Pricing methods

Accepted methods

What transfer pricing methods are acceptable? What are the pros and cons of each method?

Brazilian transfer pricing rules provide four methods applicable to define the maximum amounts of deductible expenses in case of import transactions, subject to transfer pricing legislation. The four methods are:

  • comparable uncontrolled price method: the weighted arithmetical average of sales price of goods, services or rights, either identical or similar, prevailing in the Brazilian or foreign markets, in transactions of purchases and sales performed by the taxpayer or by third parties, under similar payment conditions;
  • production cost plus profits method: the weighted average production cost of goods, services or rights, either identical or similar, including the taxes levied on exports, in the country where they have been originally produced, and a mark-up of up to 20 per cent, calculated over the production cost;
  • resale price less profit method: the weighted arithmetical average of resale prices of goods (in Brazil) less unconditional discounts granted, taxes and contributions imposed on sales, commissions and brokerage fees paid, and a profit margin based on the economic sector of the legal entity subject to transfer pricing control (20 per cent, 30 per cent or 40 per cent); and
  • exchange import price method (PCI): this is based on the quotation prices of the goods or rights in future and commodities exchange internationally recognised and listed by tax authorities, adjusted upwards or downwards of the average market premium, at the transaction date or at the date of registration of the import declaration, if this date is not identified.

The Brazilian transfer pricing rules provide for five methods to determine the minimum amounts of taxable revenues in export transactions subject to transfer pricing scrutiny. They are defined as:

  • average price of export sales method: the arithmetical average of export prices adopted by the Brazilian taxpayer to unrelated parties or by other domestic exporters of goods, services or rights, either identical or similar, during the same period of calculation of the corporate income tax (CIT), and under similar payment conditions;
  • wholesale price in the destination country less profits method: the arithmetical average of sales of goods, either identical or similar, adopted in the wholesale market in the country of destination, with similar payment conditions, after deducting the taxes computed on the sales price charged in the country of destination, and a profit margin of 15 per cent over the wholesale price;
  • retail price in the destination country less profits method: the arithmetical average price of goods, either identical or similar, adopted in the retail market in the country of destination, with similar payment conditions, after deducting the taxes computed on the sales price charged in the country of destination, and a profit margin of 30 per cent over the retail price;
  • acquisition or production cost plus taxes and profits: the arithmetical average of the acquisition or production costs of goods, services or rights exported including the taxes levied on exports in Brazil and a minimum profit margin of 15 per cent over the sum of costs and taxes; and
  • exchange export price method (PECEX): this is based on the quotation prices of the goods or rights in future and commodities exchange internationally recognised and listed by tax authorities, adjusted upwards or downwards of the average market premium, on the transaction date.
Cost-sharing

Are cost-sharing arrangements permitted? Describe the acceptable cost-sharing pricing methods.

Cost-sharing arrangements are not defined under Brazilian transfer pricing rules, and there is no tax provision regarding this subject. Only case law, which mainly deals with cost-sharing arrangements between two Brazilian companies, provides guidance on how to ensure the deductibility of such costs.

The FRS rendered a decision on Request for Private Ruling 8/12, concluding that, if a cross-border cost-sharing agreement is in place, the transfer pricing rules should not apply, provided that such agreement contains provisions that are ‘consistent’ with a cost-sharing arrangement. In this case, the full amount of expenses paid or reimbursed by the Brazilian company could be considered as deductible for CIT purposes.

The mentioned ruling states that a cost-sharing agreement must be drafted in accordance with the following guidance:

  • it must have a clear division of costs and risks inherent in the development, production or obtaining of goods, services or rights;
  • the contribution of each company must be consistent with the benefits that are expected or effectively received on an individual basis;
  • benefits must be allocated to each specific company on an individual basis. If it is not possible to assume that the company may expect any benefit arising from the activity performed, such company will not be deemed to be a party to the agreement;
  • the negotiation of the reimbursement, understood as the reimbursement of the costs, must correspond to the efforts expended in the realisation of an activity, without adding a profit margin;
  • it must clearly indicate the collective character of the benefits offered to all companies belonging to the group;
  • it must contain the remuneration for the activities, regardless of their effective use. In this regard, it is sufficient that the activities are made available to and for the benefit of the other companies of the group; and
  • it must have conditions that would interest any company, under the same circumstances, to contract.

This decision is an isolated decision and is binding only on the taxpayer that filed this request for ruling. Therefore, despite being a good indication of the FRS’s position in a specific matter, this private ruling cannot be understood as a final and binding decision on this matter. Recently, in a request for rulings, the FRS has interpreted that cross-border cost-sharing arrangements are services for tax purposes and, hence, subject to the taxes applicable to import of services (eg, Social Contributions on Importations of Goods and Services - PIS/COFINS-Import). This may represent a change to the FRS’s interpretation regarding the nonapplication of transfer pricing control to cost-sharing arrangements. This is because, as a rule, intercompany services transactions (imports and exports) are subject to transfer pricing scrutiny in Brazil.

Indeed, in a more recent private and non-binding ruling (#6,024 of 30 May 2017), the FRS concluded that the remuneration paid by a Brazilian company to a foreign related party under a cost-sharing arrangement was considered as remuneration for technical services, subject to the taxes applicable on importation of services and to transfer pricing control.

From a practical perspective, Brazilian taxpayers usually attempt to enter into cost-sharing arrangements related to back-office activities (such as administrative, accounting and human resources), to the extent that it is more reasonable to support them so a cost-sharing arrangement should not be considered as a service provision. If such cost-sharing arrangements are implemented with regard to the core business of the company, the arguments to support this position are weakened.

Best method

What are the rules for selecting a transfer pricing method?

There is no best-method rule, except for commodities that are necessarily subject to the PCI or PECEX methods. Therefore, except for commodities, any method may be selected by the taxpayer to support the agreed consideration in a transaction, subject to transfer pricing control. The taxpayer is free to decide on the most efficient transfer pricing method for its transactions and no transfer pricing adjustment is required if the minimum taxable revenue or the maximum deductible expense, determined according to the elected method, is reached.

Taxpayer-initiated adjustments

Can a taxpayer make transfer pricing adjustments?

The transfer pricing adjustment, if any, should be made when filling in the income tax return since the transfer pricing adjustment is an off-book adjustment. If the taxpayer wants to reflect such a transfer adjustments in the books (ie, adjust the commercial transactions), then such an adjustment shall be made before the books are closed at year-end and different effects and risks may apply.

Safe harbours

Are special ‘safe harbour’ methods available for certain types of related-party transactions? What are these methods and what types of transactions do they apply to?

There is a ‘safe harbour’ method for export transactions subject to transfer pricing scrutiny. According to this safe harbour, if the average price charged on the export transaction is equal to or higher than 90 per cent of the average sales price charged in transactions carried out in the Brazilian market with non-related parties, the Brazilian taxpayer is not required to adopt one of the transfer pricing methods for the purposes of calculating the minimum revenue to be recorded.

The Brazilian transfer pricing rules provide for certain imperfect safe harbours. The harbours are not perfect as they only shift the burden of proof to the tax authorities to demonstrate that the prices are not at arm’s length. The safe harbours do not apply in case of sales transactions of rights, goods or services to buyers domiciled in low-tax jurisdictions or in jurisdictions that prohibit disclosure of equity ownership. They are as follows:

  • the taxpayer that has a minimum 10 per cent net profit on its total export net revenues to related parties can demonstrate its compliance with the transfer pricing rules only with the documents of the export transactions with related parties. The 10 per cent net profit must be calculated based on the annual average of the current and the two previous years. The referred safe harbour only applies in case that the net revenues of exports to related parties is lower than 20 per cent of the total export net revenues; and
  • the taxpayer whose export net revenue in the calendar year does not exceed 5 per cent of its total net revenue in the same period may demonstrate its compliance with the transfer pricing rules with the export documents only.