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Transfer pricing methods

Available methods

Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?

In relation to import transactions, four methods are available to determine the parameter price of products, services and rights imported by Brazilian companies:

  • The comparable uncontrolled price method for import transactions (PCI) – the transfer price is based on the average price of identical or similar products or services in purchase and sale transactions carried out in the internal or external market under similar payment conditions. The benchmark must represent at least 5% of the value of the import transactions subject to transfer pricing rules. If the transactions in that given year do not reach the 5% threshold, the taxpayer may also consider the transactions performed in the previous year, adjusted by currency fluctuations.
  • The resale price less margin method (RPL) – the transfer price is based on the average resale price of the goods applied by the importer in transactions with independent parties, less unconditional discounts, taxes, brokerage fees and profit margin. The margins for the application of the RPL method vary in accordance to the company’s industry sector. The 40% and 30% margins apply to certain listed sectors, while the 20% margin applies to all other industry sectors.
  • The cost-plus method (CPL) with a fixed profit margin of 20% – the transfer price is based on the average production cost of identical or similar products, services or rights in the jurisdiction in which such products, services or rights were originally produced, increased by taxes paid in such jurisdiction and with a fixed profit margin of 20% of the cost net of taxes.
  • The quote price for import method (PCI), mandatorily applicable to intercompany import transaction of commodities – the parameter price is the average price of the daily medium quotes of the commodities negotiated in internationally known commodities and future exchanges, adjusted by the applicable premiums and other variables. In the absence of a trading price in commodities and future exchanges, prices could be compared to those obtained from independent data sources provided by internationally known research institutes.

The following methods are available in Brazil for export transactions:

  • The comparable uncontrolled price method for export transactions (PVEX) – the parameter price is based on the average price of identical or similar services, products or rights exported by a Brazilian company to foreign independent parties in the same taxable year and under similar payment conditions.
  • The wholesale price in the country of destination less profit margin method with a fixed profit margin of 15% – the parameter price is based on the average sales price of identical or similar products in the wholesale market of the country of destination of the exported products, under similar payment conditions, less local taxes and less a 15% fixed profit margin.
  • The retail price in the country of destination less profit margin method with a fixed profit margin of 30% – the parameter price is based on the average sales price of identical or similar products in the retail market of the country of destination of the exported products, less taxes and less a 30% fixed profit margin.
  • The acquisition or production cost, plus taxes and profit margin method with a fixed profit margin of 15% – the parameter price is based on the average acquisition or production costs of the exported products, services or rights, increased by Brazilian taxes and with a 15% fixed profit margin, calculated on costs and taxes.
  • The quota price for exports method (PECEX), mandatorily applicable to intercompany export of commodities – the parameter price is the average price of the daily medium quotes of commodities negotiated in internationally known commodities and future exchanges, adjusted by the applicable premiums and other variables. In the absence of a trading price in commodities and future exchanges, prices could be compared to those obtained from independent data sources provided by internationally known research institutions.

The PCI and PVEX methods, which under Brazilian legislation are the only methods which depend on a comparability analysis of the goods, services and rights, rely on the taxpayer having access to documentation and information regarding its industry sector that may be difficult to obtain. In light of this, taxpayers usually end up adopting other methods provided by legislation in which no comparability analysis is made, since the calculation of the transfer price in those cases depends on the adoption of fixed margins, regardless of particularities of the taxpayer business.

Taxpayers in Brazil also face difficulties in the adoption of the CPL method since the assessment of the parameter price under this method depends on the taxpayer verifying and proving the average production cost of identical or similar products, services or rights in the jurisdiction in which such products, services or rights were originally produced, to which the taxpayer may not have access.

Finally, from a documentation perspective, the RPR method is the easiest method to apply. However the level of the fixed margins is sometimes burdensome and incompatible with the taxpayer’s business activities, which is an incentive to taxpayers to invest additional efforts in complying with either the PCI or the CPL methods. 

Specific rules also apply to inbound and outbound loan transactions that are subject to transfer pricing control.

Agreements executed as of January 1 2013 and inbound loan transactions entered into with related parties or with parties located in low-tax jurisdictions or privileged tax regimes (no matter whether registered with the Central Bank of Brazil) are subject to the limitations in relation to the interest deduction.

In relation to agreements executed as of 2013, the calculation of the maximum deductible expense should respect specific rates depending on the nature of the transactions, such as the market rate of the sovereign bonds issued by the government on the external market, indexed in dollars or reals, the London Interbank Offered Rate or parameters determined by the Ministry of Finance.

Regarding outbound loans, taxpayers must recognise for corporate income tax purposes a minimum interest revenue based on the same parameters as applicable to inbound loans.

Preferred methods and restrictions

Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?

There is no hierarchy of preferred methods in Brazil, although some of methods are applicable to specific industries or transactions.

With the exception of transactions involving commodities, in relation to which Brazilian transfer pricing rules establish mandatory and specific methods (the PCI and PECEX methods), the taxpayer can adopt the most favourable method.

In respect of export transactions, if more than one method applies the Brazilian taxpayer may adopt the method which results in the lowest export parameter price. For import transactions, if more than one method applies the company may elect the method resulting in the highest import price.

In addition, specific rules apply to the deductibility of interest expenses or revenues recognised in relation to inbound and outbound loan transactions entered by a Brazilian entity with related parties, parties located in low tax jurisdictions or benefiting from a privileged tax regime.

Comparability analysis

What rules, standards and best practices should be considered when undertaking a comparability analysis?

In Brazil, a comparability analysis for the assessment of the parameter price occurs only on the adoption of the comparable uncontrolled price method for import and export transactions (the PCI and PVEX methods, respectively). In these situations, the comparability analysis is made in respect of transactions involving identical or similar products.

Regarding the PCI method, the transfer price is based on the average price of identical or similar products or services in purchase and sale transactions carried out in either the internal or external market under similar payment conditions.

In relation to the PVEX method, the parameter price is based on the average price of identical or similar services, products or rights exported by a Brazilian company to foreign independent parties in the same taxable year and under similar payment conditions.

According to Brazilian transfer pricing legislation, goods are considered similar when they:

  • cumulatively have the same nature and function;
  • can be mutually substituted in the finality they are destined to; and
  • have equivalent specifications.

The value of the goods, services and rights to be compared can be adjusted to minimise the effect on the prices derived from the particularities or conditions of the business, the nature of the product and its content.

In relation to identical goods, services and rights, Brazilian transfer pricing legislation admits only specific adjustments, which are expressly indicated in the regulations and related to specific aspects of the transaction (eg, payment term, quantity of the product negotiated, packaging, freight and insurance).

For the comparability of similar goods, services and rights, their prices can also be adjusted in relation to differences in their nature and content in light of:

  • the costs incurred with the production of the goods;
  • the execution of the services; and
  • the constitution of the rights under analysis.

A comparability analysis is also made under the PCI and PECEX methods, which apply to the import and export of commodities. In relation to these methods, the parameter price corresponds to the average price of the daily medium quotes of the commodities negotiated in internationally known commodities and future exchanges, adjusted by the applicable premiums and other variables.

Special considerations

Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?

Related parties should bear in mind that, although following the methodology suggested by the Organisation for Economic Cooperation and Development Guidelines, Brazilian transfer pricing legislation deviates from the guidelines – for example, it adopts fixed margins for the various methods regardless of the specific situation of the taxpayer or the particularities of the business.

The taxpayer should analyse the available methods under Brazilian legislation in view of:

  • the specific nature of the transactions to be implemented;
  • the necessary documentation and information for the assessment of the parameter price under each method; and
  • the adjustments deriving from such methods.

Since there is no hierarchy of the methods in Brazil, with the exception of the use of the PCI and PECEX methods for the import and export of commodities, the taxpayer can adopt the most favourable method.

In addition, related parties should bear in mind that, in contrast to other countries, the Brazilian transfer pricing rules do not adopt corresponding adjustments, which could lead to double taxation, and advance pricing agreements are not permitted in Brazil.

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