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 that: ‘The word is a bad vehicle of thought; therefore, although the form is translucent in appearance, it does not reveal the entire content of the law, there is always room for a concept of doubts; the letter itself does not always indicate whether it must be understood to the letter, or applied extensively; finally, even the external clarity is illusory; under a single verbal wrapper several ideas are gathered and hidden, values broader and deeper than those resulting from the simple literal appreciation of the text'(in Hermeneutics and Application of Law, ed.Forense, 17th ed,p.36).
With this thought, I also reject another interpretation line that is attached to the literal content of item II, article 18 of Law 9430/96, whose only difference from the interpretation given by the appellant is that, according to it, the added value is reduced by the result of the application of the percentage of 60% on the net sale price. All the criticisms previously made to the interpretation adopted by the appellant apply to it, in addition to the fact that the two interpretative lines take as fully defined in the legal rule the calculation method by which the “value added in the Country” would be excluded from the price parameter, which is not true.
Therefore, the question is whether the exegete could conclude from the expression ‘reduced… of the value added in the country’ that the portion of the net sales price proportional to the share of the imported input on the total cost should be taken into account for the application of the 60% percentage. I believe so, since the proportionalization determined by the subparagraphs of paragraph 11 of art. 12 of IN SRF 243/02 is an interpretation that meets the reasonableness criterion, since it is more in accordance with the spirit of a norm (art. 18, II, of Law 9.430/96) which aims at the control of transfer pricing on imports, guaranteeing an isonomic treatment of taxpayers that find themselves in the same situation; adequacy, as it was not up to the legislator to detail, in a law text, the calculation method of the price parameter, it is enough to give legal contours, which are observed by IN 243/02; and necessity, as it rectified the erroneous interpretation given by IN SRF 32/01, perfecting the calculation method of the PRL.
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Brazil vs LG Eletronics do Brasil Ltda, CARF 2013