Recente and specifc changes in the transfer princing legislation in Brazil

In our latest Newsletter, we have debated the changes introduced by the Provisional Measure No. 252/05 regarding two main tax benefits for exporters, one related to softwares and information technology (REPES), and the other to capital goods (RECAP).

By considering the fact that this Measure has not been approved by the Legislative Branch within the time limit allowed in the Constitution, and in order to avoid its invalidity, the National Congress has manoevered inserting its dispositions inside of Provisional Measure No. 255/05, which has finally been converted into Law No. 11.196/05, enacted in November 11^th, 2005.

Based on the fact that this enactment has consolidated most of the Provisional Measure No. 252/05 dispositions, and has also elucidated some vague points, we shall now focus our short analysis on the changes brought to the Transfer Pricing field.

Since the end of 2003, based on the provisions stated in section 45 of Law No. 10.833/03, the Federal Tax Bureau can enact Administrative Rules to simplify the ascertainment of transfer pricing methods specifically in relation to revenue obtained from exportations, except for those exportations destinated to “Tax Havens” and to those countries which present secrecy regarding the companies’ shareholders disclosure. Besides which, the section also states that the Federal Tax Bureau can determine the dissent margins on import and export procedures to apply (or not) the Transfer Pricing rules.

With the advent of section 36 of Law No. 11.196/05, the Treasury can now enact Administrative Rules to establish an adjustment mecanism to reduce the tax impact resulting from the currency appreciation on exports procedures and/or exclude some companies from the Transfer Pricing exportation rules. However, this adjustment is temporary, i.e. it can only be effective for a certain period of time.

Based on legal grounds – Law No. 10.833/03 and Law No. 11.196/05 – the Treasury and the Federal Tax Bureau have enacted, respectively, two Administrative Rules; Portaria No. 436/05 and Instrução Normativa No. 602/05.

According to Portaria No. 436/05, the adjustment mechanism, valid only for the 2005 fiscal year, consists of a rate application of 1.35 on: (i) the exportation sales revenue to be compared with the internal market sales revenue, in order to determine any addition to the taxable income; and (ii) the price used for the company on exports to any foreign linked company when the exporter company chooses to determine Transfer Pricing using the Cost of Acquisition or Cost of Production plus Taxes and Profit Method (CAP).

As we can see, the first hypothesis’ purpose is to exclude some companies from the Transfer Pricing rules, by adjusting the margin of dissent between the export and the internal market sales generated by currency appreciation. The second hypothesis’ purposes is to reduce the tax basis for that companies already obliged to apply the Transfer Pricing rules.

On that basis, it is also important to emphasize that in the latter hypothesis the rate (adjustment) shall be levied on the revenue and not on the costs, otherwise the company shall see a taxable income increase.

Regarding to Instrução Normativa No. 602/05, in its section 1 there is a provision stating the same rate (1.35) to be levied on export sales revenue – related to the 2005 fiscal year – to determine the net profit arithmetic average for the last three years, as stated on section 35 of Instrução Normativa No. 243/02, which by the way finds no legal ground at all, i.e. by using this rate the exporter company shall not have to adjust its taxable income and to pay more Income Tax and CSSL.

On its section 2, the Federal Tax Bureau stated a more simple rule to determine the tax basis adjust, i.e. the exporter company can calculate the net profit arithmetic average on annual basis by using the 1.35 rate on the export sales revenue for the 2005 fiscal year.

As we can see the rules above only produce their effects for the exporter companies that could be facing problems based on the currency appreciation. Now for sure the importer companies expect that Federal Government enacts the same rules when we face currency depreciation, otherwise these companies shall have to pay more taxes based on Transfer Pricing rules.