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Brazilian Transfer Pricing Managing the risks and opportunities
Economic environmentIn the first half of 2008, in a period which has been marked by considerable instability in the financial market and which has affected the investors’ mood both domestically and overseas, Brazil finally reached the long aspired investment grade.
Even with the severe economic crisis which is affecting the US economy, Brazil has obtained recognition by the rating agencies due to the stability and good performance of its economy, whose turnover from January to March, according to Brazilian Institute of Geography and Statistics (IBGE), was USD 665.5 billion, 0.7% more than that verified in the previous quarter.
The main highlight of the Brazilian economy for the beginning of 2008 has been the industrial sector, which grew by 6.9% in relation to 1Q 07. A good example is the automobile sector, which is continuing to break one record after the other. It closed the first half of 2008 with a production of 1.68 million units (21.3% more than 1H 07), according to data from Anfavea (National Association of Vehicle Manufacturers).
Within this scenario, cross-border transactions, such as imports (driven by the valuation of Brazil’s currency – R$ against US Dollar, the increase in income of the Brazilian population and the increase in production) and exports have been constantly increasing as the country also grows.
Due to the growth in foreign trade transactions over the last few years, the Brazilian tax authorities have become more aggressive about monitoring cross-border operations.
Bra
zilia
nTransfer Pricing
Transfer Pricing in BrazilEven though the Brazilian Transfer Pricing rules are different from the OECD rules, there are possibilities for bridging the gap between the OECD and Brazilian rules that can and should be considered.
Balance of Trades in USD (billion) FOBConsidering every 1st half of each year
100
80
60
40
20
0 2003 2004 2005 2006 2007 2008 Exports Imports
33
22,6
43,4
28,3
53,8
34
61
41,5
73,2
52,6
90,6
79,3
Source: Ministry of Development, Industry and Trade (www.desenvolvimento.gov.br)
Main characteristicsSome methods are unique to Brazil and driven by predetermined profit 33
margins that range from 15% to 60%, regardless of the nature of the taxpayer’s business or industry.
Regardless of the shareholding relationship between the parties, the 33
rules are applicable to transactions between a Brazilian entity and its exclusive distributor.
The rules are also applicable to transactions between an entity or 33
individual taxpayer resident or domiciled in Brazil and any corporate or individual taxpayer, whether or related not, resident or domiciled in a country that does not have income taxes or levies income taxes at 20% or less (listed low-tax jurisdictions) or imposes restrictions on the exchange of information regarding shareholding structure.
The APA (Advanced Pricing Agreement) is not foreseen in the local 33
rules. Although there is a provision which permits changing the margins fixed by law, this administrative procedure is not commonly adopted.
Service transactions are also subject to transfer pricing rules, although 33
the rules do not provide specific methods. The rules are not applicable to the payment of royalties, nor to fees for technical, scientific, administrative or similar assistance, provided that the agreement is registered with the INPI (National Institute of Industrial Property).
Interest paid or credited to a related party, arising from a loan contract 33
that is not registered with the Central Bank of Brazil, is deductible from taxable income limited to an amount that does not exceed the LIBOR rate for six-month US Dollar deposits plus an annual spread of 3%. This is also the minimum interest that should be charged when the Brazilian party is the lender.
The Brazilian provisions do not foresee the “best method rule”. 33
Taxpayers are allowed to choose the method that provides the best results from their perspective.
Safe harbors are available only for export transactions and aim at 33
facilitating compliance for exporters.
Neither benchmark research nor a basket approach is available in the 33
rules, as the price analysis should be made per transaction with no function analysis.
When transfer pricing rules came into force, the Brazilian tax authorities from DEaIN (Inspection Office for International affairs) focused their attention on the automotive, pharmaceutical and chemical sectors.
Nowadays, transfer pricing inspections are both more vigilant and more comprehensive, as well as encompassing many different industry and service sectors.
In addition, in order to make tax inspections more efficient, DEaIN has developed an electronic tool, PGD aUDIN (transfer Pricing Inspection) which gathers and validates the necessary information for transfer pricing calculation purposes. accordingly, Brazilian companies need to be in compliance with the standards and data layouts as required by PGD aUDIN.
tax authorities approach
transfer Pricing softwareA multidisciplinary team at KPMG in Brazil has developed in-house an exclusive software aimed at automating the transfer pricing calculations according to Brazilian legislation.
This electronic tool is able to help clients in their management of transfer pricing controls through:
selecting the most appropriate transfer pricing methods based on the 33
client’s facts and circumstances;
calculating all the necessary transfer pricing methods either for import 33
or export transactions comprising cross border trades of goods, services and rights;
producing a wide range of results for a variety of assumptions that 33
may be applicable or not, depending on the client’s decision;
How can KPMG Brazil assist multinational clients?
Web-enabledTP tool is web-enabled software that clients can access through the Internet. Web access enhances collaboration and streamlines information gathering, giving the client greater control over the transfer pricing analyses. Using the web also means that our clients always have the latest version of detailed calculations, reports and results.
Data loading through text file format allows integration with any ERP system available on the market.
PGD audin ComplianceFurthermore, in order to offer the most advanced resources regarding Brazilian Transfer Pricing matters to our clients, the software is fully prepared to generate the electronic files required by the tax authorities’ software PGD AUDIN (Transfer Pricing Inspection System).
KPMG can also offertransfer Pricing Compliance ReviewIf the company has developed the transfer pricing controls internally, KPMG offers review procedure services which include mapping operations, numeric testing and suggestions for improving controls, when applicable.
In the event a company has still not implemented the controls required by law, KPMG may implement these controls, starting from an initial survey of the data, then choosing the most appropriate method to be adopted for the proof of prices, and finally preparing the spreadsheets required by legislation, using our electronic TP tool.
assistance in tax InspectionsIn the case of corporate taxpayers that have been targeted for inspection by DEAIN (Inspection Office for International Affairs), KPMG can provide advisory services with respect to the core documentation to be presented to the tax authorities.
In-company trainingIf a Company intends to set up an internal team responsible for transfer pricing, KPMG offers tailor-made training.
Global Transfer Pricing Services Tax authorities around the globe are more vigilant about monitoring transfer prices, which makes full and timely preparation of the required transfer pricing documentation a challenge.
How can you efficiently determine your transfer pricing needs, gather the necessary information, perform the proper analyses, and complete the requisite documentation?
Interpreter® KPMG's tranfer pricing softwareInterpreter® is a robust web application designed by transfer pricing professionals with your multinational needs in mind. It is the same software used by more than 400 professionals from the member firms of KPMG International to perform transfer pricing analyses for the thousands of clients they serve.
For more information about Interpreter® and other services offered by KPMG’s Global Transfer Pricing Services practice, e-mail us at [email protected] or contact a local KPMG Transfer Pricing professional.
kpmg.com.br
ContactsTransfer Pricing team in
São PauloSérgio [email protected]: +55 (11) 2183-3124
Eliete [email protected]: +55 (11) 2183-3288
Edson [email protected]: +55 (11) 2183-3623
Henrique De Conti [email protected] Tel: +55 (11) 2183-3278
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
© 2009 KPMG Tax Advisors Ltda., a Brazilian member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Brazil.
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