Transfer Pricing

The principal transfer pricing rules in Brazil are as follows:

• Law 9,430 of 27 December 1996 (and amendments);
• Law 10,451 of 10 May 2002;
• Law 10,637 of 30 December 2002;
• Law 10,833 of 29 December 2003;
• Law 11,727 of 23 June 2008;
• Law 12,249 of 11 June 2010;
• Federal Revenue Service, Normative Ruling 1,037 of 4 June 2010 (and amendments);
• Federal Revenue Service, Normative Ruling 1,154 of 12 May 2011;
• Federal Revenue Service, Normative Ruling 1,312 of 28 December 2012 (and amendments);
• Federal Revenue Service, Normative Ruling 1,547 of 13 February 2015;
• Ordinance of the Ministry of Finance 222 of 24 September 2008;
• Ordinance of the Ministry of Finance 427 of 30 July 2013;
• Federal Revenue Service, Normative Ruling 1,669 of 10 November 2016; and
• Federal Revenue Service, Normative Ruling 1,681 of 29 December 2016 (and amendments).

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The federal tax authorities are responsible for audit transfer pricing matters. In the past, there was a unit of the Brazilian Federal Revenue Service (FRS) called the Special Department for International Issues, which used to be responsible for tax investigations related to international trade and taxes, including transfer pricing issues. However, this unit no longer exists and, based on practical experience, there is no longer a unit that centralises all transfer pricing inspections.

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Even though Brazilian transfer pricing legislation was inspired by the OECD Model Convention, Brazil does not follow the guidelines of the OECD, since it is not a member of such organisation. In this sense, OECD Transfer Pricing Guidelines do not have binding or persuasive authority over Brazilian tax authorities or taxpayers. The Brazilian tax authorities follow the provisions of Brazilian internal legislation.

Notwithstanding this, from a practical perspective, the OECD Transfer Pricing Guidelines are sometimes used by taxpayers and judges as an auxiliary instrument for the interpretation of the Brazilian transfer pricing rules.

On 30 May 2017, the Brazilian Ministry of Finance and the Brazilian Ministry of Foreign Affairs sent a letter to the general-secretary of the OECD, requesting the starting of the process for Brazil to be accepted as an OECD member. However, if Brazil is accepted as an OECD member, it is still not clear what would be the consequences for the Brazilian transfer pricing rules (ie, if Brazil would follow and apply the OECD Transfer Pricing Guidelines).

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With few exceptions, Brazilian transfer pricing rules apply to cross-border transactions related to goods, services and rights and implemented between related entities:

• a Brazilian entity and an entity with headquarters in a tax haven;
• a Brazilian entity and an entity headquartered in a country in which there is a non-disclosure policy regarding the corporate composition or ownership of legal entities; and
• a Brazilian entity and an entity entitled to a privileged tax regime.

A privileged tax regime is one where:

• income is not taxed, or is taxed at a maximum rate lower than 20 per cent (Ordinance 488 of 1 December 2014 from the Ministry of Finance reduced this percentage to 17 per cent for the countries, dependencies and regimes that are aligned with the international standards of fiscal transparency, in the terms to be defined by the FRS, notwithstanding the observance of the other conditions provided by articles 24 and 24-A of Law 9,430/96);
• tax advantages are granted to non-resident individuals or legal entities without requiring any substantial economic activity to be carried out in the country or location or contingent on the absence of substantial economic activity in the country or location;
• the income earned outside its territory is not taxed, or is taxed at a maximum rate lower than 20 per cent (ibid); or
• access to information related to the corporate structure, ownership of goods or rights or the economic transactions performed, is not allowed.

The legislation provides that the following parties are deemed to be related entities of a Brazilian taxpayer for transfer pricing purposes, with details as listed below:

• its parent company, residing abroad;
• its branch or agency, residing abroad;
• the individual or legal entity, residing or domiciled abroad, whose interest in the capital of the Brazilian taxpayer characterises it as a controlling shareholder or affiliate party, as defined in the Corporate Law;
• the legal entity residing abroad that is characterised as a controlled entity or an affiliate party of the Brazilian taxpayer, pursuant to the Corporate Law;
• the legal entity residing abroad, when such an entity and the Brazilian taxpayer are under common corporate or administrative control, or when at least 10 per cent of the capital of each entity is owned by the same person or legal entity;
• the individual or legal entity residing abroad that, together with the Brazilian taxpayer, holds interest in the capital of a third legal entity, which sum characterises them as the latter’s controlling shareholders or affiliate parties, as defined in Brazilian corporate law;
• the individual or legal entity, residing and domiciled abroad, that is associated, in the form of a consortium or condominium, pursuant to the Brazilian law, with any enterprise;
• the individual residing in Brazil who is a relative up to the third degree (as defined in the Brazilian Civil Code), the spouse or companion of the Brazilian company’s management, or a direct or indirect controlling shareholder;
• the individual or legal entity, residing or domiciled abroad, which has exclusive rights, as agent or distributor, to purchase and sell goods, services and rights of the Brazilian entity; and
• the individual or legal entity, residing or domiciled abroad, which has a Brazilian entity as exclusive agent or distributor to purchase or sell goods, services or rights.

Interest is also subject to the transfer pricing rules, and may additionally be subject to other tax rules such as thin-capitalisation rules, which are not included in the scope of the Brazilian transfer pricing rules.

The importation of intangibles subject to registration with the Patent and Trademark Office, such as patent, trademark and transfer of technology, are subject to a deductibility limit based on a percentage of the revenues rather than being subject to the transfer pricing rules.

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Brazil does not follow the arm’s-length principle as established in the OECD Transfer Pricing Guidelines. Brazilian transfer pricing legislation defines rules and methods that taxpayers must follow in order to reach the maximum amounts of deductible expenses, and the minimum amounts of taxable revenues, in transactions subject to transfer pricing scrutiny. The result obtained from the use of any Brazilian transfer pricing method is deemed the Brazilian arm’s-length price, or the parameter price. In other words, there is a legal presumption that if the taxpayer complies with those rules provided in the transfer pricing rules, the result will be arm’s length.

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There has been no formal change in the Brazilian transfer pricing rules directly linked to the BEPS. As mentioned, for most of the transactions subject to transfer pricing control, the current Brazilian transfer pricing rules provide for minimum or maximum statutory profit margins or mark-ups. These rules are still in place, except in connection with transaction involving commodities, where a best-method rule based on the market price has been applied since 2012/2013.

In any event, multinationals are more focused and concerned about the cross-border transactions and results involving the Brazilian subsidiaries or controlled entities (as applicable) in order to be sure that they are consistent from a global perspective.

Brazil has introduced certain changes to its tax legislation as a result from BEPS, such as the introduction of country-by-country (CbC) reporting and the mutual agreement procedure (MAP), etc. However, those changes do not specifically refer to the Brazilian transfer pricing rules.

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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.

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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.

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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.

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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.

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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.

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There is no specific document that must be presented for transfer pricing purposes. In annual CIT returns, taxpayers must indicate the existence of transactions subject to the transfer pricing rules, as well as the method elected for compliance purposes, the parameter price, the actual imported or exported price and the need of a tax adjustment (if any).

In addition, taxpayers should have supporting documentation to demonstrate the proper application of the elected method, if requested by the tax authorities. The supporting documentation should be ready for presentation to the tax authorities upon request during a tax inspection.

Preparing transfer pricing documentation is essential in case of a tax inspection or a tax assessment. As mentioned before, the taxpayer must be able to prove compliance with transfer pricing rules to the tax authorities in case of a tax inspection.

The taxpayer must file a CIT return annually. As a rule, CIT returns must be submitted by the last business day of July of the following year.

Besides the CIT return, the taxpayer is not required to submit any other transfer pricing documentation upfront. There is no specific master file or local file requirement. However, upon a tax inspection, the taxpayer will be required to present supporting documentation proving compliance with transfer pricing rules. The supporting documentation may be prepared on a global or regional basis, as long as it supports the compliance with Brazilian transfer pricing rules. As a general rule, considering that Brazil does not follow the OECD Guidelines, global documentation is used only as ancillary documentation in certain cases. The Brazilian company must usually have local documentation to demonstrate the calculation and methodologies according to the Brazilian transfer pricing rules.

All foreign documentation must be translated into Brazilian Portuguese by a sworn translator.

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Brazil introduced CbC reporting through Normative Ruling 1,681, published on 28 December 2016 and effective for fiscal years of multinational enterprise groups commencing on or after 1 January 2016.

The main goal of BEPS Action 13 is to provide tax authorities with information to facilitate the inspection of transfer pricing policies. Brazilian transfer pricing rules do not follow the OECD guidelines or the United States regulations in this respect. Therefore, at this moment, it is still unclear how useful will be the CbC reporting in Brazil. Considering that it will likely not be useful for transfer pricing, the tax authorities may use the information to inspect other areas, such as the substance of international structures, application of tax treaties, and transactions with low-tax jurisdictions and privileged tax regimes.

In general, the template and requirements for the CbC reporting in Brazil are the same as the OECD’s. However, owing to its specific set of transfer pricing rules, Brazil has not adopted master file and local file. Moreover, the CbC reporting in Brazil is electronically filed with the annual CIT return, in a file named ‘Bloco W’.

The general rules for the file of the CbC reporting in Brazil are the following.

A Brazilian tax-resident entity that is the ultimate parent entity of a multinational group, which exceeds the revenue threshold of 750 million reais (or 2.26 billion reais, if the ultimate parent entity is resident in Brazil), must file the CbC reporting in Brazil.

A Brazilian tax-resident entity that is not the ultimate parent entity of a multinational group that exceeds the revenue threshold must also file the CbC reporting in Brazil, if one or more of these situations occur:

• the ultimate parent entity of the multinational group is not required to file the CbC reporting in its jurisdiction;
• the jurisdiction of the ultimate parent entity has entered into an international treaty with Brazil, but it has no competent authorities treaty with Brazil for automatic exchange of information until the deadline for the file of the CbC reporting for the reporting fiscal year; or
• there has been a systemic failure in the jurisdiction of the ultimate parent entity of the multinational group, notified by the FRS to the Brazilian entity.

Notwithstanding this, a Brazilian subsidiary is dismissed from filing the CbC reporting, if the multinational group appoints a surrogate reporting entity that complies with all of these conditions:

• the jurisdiction of the surrogate entity requires the file of the CbC reporting;
• the surrogate entity files the CbC reporting in its jurisdiction within 12 months, counted as from the last day of the reporting fiscal year of the multinational group;
• the jurisdiction of the surrogate entity has entered into a competent authority treaty with Brazil for the automatic exchange of the CbC reporting up to the date the file is due in Brazil;
• the jurisdiction of the surrogate entity has not notified the FRS, nor has been notified by the FRS about the occurrence of systemic failure;
• the surrogate entity informs its jurisdiction that it is the reporting entity of the group; and
• the FRS has been informed of the existence and identification of the reporting entity.

A Brazilian entity may be appointed as the surrogate entity if it complies with the above requirements. In this case, the Brazilian entity must file the CbC reporting in Brazil.

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The taxpayer must file a corporate income tax return, containing information about transactions subject to transfer pricing control (eg, the applicable method per item and the corresponding transfer pricing adjustments)about transactions subject to transfer pricing control, on an annual basis (few exceptions may apply, in which case the taxpayer must file the corporate income tax return on a quarterly basis )annually. As a rule, corporate income tax returns must be submitted by the last business day of July of the following year. But the taxpayer is only require to submit the detailed transfer pricing supporting documentation to the tax authorities upon a tax inspection audit (and, of course, in case of a tax assessment).

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Failing to submit transfer pricing information in the income tax return documentation or submitting it the documentation with omitted, inexact or incorrect information is an tax infraction and expose the taxpayer to the application of penalties. The penalties regarding transfer pricing information documentation are the same as those applicable to corporate income tax (CIT) return, as follows:

1. penalty equivalent to 0.25 per cent, for calendar-month or fraction, of the net profits before CIT, in the corresponding period, limited to 10 per cent, relating to the legal entities that do not file or file the CIT return with delay; or
2. penalty of 3 per cent, not lower than 100 reais, of the value omitted, inexact or incorrect.

The penalty of item (i) is limited to:

• 100,000 reais for legal entities that in the previous calendar year accrued total gross revenues equal or lower than 3.6 million reais; and
• 5 million reais for other legal entities.

The fine of item (i) is reduced by:

• 90 per cent, when the CIT return is presented within 30 days as from the deadline;
• 75 per cent, when the CIT return is presented within 60 days as from the deadline;
• 50 per cent, when the CIT return is presented after the deadline, but before any tax audit procedure; and
• 25 per cent, when the CIT return is presented within the term established by in notification.

The penalty of item (ii) is not due if the taxpayer corrects the omission or the inexact or incorrect information before a tax audit, and the penalty is reduced to 50 per cent if the correction is made within the term established in the tax authorities’ notification. Where there is a lack of federal tax payment (eg, CIT) and taxpayers decide to pay such tax before any tax assessment, the applicable penalty is 0.33 per cent per day limited to 20 per cent, plus interest on delay. If there is a tax assessment, the penalty is 75 per cent.

The failure to submit the transfer pricing documentation to the tax authorities upon a tax inspection audit, will likely result in a tax assessment of the principal amount deemed due (plus interest on delay and penalties). The burden of proof regarding transfer pricing compliance lies on the taxpayer.

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The term that tax authorities have to review a transfer pricing filing is the statute of limitation provided in the legislation. The statute of limitation is five years, counting from the first day of the calendar year subsequent to that in which an assessment could have been made. For instance, if the CIT return with transfer pricing information of calendar year 2016 was filed in July 2017, the statute of limitation will be counted as from 1 January 2018 provided that there is no fraud (otherwise, it may be counted as from 1 January 2019). Hence, tax authorities would have until 1 January 2023 to review it and carry out a tax inspection, if necessary.

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For transfer pricing compliance purposes the tax authorities follow the transfer pricing legislation (Law No. 9430/96, Normative Ruling No 1312/12 and related rulings), which describes the methods that the taxpayer may adopt for compliance purposes. Brazil does not adopt benchmark analysis, so compliance is focused on the transfer pricing rules established in law. The taxpayer has the burden of proof for compliance purposes.

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If there is a tax assessment, the taxpayer may file a defence at the administrative or judicial level. Though it is possible to file an appeal at both levels, they cannot be filed at the same time. In other words, the taxpayer may first discuss this matter at the administrative level; and if the taxpayer is not successful then he or she may file a judicial measure. The administrative appeal must be filled within 30 days and the judicial appeal within 15 days, both counted as from the publication of the decision.

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Even though Brazil has a comprehensive income tax treaty network, several important trading partners, such as Ireland, Singapore, Switzerland and the US, do not have a treaty in force with Brazil. Even though Brazil is not a member of the OECD, most treaties follow the OECD model. From a practical perspective, the Brazilian authorities are not used to applying the treaties to avoid issues of double taxation caused by transfer pricing adjustments. The treaties with Singapore and Switzerland were recently executed, but they are still pending ratification by the countries. Moreover, under Brazilian legislation, the treaties must be ratified by the National Congress and published in the Official Gazette through a Presidential Decree to become effective.

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Brazil has actively participated in the discussions from which the BEPS Action Plan originated and has adopted some of BEPS’ minimum standards. One minimum standard adopted by Brazil is the MAP, as per BEPS Action 14. The MAP was formally introduced in Brazil through Normative Ruling 1,669 that entered into force on 10 November 2016.

Many treaties executed by Brazil already contained provisions regarding the MAP, but there was previously no domestic legislation regulating the procedure. With the enactment of Normative Ruling 1,669, both the taxpayer domiciled in Brazil and the foreign authorities may request the FRS to provide answers regarding conflicts upon interpreting tax treaties.

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The taxpayer resident in Brazil may present the MAP request before the FRS when he or she considers that the actions of one or both contracting states of a tax treaty resulted or may result in taxation not in accordance with the provisions of the relevant tax treaty.

The MAP request will not be accepted if its subject has been decided at the judicial or administrative level - even in the case of an appealable decision.

The time limits to file the MAP request vary depending on the tax treaty. Normative Ruling 1,669 sets forth a list of the time limits of all tax treaties executed by Brazil.

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The taxpayer may present a refund request for CIT overpaid in Brazil along with the MAP request. Therefore, the competent authority relief should be the recognition of the overpaid CIT in Brazil by the FRS, so the taxpayer should be able to obtain a refund or offset the tax credit with other taxes administered by the FRS.

The concrete consequences of the MAP procedure in Brazil are still unknown, because, as to date, the authors are not aware of any MAP that has taken place in Brazil.

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As to date, the authors are not aware of any MAP that have taken place in Brazil. Therefore, it is still not possible to measure how effective the competent authority is in obtaining relief from double taxation.

Notwithstanding this, BEPS Action 14 establishes that countries must seek the effective and efficient prevention of double taxation, since improving dispute resolution mechanisms is one of the BEPS’ goals. Moreover, Action 14 provides for that countries must commit to seek to resolve MAP cases within an average time frame of 24 months. We understand Brazil should follow Action 14 guidance and recommendations as a signatory of BEPS.

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There is no advance pricing agreement (APA) regime in Brazil.

The most similar procedure is the possibility of Brazilian taxpayers to request, before the Ministry of Finance, for a change in the fixed margins provided by law under the cost-plus and resale price methods. This procedure is described in the Ordinance of the Ministry of Finance 222/08. However, such mechanism has rarely been used in Brazil. We are not aware of any successful requests relating to a change to the statutory profit margin.

The request may be filed either on a general, sectorial or specific basis and may be presented by an entity representing an economic or professional sector at the national level or by the interested legal entity. The request must be based on technical and consistent criteria and it must contain information on the interested party, as well as on the goods, rights or services that should be encompassed by the differentiated margins. Tax authorities must determine for how long the new margins will be in force, which cannot be less than two years.

An application for changes to the statutory margins is relevant to either the cost-plus or the resale price less profit method. However, there are significant issues concerning this request, such as whether the Brazilian authorities have sufficient sophistication in transfer pricing analysis to deal with transfer pricing studies, as well as the generally complex issues involved in the documentation supporting the request for a change in the statutory margin. Moreover, it is recommended that taxpayers evaluate the exposure that the request may cause, since tax authorities might decide to initiate a tax audit.

In addition to the procedure described above, since 2005, the FRS has published rulings that allow taxpayers to perform adjustments on export income by a specific factor. Those rulings aim to reduce potentially adverse effects on the transfer pricing computations resulting from the appreciation of the Brazilian currency against the US dollar during 2008, 2010 and 2011. For instance, Normative Ruling 1,233/12 and Ordinance 563/11 allowed taxpayers to adjust export income in 2011 by a factor of 1.11. However, this adjustment does not qualify as an APA.

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Not applicable.

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Not applicable.

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Not applicable.

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Not applicable.

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As mentioned before, there is no APA programme in Brazil.

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Not applicable.

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As a rule, the tax authority cannot disregard the form of related-party transactions as actually structured. Upon performing a transaction subject to transfer pricing control in Brazil, regardless of the structure of the transaction, the taxpayer will need to comply with the transfer pricing rules, otherwise he or she may be assessed due to lack of payment of CIT.

There is room to disregard the structure of the transaction, if the tax authority is able to demonstrate that the taxpayer simulated a transaction to avoid the payment of taxes. In this case, the tax authorities usually take the ‘substance over form’ approach.

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The comparable methods in Brazil allow the comparison of prices of products, services or rights, either identical or similar. On import transactions, taxpayers may use prices agreed between non-resident parties as a parameter price for transfer pricing purposes. On the other hand, on export transactions, the comparison may be made only with prices practised by that specific taxpayer or another Brazilian exporter. Accordingly, Brazilian transfer pricing rules limit the use of external data in case of export transactions. In principle, there is no restriction for comparables of any jurisdiction.

The adjustments allowed by the legislation to minimise any physical, business or content differences between the comparable transactions are related to:

• payment terms;
• volume of the transaction;
• guarantee of functionality of goods and applicability of service or rights;
• obligation of promotion through publicity or advertising of the goods, right or service;
• responsibility for the costs of quality, service standards and sanitation certification and verification;
• costs of intermediating sales transactions performed by the unrelated entity;
• packaging; and
• freight and insurance.

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Brazilian transfer pricing rules do not provide any guidance on secret comparables. The tax authorities have a database called Siscomex in which all imports and exports of goods are registered. This is commonly used by the tax authorities to apply comparable methods. There is also a database called Siscoserv, in which all imports and exports of services and intangibles and any other transactions that imply a change in the net worth, assets or liabilities of the Brazilian company are registered. Taxpayers do not have access to these databases.

The Second Level of Administrative Tax Courts has already rendered decisions allowing the tax authorities to use the Siscomex database. However, in order to do so, the tax authorities have to be able to prove that the samples of goods extracted from the databases are relevant and that they are indeed similar or identical to the goods that are under the tax assessment, so that the taxpayers are able to question such comparables, either on administrative or judicial level, if they do not agree with the information provided by the tax authorities.

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There are no secondary transfer pricing adjustments in Brazil.

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As a general rule, the fact that payments are made to a related party abroad (intercompany payments) per se does not prevent the deductibility of these payments, provided that the requirements established by the tax regulations are met (eg, the expense should be usual and necessary, should comply with transfer pricing rules and should comply with thin-capitalisation rules, if applicable).

However, the deductibility of amounts remitted to beneficiaries resident in low-tax jurisdictions or privileged tax regimes is subject to the additional conditions, as follows:

• the identification of the beneficial owner of the legal entity abroad, to whom the amounts are paid;
• the proof of the operational capacity of the legal entity abroad to perform the transaction (or to render the services charged); and
• the supporting documentation relating to the payment of the price and to the actual importation of the goods or rights or the use of the service.

Payments by a Brazilian payer of royalties related to trademark, patent, supply of technology and technical services are subject to specific deductibility requirements, and not to the transfer pricing rules. These payments can be deducted up to a maximum limit of 5 per cent calculated upon net sales of the products manufactured or the services rendered under the royalty agreement (the percentage varies from 1 per cent to 5 per cent depending on the industry). If the agreement involves only the licence of trademark, the limitation of deduction is 1 per cent of net sales.

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In terms of cross-border transactions, the Brazilian CFC rules, although not new, are regulations that aim indirectly at mitigating tax avoidance situations. In line with BEPs, Brazil has adopted the country-by-country report as an obligation. This aims to provide transparency of global corporate structures and detect tax avoidance transactions. In general terms, the Brazilian tax authorities are also more and more focused on substance over form or business purposes when analysing cross-border transactions that may have resulted in tax avoidance.

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There is no specific treatment for location savings or other location-specific attributes. In principle, those factors would not impact the transfer pricing analysis.

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From a Brazilian tax and transfer pricing standpoint, branches and PEs are treated as separate taxpayers, being subject to compliance with the transfer pricing rules. However, this is not a common structure. To incorporate a branch in Brazil, there is the need of presidential authorisation. Brazilian PE rules, on the other hand, are not well developed and Brazilian tax authorities have not been active in enforcing then. PE rules in Brazil rely on whether the Brazilian agent or representative holds the power to contractually bind the foreign vendor with the purchaser.

As a signatory of BEPS and considering the application to the OECD, Brazil might change its PE rules in the future. In any event, a legal amendment on these terms would have to observe the vacancy established by the Brazilian Federal Constitution (ie, next calendar year following the publication date and 90 days counted as from the publication date).

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There is no provision related to exit charges. The tax authorities have never imposed any exit charges on restructurings.

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There are tax incentives aiming at the development of Brazilian industry. It is common in Brazil to have tax incentives granted to specific industry sectors or to specific regions. These incentives may be granted on a federal, state or municipal level. Note, however, that such tax incentives are provided by law and cannot be established by branches or boards of government.

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