing of pharmaceuticals,  tobacco products, optical, photographic and cinematographic equipment and instruments, commercialization of machines, equipment and appliances for dental, medical or hospital use, extraction of oil and natural gas and manufacturing of oil derivatives: 40 percent


In case the company carries out more than one type of activity subject to different margins, it shall use the appropriate margin depending on the purpose of the imported item.


Historically, taxpayers have been litigating with the tax authorities with regard to calculation of the profit margin, claiming that the methodology set forth in the Normative Instruction issued by the Internal Revenue Service that regulates the matter is more prejudicial than the one set forth in the law. The new Provisional Measure aims to eliminate this controversy (in favor of the government) by legalizing the methodology prescribed in the Normative Instruction currently in force. On the other hand, it provides taxpayers with a good argument regarding their rights in the past: if a change in the law was necessary, then it would be reasonable to conclude that prior to such change the method provided for in the Normative Instruction was not legal).


In summary, the Provision Measures determine:


  • the use of the net sales price, which is defined as the weighted arithmetic average of the sales price after deduction of the unconditional discounts, taxes levied on the sales and commissions and brokerage fees
  • the calculation of the percentage of participation of the imported item in the total cost, which is defined as the weighted average cost of the item imported on the total weighted average cost of the item sold, based on the company’s cost spreadsheets
  • the applicability of the percentage of participation of the imported item on the net sales price in order to obtain the amount of participation of the imported item on the net sales price
  • the determination of the benchmark based on the amount of participation of the imported item on the net sales price less the profit margin


Finally, the Provisional Measure provides that the taxes levied upon importation and the expenses related to customs clearance are not integrated into the cost base. Also, the amount of freight and insurance born by the importer does not get integrated into the import cost, as long as they have not contracted with related parties or parties domiciled in tax havens or subject to privileged tax regimes. These two points, as well as the differentiated profits margins, were the government response to the taxpayers pleas.


New mandatory methods for commodities (price based on listed amounts)


The Provisional Measure outs in place mandatory methods for import and export of commodities, based on the daily average listed amounts of goods subject to public prices in the internationally recognized commodity exchange market, adjusted by the average market premium (an expression not defined in the Provisional Measure).


In addition, specifically for the export of commodities, the Provisional Measure states that the safe harbor rule, which dismisses transfer pricing controls when the average export price is equal to or more than 90 percent of the average price typically used in the domestic market, is not applicable.


Changes regarding interest payments


Interest arising from any loan agreements and paid or credited to foreign related parties, parties domiciled in tax havens or subject to a privileged tax regime, shall only be deductible up to the amount which does not exceed the calculation based on the LIBOR for deposits in US dollars for a six-month term, accrued by a percentage margin of spread (to be defined annually by the Minister of the Treasury based on the market average), proportionate to the period to which the interests refer. If a Brazilian company is the lender, it must recognize a minimum taxable revenue amount based on the same rule.


Currently, interests derived from loan agreements duly registered with the Brazilian Central Bank are not subject to transfer pricing controls, and for those unregistered agreements the spread is fixed at 3 percent.


This change should be carefully analyzed.  It could provide grounds to challenge the new rule in court should it enter into effect.


It is also important to note that taxpayers have an obligation to comply with transfer pricing rules, as well as thin capitalization rules.


Option for methods and proceedings in case of inspection


The Brazilian IRS must regulate how and when the option for one of the methods must be formalized by the taxpayer. Once a formal tax inspection is initiated, a taxpayer will not be able to change methods, even if another method is proven to be more beneficial. Should tax authorities disregard the method chosen by the taxpayer, they must notify the taxpayer within 30 days  that it will need to present a new calculation based on a different method.


One final note: Brazil’s Congress is now analyzing these new transfer pricing rules.  When the Provisional Measure is converted into law, we can be certain that some of these rules will change.


For more information about tax issues in Brazil, please contact:


Leonard Homsy


Guido Vinci




*Leonardo Homsy and Guido Vinci are partners with Campos Mello Advogados, based in Rio de Janeiro.  DLA Piper works in cooperation with Campos Mello Advogados to grant our clients access to the firm and its lawyers in Brazil. Learn more here.