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Review and adjustments

Review and audit

What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?

The activity carried out by tax authorities is guided by constitutional principles, such as the legality principle, which establishes that tax authorities must observe and are restricted to the law. In addition, transfer pricing adjustments and the disqualification of transfer pricing methods by tax authorities must be duly motivated.

In a tax inspection, the taxpayer has the burden of proving that the transfer price used complied with Brazilian transfer pricing rules. However, in cases where the documentation presented by the taxpayer is deemed inadequate or insufficient by the tax authorities to prove the calculation of the price of the transactions analysed, the tax authorities can determine the transfer price by applying another method based on the documentation and information made available by the taxpayer.      

Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?

Normative Ruling 1,312/2012 sets down procedures for tax inspections involving transfer pricing rules. The corporate taxpayer undergoing the tax inspection must provide tax authorities with the relevant documentation to support the transfer price used and the calculation charts used for the assessment of the parameter price, according to the methods indicated on the annual income tax return.

If during a tax inspection the tax authorities do not agree with the transfer pricing method or the calculation methodology adopted by the taxpayer, the taxpayer will be asked to present a new method or calculation methodology within 30 days.

If the taxpayer does not provide the tax authorities with an alternative method within the 30 days, or if the documentation presented by the taxpayer is deemed inadequate or insufficient to prove the calculation of the price of the transactions, tax authorities can determine the transfer price by applying another method based on the documentation and information made available by the taxpayer.

Penalties

What penalties may be imposed for non-compliance with transfer pricing rules?

Non-compliance with the transfer pricing rules may lead to the issuance of a tax assessment, in which a penalty of 75% and interest calculated by the Selic rate will be added to the tax due. In case of sham, fraud or misconduct, a penalty of 150% is applied (but this is rare in transfer pricing matters).

Transfer price adjustments may also lead to the imposition of a 50% penalty if the taxpayer underpays its monthly corporate income tax.

In addition, tax authorities may apply a penalty for non-compliance with ancillary obligations related to transfer pricing rules. According to the applicable legislation, any mistake, inaccuracy or omission in the fulfilment of the corporate annual income tax return will be subject to a penalty of 3% of the incorrect, inaccurate or omitted value. This penalty will not be due if the taxpayer corrects the mistake, inaccuracy or omission before the tax authorities start the inspection, and the penalty will be reduced by 50% if the mistake, inaccuracy or omission is corrected within the term established by tax authorities.        

Adjustments

What rules and restrictions govern transfer pricing adjustments by the tax authorities?

The activity carried out by tax authorities is guided by constitutional principles, such as the legality principle, which establishes that tax authorities must observe and are restricted to the law. In addition, transfer pricing adjustments and the disqualification of transfer pricing methods by tax authorities must be duly motivated.

If during a tax inspection the tax authorities do not agree with the transfer pricing method or the calculation methodology adopted by the taxpayer, the taxpayer will be asked to present a new method or calculation methodology within 30 days.

Challenge

How can parties challenge adjustment decisions by the tax authorities?

Transfer pricing adjustments made by the tax authorities lead to the issuance of tax assessments aimed at collecting corporate income tax. Taxpayers can challenge tax assessments in both the administrative and judicial spheres.

In the administrative sphere, a tax assessment can be challenged by filing a defence to the Federal Revenue Judgment Office, which suspends the enforceability of the tax debt assessed. If the office issues an unfavourable decision, the taxpayer can challenge the decision by filing a voluntary appeal to the Administrative Courts of Tax Appeals and subsequently a special appeal to the Superior Chamber of Tax Appeals.

If the outcome in the administrative sphere is unfavourable, a taxpayer can challenge the tax assessment in the judicial sphere.

Mutual agreement procedures

What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?

Normative Ruling 1,669/2016 introduced the mutual agreement procedure in Brazil, in order to avoid double taxation in an attempt to align Brazil to the Organisation for Economic Cooperation and Development minimum standards.

Brazilian tax residents may submit a mutual agreement procedure request to the Federal Revenue Service if certain measures adopted by the countries involved have led or may lead to taxation contrary to the double tax treaties entered into between those countries.

Normative Ruling 1,669/2016, expressly recognises the possibility of the request of a mutual agreement procedure in the context of advance pricing arrangements, although there may be some practical difficulties since Brazil adopts fixed margins for various methods in contrast to other jurisdictions.

The mutual agreement procedure may have two phases:

  • a unilateral phase, in which the Federal Revenue Service receives and analyses the request made by the taxpayer; and
  • a bilateral phase, in which the Federal Revenue Service discusses the matter under request with the competent tax authority of the other country in order to find a solution of the case if it was not resolved in the unilateral phase or if it was raisedby a request presented abroad.

 

As Normative Ruling 1,669/2016 was only recently enacted, it has not yet been applied in practice.

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