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Policy, trends and developments

Government policy

Describe the general government/regulatory policy for transfer pricing in your jurisdiction. To what extent is the arm’s-length principle followed?

Transfer pricing rules were introduced in Brazil in 1996 through the enactment of Law 9,430. According to the law, the following are subject to transfer pricing rules:

  • cross-border transactions carried out by legal entities incorporated in Brazil when they are entered into with related parties;
  • cross-border transactions carried out between a Brazilian resident and a company resident in a low-tax jurisdiction or benefiting from a privileged tax regime, irrespective of whether they qualify as related parties; and
  • inbound and outbound loan transactions in these conditions.

Brazilian transfer pricing rules do not apply to cross-border payments of trademark or patent royalties, nor to fees payable as compensation for the transfer of technology or for the performance of technical, administrative or scientific assistance services if such transactions are registered with the Brazilian Intellectual Property Agency and the Brazilian Central Bank (in which case they are subject to specific limitations).

Brazilian transfer pricing rules also apply to back-to-back transactions, described as those where there is no effective import or export of the goods and services into and from Brazil, even though there is an acquisition or sale of goods and services by a Brazilian corporate taxpayer with an affiliated entity outside Brazil.

Brazilian legislation follows the transfer pricing methodology suggested by the Organisation for Economic Cooperation and Development (OECD) Guidelines to some extent, but also deviates from them in the following ways:

  • Brazilian law adopts fixed margins for the various methods, regardless of the situation of the taxpayer or the peculiarities of the business. According to the tax authorities, these fixed margins are in accordance with the arm’s-length principle adopted by the OECD.
  • Brazilian transfer pricing legislation presents only transactional methods and has no profit-based methods.
  • Under the methods available there is no functional analysis as established by the OECD Guidelines, which is based on the functions performed, the assets used and the risks assumed by each party in a controlled transaction.

Trends and developments

Have there been any notable recent trends or developments concerning transfer pricing in your jurisdiction, including any regulatory changes or case law?

Until the issuance of Law 12,715/2012, which amended Law 9,430/1996, there was much litigation between taxpayers and the Federal Revenue Service regarding the assessment of the parameter price under the resale price less margin method with a 60% fixed margin (RPL 60), applicable to the import of products subject to a manufacturing process in Brazil.

Regulating the RPL 60 method, Normative Ruling 243/2002 issued by the Federal Revenue Service introduced a new methodology for the determination of the parameter price under RPL 60, which taxpayers alleged was different from that established by Law 9,430.

The difference between RPL 60 under Law 9,430/1996 and that under Normative Ruling 243/2002 consisted of the deduction of the profit margin from the net resale price. While Law 9,430/1996 determined that the 60% margin be imposed on the total value of the product’s net sale price reduced by the value added in the country, Normative Ruling 243/2002 determined that the 60% margin be imposed on part of the product´s net sale price after an apportionment by reference to the cost of the input imported regarding the total cost of the final product sold (the IN methodology). As a result, the IN methodology increased the adjustments under RPL 60 compared to those provided by Law 9,430.

In light of the litigation between taxpayers and the tax authorities involving the IN methodology, Law 12,715/2012 amended Law 9,430/1996 to set down a legal basis for the IN methodology.

In addition, Law 12,715/2012 introduced new margins for the assessment of the parameter price which vary according to the taxpayer’s industry sector. Margins of 40% and 30% now apply to certain listed sectors, while a 20% margin applies to all other industry sectors.

Despite the fact that Law 12,715/2012 amended Law 9,430/1996, taxpayers are still engaged in discussions on the issue in both the administrative and judicial spheres, and the matter has not yet been definitively decided by the Brazilian courts.

Legal framework

Domestic legislation and applicability

What primary and secondary legislation governs transfer pricing in your jurisdiction?

The primary legislation governing transfer pricing in Brazil is Law 9,430/1996, which introduced transfer pricing rules. Normative Instruction 1,312/2012, issued by the Federal Revenue Service regulates Law 9,430/1996.

Are there any industry-specific transfer pricing regulations?

Yes. The resale price less margin method (RPL) uses different margins which vary according to the company’s industry sector. Under the RPL, the transfer price is based on the average resale price of the goods applied by the importer on transactions with independent parties, less unconditional discounts, taxes, brokerage fees and profit margins.

The fixed margins apply as follows:

  • 40% – pharmaceutical; smoke; optical, photographic and cinematographic equipment and instruments; machinery and equipment for hospitals and medical use; oil and gas.
  • 30% – chemical; glass; paper and metallurgy.
  • 20% – all other industry sectors that are not specified by the law.

Brazilian tax legislation also establishes mandatory methods for transactions involving commodities (the quota price for import (PCI) and export (PECEX) methods).

What transactions are subject to transfer pricing rules?

The following are subject to transfer pricing rules:

  • cross-border transactions carried out by legal entities incorporated in Brazil when they are entered into with related parties;
  • cross-border transactions carried out between a Brazilian resident and a company resident in a low-tax jurisdiction or benefiting from a privileged tax regime, irrespective of whether they qualify as related parties; and
  • inbound and outbound loan transactions in these conditions.

Brazilian transfer pricing rules do not apply to cross-border payments of trademark or patent royalties, nor to fees payable as compensation for the transfer of technology or for the performance of technical, administrative or scientific assistance services if such transactions are registered with the Brazilian Intellectual Property Agency and the Brazilian Central Bank (in which case they are subject to specific limitations).

How are ‘related/associated parties’ legally defined for transfer pricing purposes?

For transfer pricing purposes, Law 9,430/1996 lists the following situations where transactions are considered to be implemented between related parties:

  • transactions carried out by a Brazilian entity whose parent company is located abroad;
  • transactions carried out by a Brazilian entity whose branch or subsidiary is located abroad;
  • transactions carried out by an individual or a legal entity resident or incorporated outside Brazil which directly or indirectly holds more than 10% or the control of the share capital of the Brazilian company;
  • transactions carried out by a legal entity incorporated abroad which is controlled by a Brazilian company or which receives investments from the latter equivalent to more than 10% of its share capital;
  • transactions carried out by a legal entity incorporated abroad when the same persons participate directly or indirectly in the management, control or capital of both the entity and the Brazilian company, or hold at least 10% of the share capital of the companies;
  • transactions carried out by an individual or legal entity resident or incorporated abroad which, jointly with a Brazilian company, holds the share capital of a third legal entity representing a total of at least 10% of the share capital or the control of the capital;
  • transactions carried out by an individual or legal entity resident or incorporated abroad that is associated with a Brazilian company pursuant to a consortium or a condominium agreement for any enterprise, as defined under Brazilian laws;
  • transactions carried out by an individual resident abroad who is a relative or spouse of the director of a Brazilian company or its controlling shareholder;
  • transactions carried out by an individual or legal entity resident or incorporated abroad which holds the exclusive rights, as an agent, dealer or concessionaire, to the purchase and sale of goods, services or rights provided by a Brazilian company; and
  • transactions carried out by an individual or legal entity resident or incorporated abroad which grants a Brazilian company the exclusive rights, as an agent, dealer or concessionaire, to the purchase and sale of goods, services or rights provided by the non-resident.

Are any safe harbours available?

Yes. Under the first general safe harbour rule, a taxpayer is deemed to have applied an appropriate transfer price if the average export sales price is at least 90% of the average domestic sale price in the Brazilian market during the same period and on similar payment terms.

The second safe harbour rule allows a difference of up to 5% (up or down) in relation to the overall transactions and 3% (up and down) in relation to the transactions subject to the PCI and PECEX methods between the adjusted-limit price and the transaction price.

Normative Ruling 1,312/2012 also establishes two other rules intended to simplify the application of the transfer pricing rules and respective tax inspections. These rules are not considered to be true safe harbours because the tax authorities must review the transfer pricing methods and may, in principle, assess the taxpayers.

These rules allow exporters to demonstrate the appropriateness of the transfer pricing based exclusively on the export transaction documentation if:

  • the exporter can prove that the net commercial profit derived from the export transactions is equal to at least 10% of the export income, based on the annual average of the calendar year and the two last taxable periods, provided that the net export revenue to related entities does not exceed 20% of the total net export revenue; or
  • the exporter can prove that the net export income does not exceed 5% of the total net income in the same calendar year.

Regulators

Which government bodies regulate transfer pricing and what is the extent of their powers?

Congress issued the law providing general transfer pricing guidance (Law 9,430/1996) and the Federal Revenue Service is responsible for regulating it.

The Ministry of Finance can establish different margins for different industries in order to determine the parameter price in controlled transactions. In relation to inbound and outbound loans subject to transfer pricing rules, the ministry is responsible for defining the applicable annual spread to be observed by taxpayers.

Regarding transactions involving commodities, the ministry and the Federal Revenue Service are responsible for indicating the commodities and futures exchanges and the internationally recognised research institutes that will be adopted as reference for the price quotation.

International agreements

Which international transfer pricing agreements has your jurisdiction signed?

None.

To what extent does your jurisdiction follow the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines?

Despite following the transfer pricing methodology suggested by the OECD Guidelines to some extent, Brazilian legislation deviates from these guidelines in the following ways:

  • It adopts fixed margins for the different methods, independent of the specific situation of the taxpayer or the peculiarities of the relevant industry.
  • The criteria for searching and adopting comparables and appropriate adjustments are not clearly regulated.
  • Advance pricing agreement procedures are generally not allowed.
  • The rules are not applicable to cross-border payments of royalties and payments for technical, administrative and scientific assistance services, including those involving the transfer of know-how made by or in favour of Brazilian companies, if such transactions are registered with the Brazilian Intellectual Property Agency.
  • The related parties test also encompasses situations involving cross-border transactions carried out between Brazilian companies and parties located in low tax jurisdictions, as defined by the Brazilian tax laws among other situations which do not involve related parties.
  • Comparables cannot be applied for definition of profit margins.
  • The rules do not allow taxpayers to adopt the transactional net margin or profit split methods.
  • There are no specific provisions allowing cost-sharing arrangements.
  • There is no functional analysis based on the functions performed, the assets used and the risks assumed by each party in a controlled transaction.

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.

Documentation and reporting

Rules and procedures

What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?

Taxpayers must prepare the documentation relating to the controlled transactions undertaken and the observance of the transfer pricing methods annually. In addition, corporate taxpayers must declare in their annual income tax returns the transactions undertaken with related parties and the adopted transfer pricing method for the relevant taxable period.

The documentation supporting the transfer pricing method used and the calculation charts used for the assessment of the parameter price must be presented to the tax authorities in the event of a tax inspection in order to prove its compliance with the transfer pricing rules, according to the methods adopted by the taxpayers.

Taxpayers should keep documentation related transfer pricing control for five years, as the tax authorities have five years to review the transfer price adopted by the taxpayer and implement adjustments in order to claim any corporate income tax due.

Content requirements

What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?

Taxpayers should keep documentation related to transfer pricing control for five years, as the tax authorities have five years to review the transfer price adopted by the taxpayer and implement adjustments in order to claim any corporate income tax due. The documentation must be presented to the tax authorities in the event of a tax inspection.

Normative Ruling 1,681/2016 requires the filing of country-by-country reporting by the final holding company of a multinational group resident for tax purposes in Brazil and whose economic group has earned consolidated revenues higher than R2.26 billion or €750 million in the fiscal year before the fiscal year of the report.

Through the country-by-country reporting the Federal Revenue Service will gain access to information aggregated by each jurisdiction in which the multinational group operates, comprising consolidated revenues and segregating those obtained in transactions with related and unrelated parties.

No master-file or local-file requirements apply.

Penalties

What are the penalties for non-compliance with documentation and reporting requirements?

If the documentation presented by the taxpayer in a tax inspection is deemed inadequate or insufficient by the tax authorities to evidence 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.

Non-compliance with the documentation and reporting requirements may also lead to the imposition of penalties, in addition to those applied in the case of a tax assessment intended to collect corporate income tax derived from transfer price adjustments, where the tax authorities will charge the taxes due plus a penalty of 75% and interest calculated by the Selic rate. In case of sham, fraud or misconduct (unusual in transfer pricing matters), a penalty of 150% is applied.

Transfer price adjustments may also lead to the imposition of a 50% penalty in the event of the underpayment of corporate income tax monthly estimates by the taxpayer.

According to the applicable legislation, any mistake, inaccuracy or omission in the corporate annual income tax return will be subject to a penalty of 3% of the incorrect, inaccurate or omitted value. The penalty will not be due if the taxpayer corrects the mistake, inaccuracy or omission before the tax authorities begin the inspection, and the penalty will be reduced by 50% if the mistake, inaccuracy or omission is corrected within the term established by the tax authorities.

Best practices

What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?

Taxpayers should keep documentation related to transfer pricing control for five years, as the tax authorities have five years to review the transfer price adopted by the taxpayer and implement adjustments in order to claim any corporate income tax due.

The documentation that supported the transfer price used and the calculation charts used for the assessment of the parameter price must be presented to tax authorities in the event of a tax inspection in order to prove compliance with the transfer pricing rules, according to the methods indicated by the taxpayer on the annual income tax return.

Advance pricing agreements

Availability and eligibility

Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?

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 raised by a request presented abroad.

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

Rules and procedures

What rules and procedures apply to advance pricing agreements?

N/A.

Timeframes

How long does it typically take to conclude an advance pricing agreement?

N/A.

What is the typical duration of an advance pricing agreement?

N/A.

Fees

What fees apply to requests for advance pricing agreements?

N/A.

Special considerations

Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?

N/A.

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.

Anti-avoidance framework

Regulation

What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?

Since the mid-1990s, the federal government has implemented specific anti-avoidance rules (SAARs) to mitigate the effects of international tax planning under the Organisation for Economic Cooperation and Development (OECD) OECD Action Plan on Base Erosion and Profit Shifting (BEPS). These rules have been implemented in Brazil through legislative changes since 1998 based on the OECD’s recommendations in the Harmful Tax Competition Report.

Examples of SAARs adopted by Brazil are taxation on worldwide income, transfer pricing rules, a list of low-tax jurisdictions (black list) and privileged tax regimes (grey list), increased rate of income tax on payments to low-tax jurisdictions, limitation on the deductibility of such payments and thin capitalisation rules.

In 2015 the federal government attempted to introduce the mandatory disclosure of tax planning, inspired by Action 12 of BEPS, under which taxpayers would have to disclosure to the Federal Revenue Service tax-efficient transactions which lacked significant non-tax reasons or which were based on indirect legal acts. The initiative was not passed into law.

In 2016 the Federal Revenue Service issued normative rulings dealing with the mutual agreement procedure in Brazil and the obligation of companies filing the country-by-country report, in alignment with Actions 14 and 13 of BEPS. In the same year, the Federal Revenue Service introduced an obligation for entities enrolled with the Federal Revenue Service to disclose the final beneficiaries of entities, whether residents or non-residents.

Brazil chose not to sign the Multilateral Convention on the Implementation of Tax Treaty-Related Measures but rather to enter into bilateral agreements, such as that entered into with Argentina in 2017, which modified the original tax treaty entered into between the countries to include new measures to prevent tax avoidance. 

To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?

In recent years, Brazil has implemented various measures in order to align its legislation with BEPS. In this context, the National Congress incorporated the Convention on Mutual Administrative Assistance in Tax Matters 2010 and the Federal Revenue Service signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information. Through these agreements, Brazil has formally adhered to the Common Reporting Standard, with the intention of undertaking the first exchanges of financial information in 2018.

Further, in 2015 the federal government attempted to introduce the mandatory disclosure of tax planning, inspired by Action 12 of BEPS, under which taxpayers would have to disclose to the Federal Revenue Service tax-efficient transactions which lack significant non-tax reasons or which are based on indirect legal acts. The initiative was not passed into law.

In 2016 the Federal Revenue Service issued normative rulings on the mutual agreement procedure in Brazil and the obligation of companies filing the country-by-country report, in alignment with Actions 14 and 13 of BEPS. Finally, the Federal Revenue Service issued a normative ruling that defined economic substance requirements for holding companies of specific countries and those benefiting from privileged tax regimes, in alignment with Action 5 of BEPS.

Is there a legal distinction between aggressive tax planning and tax avoidance?

There is no legal distinction or clear line between aggressive tax planning and tax avoidance. Tax avoidance is characterised by acts of commission or omission before the occurrence of the taxable event, and without the taxpayer intending to violate the law.

In contrast, aggressive tax planning, or tax evasion, involves unlawful practices, based on sham and fraudulent acts, in order to eliminate the taxable event.

In addition, tax authorities usually broaden the concept of abuse of rights in order to disregard transactions and structures implemented by taxpayers based on the argument that taxpayers do not have an absolute right to organise their economic lives at their own discretion, but must observe the limits imposed by the law for the exercise of their rights with respect to the principles of equality before the law and capacity to pay taxes.

Penalties

What penalties are imposed for non-compliance with anti-avoidance provisions?

Non-compliance with anti-avoidance provisions may lead to the issue of tax assessments, where the tax authorities would charge the taxes due plus a penalty of 75% and interest calculated by the Selic rate. In case of sham, fraud or misconduct (unusual in transfer pricing matters), a penalty of 150% is applied.

In addition, a 50% penalty may also be applied if the taxpayer underpays its monthly corporate income tax.