Nordic-Light-Jun2014-Aug2014

Legal Framework for Business Development
Transfer pricing –
A challenge for investors
in Brazil
By Pedro Leonardo Stein Messetti*
As discussed last April 10 at Swedcham (during a lecture
presented for some Nordic companies - e.g. Scania, SKF,
Sandvik and Atlas Copco), the rules stated by the Brazilian
transfer pricing (TP) legislation are known for its complexity
and for its model, which is quite different from OECD’s
guidelines (international TP rules).
Nordic companies with related parties located in Brazil often find difficulties
to adapt their intercompany policies to the Brazilian model and,
as a consequence, face a great challenge to prevent their activities from
becoming unfeasible in the country as a result of the internal TP legislation’s
burden.
The major concerns of the Nordic companies – with regard to TP matters
- when dealing with Brazil, are: (i) the predetermined profit margins,
and (ii) the limitations on tax planning.
Predetermined profit margins
Most companies in Brazil perform their TP calculation by applying the
legal methods that are based on profit margins predetermined by the law.
The other legal methods – not based on predetermined profit margins -
depend on information that, in practice, may not be available.
This scenario is burdensome for the companies to the extent that the
required profitability differs from the real conditions of the market. It is
worth mentioning that, under Brazilian TP legislation, the possibility of
changing the predetermined profit margin used to be unfeasible due to
the terms and conditions imposed by the law.
Tax planning – limitations of TP rules
It is usual for the companies to carry out a plan aiming to reduce the
tax burden levied on their transactions. However, the Brazilian TP legislation
severely limits this practice, due to its particularities, for example:
(i) the obligation to perform the calculation on an annual basis, by item
and by supplier (or customer);
(ii) the impossibility of offsetting TP adjustments between different items; and
(iii) the mathematical formula provided by the legislation for the Resale
Price Method (PRL), the most applied method for import transactions, that
depends on variables that are conditioned on forthcoming events.
In short, these variables are: (i) acquisition cost; (ii) cost of item sold;
and the (iii) sale price. Due to these variables being conditioned on forthcoming
events, they can be influenced by external factors (e.g. exchange
rates and market conditions) that are beyond the companies’ control.
Pedro Leonardo Stein Nessetti (left) and Carlos Eduardo Ayub,
a tax partner focused on transfer pricing consulting services at
Deloitte Brazil, were the guest speakers on April 10 during a
presentation entitled “Transfer Pricing in Infrastructure – The
Challenge of Investing in Brazil in 2014”, organized by Swedcham’s
Legal & Business Committee
Alternative: periodic monitoring
Considering the particularities and limitations
mentioned above, the companies should adopt a
preventive behavior, i.e. they should periodically
monitor their transactions from the standpoint of
TP rules and identify the items that are generating
TP adjustments and, also, the items that present
favorable margin (“negative adjustment”).
The items with favorable margin are those that
would continue without TP adjustment even if its
practiced price (price traded with related party) is
increased (import transactions) or decreased (export
transactions), in both cases up to the limit imposed
by the legal methods.
Therefore, the main focus of the analysis is on the
prices of the items that are being traded with the
same related parties abroad - during the tax year -
which can be renegotiated.
Finally, the renegotiation mentioned above aims
to offset the high prices – of the items that can
generate TP adjustment - with the low prices - of the
items with positive margins. The expected result is to
reduce or even eliminate the TP adjustment.
* Pedro Leonardo Stein Messetti is a tax lawyer
at Pacheco Neto, Sanden, Teisseire Advogados,
graduated from Pontíficia Universidade Católica
de São Paulo and post-graduate in Tax Law from
Instituto Brasileiro de Direito Tributário, with more
than seven years of experience in tax consulting,
including in transfer pricing matters.
56 JUNE - AUGUST 2014