On August 2, 2013 the Brazilian Ministry of Finance published Ordinance No. 427/13 ("Ordinance nº 427"). This ordinance defines and clarifies the ‘spread’ that should be taken into account for Brazilian transfer pricing purposes regarding interest on related party transactions, which was already mentioned but not specified in Law 12,766/12.
Law 12,766/12, issued on December 28, 2012, provided significant changes to Brazilian transfer pricing legislation for interest bearing transactions. For more information in this respect we refer to our Client Alert on the new Brazilian Transfer Pricing legislation 2013.Please note that Ordinance nº 427 was published to regulate article 22 of Law No. 9,430/96, amended by Law 12,766/12. In accordance with the Brazilian transfer pricing rules in force for agreements executed as of January 2013, interest paid or credited to related companies or under other transactions subject to the Brazilian transfer pricing rules are deductible only up to the amount not exceeding the following interest rates, added by a spread based on the market average to be defined by the Brazilian Minister of Finance:
- in case of transactions executed in US Dollars with a prefixed rate: market rate of the sovereign bonds of the Federal Republic of Brazil issued in the foreign market in US Dollars;
- in case of transactions executed abroad in Reais with a prefixed rate: market rate of the sovereign bonds of the Federal Republic of Brazil issued in the foreign market in Reais; and
- in all other cases, the LIBOR rate for 6-month deposits.
In this context, with respect to interest expenses, Ordinance nº 427 established a maximum 3.5% spread to be added to the interest rates set forth above.
Regarding the minimum amount of taxable income, Ordinance nº 427 sets a 2.5% minimum spread to be added to the interest rates mentioned above. In this latter case, it is worth mentioning that in relation to the transactions occurred between January 1st, 2013 and August 2nd, 2013, the Brazilian taxpayer may consider a 0% spread in order to determine the minimum taxable income.