The Second Chamber of the Supreme Court of Brazil issued an interpretation of Normative Instruction SRF n. 243/2002 concerning the legal basis for application of the sixth method – RPL60 – under the Brazilianarm’s length provision contained in art. 18 of Law no. 9430/1996. The Second Champer of the Supreme Court concluded that the interpretation adopted by the Brazilian Federal Revenue Service through Normative Instruction SRF n. 243/2002 did not violate art. 18 of Law n. 9.430/1996. Excerpts “This is a writ of mandamus filed for the purpose of ensuring the right to calculate transfer prices using the PRL method according to the criteria established by art. 18 of Law no. 9430/1996, excluding those contained in SRF Normative Instruction no. 243/2002. The main objective of the transfer pricing methodology is to ensure that taxable events do not escape the state’s taxing power due to the ... Read more

Janssen-Cilag Farmaceutica LTDA filed a request for clarification with the Superior Tribunal de Justica concerning the sixt method – PRL60 – applied in Brazil in the years in question. Accordcing to the the company, there were no legal basis for applying the method. Judgement of the Supreme Court The Court dismissed the complaint. Excerpts “The appellant has failed to demonstrate any omission or contradiction in the judgment, which was expressed in a clear and reasoned manner with regard to the issues relevant to the resolution of the dispute. According to the case law of this Court, “the purpose of a motion for clarification is simply and solely to complete, clarify or correct an omitted, obscure or contradictory decision. They are not intended to adjust the decision to the understanding of the embattled party, nor to accept claims that reflect mere nonconformity, and even less to ... Read more

In this case the assessed company had imported goods from a related party. It did not fail to declare the relation to the exporter, but indicated in the completion of its import declarations that this relation did not influence the price. It therefore adopted the first method of customs valuation; the transaction value, to establish the basis for calculation and collection of taxes. The authorities found evidence that the relation did influence the declared price and on that basis ruled out the use of the first method for customs valuation. In compliance with Brazilian customs legislation, the tax authorities started to evaluate the possibility of using other customs valuation methods. The second (identical goods), third (similar goods), fourth (deductive) and fifth (computed goods) methods were not found applicable, which left the sixth and final method. The sixth method is a last resort method where the ... Read more

DSM Produtos Nutricionais Brasil S.A. had based the intragroup pricing of imported goods on the “RPL-60 method” which applied in Brazil up until 2012. “Article 18, II of Law 9430/1996, as amended by Law 9. 959/2000, provides that the transfer price, in the case of goods and rights imported for application in the productive process, calculated by the resale price minus method – PRL-60 method -, is the arithmetic average of the resale prices of goods or rights, calculated by excluding unconditional discounts, taxes, commissions brokerage and profit margin of 60%, the latter calculated on the resale price after deducting the mentioned production costs and also the added value calculated from the proportional participation of each imported good, service or right in the formation of the final price, as provided by law and detailed in the normative instruction” However, according to the Tax authorities the ... Read more

AES SUL Distribuidora Gaúcha de Energia S/A is active in footwear industry. It had paid for services to related foreign companies in South Africa, Argentina, Canada, China, South Korea, Spain, France, Holland, Italy, Japan, Norway, Portugal and Turkey. The tax authorities were of the opinion that withholding tax applied to these payments, which they considered royalty, and on that basis an assessment was issued. Not satisfied with this assessment AES filed an appeal, which was allowed by the court of first instance. An appeal was then filed by the tax authorities with the Superior Tribunal. Judgement of the Superior Tribunal de Justiça The court upheld the decision of the court of first instance and dismissed the appeal of the tax authorities. Excerpts “Therefore, the income from the rendering of services paid to residents or domiciled abroad, in the cases dealt with in the records, is ... Read more

Natura Cosmeticos S/A had been issued a tax assessment for FY 1999 to 2001. In the assessment interest income from loans granted to foreign group entities had been added to the taxable income of the company. NATURA COSMETICOS S/A stated that the transfer pricing rule provided for in paragraph 1 of article 22 of Law 9,430/96 did not apply. The rule determines that “in the case of a loan with a related person, the lending legal entity, domiciled in Brazil, must recognize, as financial income corresponding to the operation, at least the amount calculated in accordance with the provisions of this article”. Article 22 provides that interest paid to a related person, when arising from a contract not registered with the Central Bank, will only be deductible for purposes of determining taxable income “up to the amount that does not exceed the amount calculated based ... Read more

In a public ruling, the General Tax Coordination Office in Brazil (COSIT) found that a transaction labled as a “cost sharing agreement” between a foreign group and its Brazilian subsidiary, was in fact a mere agreement for provision of services. COSIT pointed to the key characteristics of cost sharing agreements. These had been listed in a prior ruling from 2012: Segregation of costs and risks inherent in the development, production or acquisition of goods, services or rights; Consistent contribution by each entity with expected and effectively-received benefits by each entity; Identification of the benefit to each participant entity; Mandatory reimbursement of costs incurred with no mark-up; Advantages offered to all participating group entities; and Payments for support activities whether such activities were actually used. < COSIT also pointed to the guidance provided in the 2017 Transfer Pricing Guidelines, Chapter VIII. Click here for translation SC_Cosit_n_276-2019 ... Read more

A significant issue under dispute between taxpayers and the tax authorities in Brazil relates to the formula for calculating the resale price method (Preço de Revenda Menos Lucros) (PRL) of 60%. The Normative Ruling (NR) No. 243 issued in 2002 introduced significant changes to the calculation of the PRL method, creating controversy as to whether it had expanded beyond the scope of what the law intended. In the case against Pfizer Ltda the tax authorities found that, when determining an arm’s length price on imports, costs related to freight, insurance, and customs, must be added when borne by the importer. The Court ruled in favor favor of the tax authorities. Click here for translation Brazil vs Pfizer Ltda 17 October 2018 CARF Case no 1201-002-628 ... Read more

This case concerns imports from related companies and use of the RPM method. Click here for translation Brazil vs Eli Lilly 11 april 2018 CARF Case No 1302-002-725F ... Read more

Syngenta had been issued a tax assessment related to two tax violations: (1) incorrect ascertainment of the PRL 60, in disagreement with IN SRF no. 243, of 2002, in the ascertainment of transfer prices, and (2) omission of revenues arising from inventory differences. Syngenta filed an opposition claiming (1) illegality of IN SRF 243, of 2002; (2) undue inclusion of freight, insurance and taxes in the price charged. (3) inadequacy of the revenue omission and (4) inapplicability of default interest on ex-officio fine. In the lower court, the opposition was partially granted, in order to partially exempt the assessments related to the omission of revenues arising from inventory differences. Due to the exonerated tax credit, the President of the Panel then filed an ex-officio appeal. A voluntary appeal was filed by Syngenta, returning the matters presented via opposition, which was heard by the second instance ... Read more

LG Electronics Do Brasil LTDA imported goods from a related company and used the “resale price minus” method to determine the arm’s length price. Following an audit, an assessment was issued where the tax authorities rejected the pricing method chosen by LG Electronics. An appeal was filed by LG Electronics with the Court of Appeals and in a judgment issued in 2013 the assessment of the tax authorities was set aside. An appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the decision of the Court of Appeal and decided in favor of LG Electronics. “There is no illegality in IN SRF 243/2002, whose mathematical model is an evolution of previous normative instructions. The methodology takes into account the share of added value in the total cost of the product resold. By adopting ... Read more

The case involved export transactions carried out by a company domiciled in Brazil, Marcopolo, manufacturing bus bodies (shells) which were sold to subsidiary trading companies domiciled in low tax jurisdictions (Jurisdição com Tributação Favorecida). The trading companies would then resell the bus bodies (shells) to unrelated companies in different countries. The tax authorities argued that the sale of the bus bodies to the intermediary trading companies carried out prior to the sale to the final customers lacked business purpose and economic substance and were therefore a form of abusive tax planning. The Court reached the decision that the transactions had a business purpose and were therefore legally acceptable. Click here for translation Brazil vs M 2014 ... Read more

LG Electronics Do Brasil LTDA imported goods from a related company and used the “resale price minus” method to determine the arm’s length price. Following an audit, an assessment was issued for FY 2006 and 2007 where the tax authorities rejected the pricing method chosen by LG Electronics. An appeal was filed by LG Electronics with the Administrative Court of Appeal. Judgement of the Court The Court set aside the assessment of the tax authorities and ruled mostly in favor of LG Electronics. “It is also important to remember that the transfer pricing rule is not intended to grant tax benefits or stimulate domestic production, because its purpose is only to prevent the transfer of tax bases to other jurisdictions, for the various reasons that lead taxpayers to do so, including to reduce tax burden. The age-old, but never forgotten, teaching of Carlos Maximiliano professed ... Read more

The Brazilian group Marcopolo assembles bus bodies in Brazil for export. It used two related offshore companies, Marcopolo International Corporation, domiciled in the British Virgin Islands, and Ilmot International Corporation, domiciled in Uruguay, in a re-invoicing arrangement whereby the product was shipped from Marcopolo to the customers but the final invoice to the customers was issued by the related companies. The tax authorities found that the arrangement lacked business purpose and economic substance and, on this basis, disregarded the transactions. Decision of the Administrative Court of Appeal The Court ruled in favour of Marcopolo SA. The Court found that, although the offshore companies did not perform any functions other than invoicing sales and contract functions, if the transfer pricing methodology was complied with, the minimum profitability required by the anti-avoidance rule was sufficient for the set-up to be considered legal. Click here for English Translation ... Read more

The Brazilian group Marcopolo assembles bus bodies in Brazil for export. It used two related offshore companies, Marcopolo International Corporation, domiciled in the British Virgin Islands, and Ilmot International Corporation, domiciled in Uruguay, in a re-invoicing arrangement whereby the product was shipped from Marcopolo to the final customers but the final invoice to the customers was issued by the offshore companies. The tax authorities found that the arrangement lacked business purpose and economic substance and, on this basis, disregarded the transactions. Decision of the Administrative Court of Appeal The Court ruled in favour of Marcopolo. According to the Court, the transactions with the offshore companies had a business purpose and were therefore legitimate tax planning. Excerpts “6. The absence of an operational structure of the companies controlled by the Appellant, capable of supporting the transactions performed, even if, in isolation, it could be admitted within ... Read more