taxpayer in view of Judgment n˚ 1641.165 of the 5th Panel of the DRJ/SPO1, the wording of which reads as follows:

SUBJECT: CORPORATE INCOME TAX IRPJ

Calendar year: 2006, 2007 TRANSFER PRICES.

METHOD PRL60. PARAMETER PRICES. ILLEGALITY OF THE NORMATIVE INSTRUCTION.

It is not up to the administrative sphere to analyse the legality or unconstitutionality of legal norms.

METHOD PRL. PRICES PRICING. FREIGHT, INSURANCE AND TAXES.

In the calculation of prices according to the PRL method (Resale Price Less Profit), the value of freight and insurance, whose burden was on the importer, and the taxes levied on imports must be included.

MOST FAVOURABLE METHOD. REQUEST FOR DUE DILIGENCE.

The choice of the most favorable method to the taxpayer is a prerogative of the taxpayer, but not an imposition to the inspection. Therefore, the request for due diligence for the taxpayer to present transfer pricing calculations using other methods is dismissed.

UNDUE COMPENSATION. LAUNCHING.

On compensations undue you should make o the corresponding entry, even if the assessments are pending confirmation. EX-OFFICIO FINE AND DEFAULT INTEREST AT THE SELIC RATE.

The application of the ex-officio fine and the calculation of default interest based on the SELIC rate are provided for by law, and the administrative sphere is not responsible for examining the legality or unconstitutionality of legal rules.

CSLL. DECORRENCE.

What has been decided regarding the Corporate Income Tax applies to taxation arising from the same facts and elements of proof.

Opposition dismissed Tax credit upheld

The applicant became aware of the appealed decision on 06/10/2012 (cf. term on fls. 3623) and filed a voluntary appeal (doc. on fls. 3625 et seq.) on 23/10/2012 (cf. term on fls. 3779), in which it pleads, in brief, the following grounds of defence:

a) that in the Tax Verification Instrument, the tax authority highlights the fact that the taxpayer had carried out expressive import during the calendar year of 2006 and "had not made any adjustment to the net income arising from the application of transfer pricing methods". However, the existence of transfer pricing rules and methods does not imply the presumption that in the commercial transactions between related parties there is profit transfer, or that, at least, there should be a minimum value to be added to the taxable income in Brazil.

b) that the absurdity in the present assessment is not the lack of adjustment, but its excess, when it intends to treat as transfer of result more than half of the value traded by the taxpayer in the calendar year.

c) more than that: all transactions selected by the tax authorities were adjusted in some way. In other words, the tax authorities would like to make taxpayers believe that every import of items carried out by the taxpayer translates into some sort of distribution of results, whether to its parent company, to an affiliate company, or to a company with a distant corporate relationship.

d) that this is the result of the application of IN SRF no. 243/02 in its current form, which is not only absurd, but also has no basis in Law 9430/96.

e) that the administrative authority is competent to analyze the lack of legal grounds of IN SRF no. 243/2002. Although article 62 of the Internal Rules of the Administrative Council of Tax Appeals (CARF) prohibits the members of the CARF's judging panels from ruling out the application or failing to observe a treaty, international agreement, law or decree, it should be pointed out that the judging bodies of the Treasury Administration have sufficient powers to fail to apply a normative rule without legal grounds or contrary to the law.

f) that this CARF has already analyzed the legality of normative instructions several times, as per the transcribed appellate decision.

g) that the National Treasury itself, in Opinion PGFN/CRF no. 439/96, has already taken a stand on the possibility of examining issues related to illegality and unconstitutionality by this Council, in the following terms, verbis:

"(...) Consequently, if the party in an administrative proceeding cannot be denied the right to invoke the unconstitutionality of a law that impedes its right, neither can it be admitted that the administrative judge imposes on himself restrictions to the prerogative of examining it or allows some superior authority to do so (...)".

h) that SRF INs 113/00 and 32/01, in the exact terms of Law 9430/96 and Law 959/00, which previously dealt with the matter, make it clear that the PRL method should be calculated on the basis of the sale price of the good produced, and that this should be taken at its absolute value, on which the deductions provided for by law would be made and directly decreased from the parameter price, without any additional calculation.

i) that, however, IN SRF no. 243/02, without legal basis, modified the structure of the PRL in the case of goods applied to production, introducing an additional procedure, since, according to its terms, it is necessary to make a proportional calculation on the net sale price, to only then determine the value of the profit margin and the applicable parameter price.

j) that IN 243/02 not only increases the transfer pricing adjustments, but also inverts the logic provided for in Law 9959/00, since, unlike the law, which values the country's aggregate value as an element to distinguish between the 20% PRL and 60% PRL methods, IN 243/02 excludes the aggregate value from the formula for calculating the adjustments, in an attempt to reduce the transaction to a simple resale.

l) that IN 243/02 violates the principle of strict legality by modifying the taxable base of the IRPJ and CSLL.

m) that there are two points in which IN SRF 243/02 differs from the wording of item II of article 18 of Law 9430/96.430/96: first, because it determines that the margin of 60% is applied on the value of the share of the imported good on the net sales price and not on the total net sales price, as determined by the Law; second, by means of the imposed proportionalization, the discount of the added value is not made in the ascertainment of the profit margin - as provided for by the Law, but directly from the net price, as if it were equivalent to the other discounts provided for in items "a", "b" and "c" of article 18, II of Law 9430/96.

n) that MP 478/09 expressly recognized that the changes in the criterion for calculating the transfer pricing system set out in Law 9430/96 were intended to "institute, in a legal provision, [...] measures that today are only contained in Normative Rulings, and thus reduce litigation," which indicates the lack of legal grounds for IN 243/02 and, consequently, for the present assessment, which was made on the basis thereof.

o) Assuming that IN 243/02 is considered valid, which is only for argument's sake, the Applicant pleads that the present process be converted into a diligence, giving the Applicant the opportunity to prove, by means of the PIC and CPL methods, the adequacy of its prices.

p) that the disallowance of allegedly undue offsetting of tax losses and negative tax bases in 2007 arises from the readjustment of profits and accumulated losses caused by the adjustment of transfer prices in 2006.

q) that the balances of tax losses and negative tax base of CSLL should be re-established in case the decision is favourable to the applicant.

r) that the effects arising from the ex-officio offsetting carried out in the administrative proceeding in question are suspended, and the imposition of a 75% punitive fine is undue, since, at most, any tax assessment notice as a result of such situation could only aim at preventing the statute of limitations, pursuant to article 63 of Law 9430/96.

s) that the inspection understood that the "price charged" subject to adjustment would be the CIF import price, regardless of the fact that the amounts related to international freight and insurance had been paid to unrelated third parties and, therefore, were costs and expenses out of the scope of the Brazilian transfer pricing legislation.

t) that such argument is absurd and does not deserve to stand, since paragraph 6 of article 18 of Law 9430/96 does not contain a generic rule for determining the "price charged", since this is a factual fact of reality and, thus, can only be "verified", but never "adjusted".

u) that, in fact, the referred to legal provision determines that the amounts related to international freight and insurance will be deductible, in their entirety, whenever borne by the domestic importer and paid to a non-bound third party, for which reason the "price practiced" to be used for comparison purposes with the "parameter price" cannot be other than the FOB price used by the taxpayer.

v) that only the costs that can be possibly manipulated by related parties are subject to transfer pricing adjustments, being that the "price charged" to be used for comparison with the "parameter price" should be the FOB price.

x) the fine is abusive, extortionate, expropriatory, confiscatory and in total conflict with article 150, IV of the Federal Constitution, to the extent that, in addition to the absence of fraud or evasion, accompanied by malice or bad faith, the taxpayer acted strictly in accordance with the law.

z) that late payment interest at the Selic rate on the ex-officio fine is inapplicable.

On pages 3784 et seq. the National Treasury Attorney General's Office filed a counter-argument, and finally requested that the voluntary appeal be dismissed, upholding in full the tax assessment.

That is the report.

Vote

Councillor Alberto Pinto Souza Junior.

The voluntary appeal is timely and was signed by a lawyer with powers

(doc. at 3670/3674), which is why I am familiar with it.

The question on trial before this Panel resides solely in knowing whether the methodology for calculating the benchmark price using the PRL60 method provided for in the subparagraphs of paragraph 11 of article 12 of IN SRF 243/02 is supported by the governing legal rule, that is, by subparagraph II of article 18 of Law 9430/96.

Initially, I would like to point out a minor divergence with the appealed decision, since it treats the items of paragraph 11 of article 12 of IN SRF 243/02 as a legal rule. Any normative rule issued by the Federal Revenue Office that deals with a matter subject to legal reservation, insofar as it departs from the mere literalness of the governing legal rule, is nothing more than a mere interpretation by the tax administration.

Normative Rulings of the Federal Revenue often perform an extraordinary function as Regulatory Decrees when they consolidate sparse legal rules, structuring them in a way that makes it easier for the various tax law operators (auditors, lawyers, accountants, etc.) to consult them. This results from the fact that the normative instructions go through a much faster procedure for their publication than the Decrees, which makes them more apt to follow the dynamism (volatility) of the tax laws.

However, the normative force of the provisions of the Normative Instruction and of the Decree, in matters under strict legality (article 150, I, CF/88), does not derive from such acts by themselves, but from the LAWS on which they are based. Therefore, both the Decree and the Normative Instruction only have normative force, in matters subject to legal reserve, when they are mere transcriptions of legal rules in force (consolidations of legal rules) or, when autonomous provisions, they fit into the hermeneutic parameters of the legal rule governing the matter.

In fact, the legal rule, in matters of strict legality, is only the rule set out in a LAW or Provisional Measure (subject to the limits set out in paragraph 2 of article 62 of CF/88). Therefore, the provisions of the Normative Instruction that depart from the plain wording of the legal rule are not legal rules, but mere interpretations by the tax administration, and it is up to the interpreter to ascertain whether such interpretation is supported by LAW. So much so, that the Internal Regulations of the RFB (MF Ordinance no. 203/2012), in item II of its article 1, states that the purpose of the Federal Revenue of Brazil is to "interpret and apply the tax, customs, social security costing and related legislation, issuing normative acts and instructions for their execution".

It is true that, by force of the provisions of article 13 combined with article 42 of Complementary Law no. 73/93, this Panel is obliged to observe interpretations expressed in opinions of the National Treasury Attorney's Office, when ratified by the Minister of State of Finance. This is merely a rule of jurisdiction that does not transform the opinion into a legal rule, but only into an interpretation binding for the bodies of the Ministry of Finance.

Likewise, the judges of the Federal Revenue Judgment Office are bound, by a rule of jurisdiction, to the interpretations issued by the Secretary of the Federal Revenue of Brazil, through Declaratory Acts and Normative Instructions. The CARF judge is not bound to this, even because it is this Panel's duty to judge the legality of the interpretations of the tax law made by the RFB. On the contrary, it is the interpretations of the CARF that may bind the RFB, since, upon the proposal of the President of the CARF, of the Secretary of the Federal Revenue of Brazil, or of the Attorney General of the National Treasury, or of the President of a confederation representing a nationwide economic category, qualified to appoint counselors, the Minister of State of Finance may attribute a binding effect to the precedents of the CARF with regard to the federal tax administration (article 75 of Attachment II of MF Ordinance 256/09). It should also be noted that the CARF Precedents are not to be considered legal rules, but rather mere interpretations of tax rules that are binding on the entire tax administration.

Due to the foregoing, I believe, in casu, the affirmation that "It is not up to the administrative sphere to analyze the legality...of legal rules" is mistaken. Well, the items of paragraph 11 of article 12 of IN SRF 243/02 do not convey a legal rule, since they are not supported ipsis litteris in item II of article 18 of Law 9430/96. In fact, the mentioned items of § 11 are mere interpretations by the Federal Revenue Office of the provisions of item II of article 18 of Law 9430/96, which must be subject to a legality judgment by the judge of this CARF, especially since this issue is the subject matter of the voluntary appeal.

Thus, I will now analyze the question posed, for which reason it is worth transcribing the provisions in cotejo, in verbis:

LAW 9.430

"Art. 18. omissis. [..]

II Resale Price Less Profit Method PRL: defined as the arithmetic average of the resale prices of goods or rights, less:

a) of unconditional discounts granted.

b) of taxes and contributions on sales.

c) of commissions and brokerage paid.

d) of the profit margin of:

1. Sixty percent, calculated on the resale price after deducting the amounts referred to in the preceding paragraphs and the value added in the Country, in the case of imported goods applied to production.

[..]"

IN SRF 243/02

"Art. 12. omissis. [...]

§ In the hypothesis set forth in § 10, the price parameter of the imported goods, services or rights will be calculated excluding the value added in the Country and the profit margin of sixty percent, according to the following methodology:

I net selling price: the weighted arithmetic average of the selling prices of the good produced, less unconditional discounts granted, taxes and contributions on sales and commissions and brokerage paid.

II percentage share of imported goods, services or rights in the total cost of the produced good: the percentage ratio between the value of the imported good, service or right and the total cost of the produced good, calculated in accordance with the company's cost spreadsheet.

III participation of the imported goods, services or rights in the sale price of the produced product: the application of the percentage participation of the imported good, service or right in the total cost, calculated according to sub II, over the net sale price calculated according to sub I.

IV profit margin: the application of a percentage of sixty percent on the "participation of the imported good, service or right in the sale price of the produced good", calculated in accordance with sub III.

V parameter price: the difference between the value of the "share of the imported good, service or right in the sale price of the produced good", calculated in accordance with subitem III, and the profit margin of sixty per cent, calculated in accordance with subitem IV."

The appellant understands that the percentage of 60% is to be levied on the resale price already reduced by the added value, which it understands to be the difference between the total cost and the imported inputs. This is certainly not the best interpretation, since I agree with the Honourable Councilor João Thomé, when he sustained that

"Therefore, although the wording of the legal text, as to its disposition in subparagraphs and items, of item II of article 18 of Law 9430/96, has not followed the best legislative technique, the fact is that the Portuguese language concordance rules lead to the conclusion that the second part of item 1 ('and of the value added in the Country, in the event of imported goods used in the production') performs the function, in fact, of a separate item, disconnected from the calculation of the profit margin, i.e.., (excerpt from the explanation of vote in Ruling no. 110200.419, as transcribed in Transfer Pricing in Brazilian Tax Law, 3rd ed.)

Moreover, according to the interpretation given by the appellant to item II of article 18 of Law 9430/96, we would have the same price parameter for several imported inputs composing the product sold, since it does not take into account in the calculations the participation of the unit cost of each imported input in the total cost.

This also makes the rule innocuous whenever the share of the imported input in the total cost is not a majority one, which does not mean at all that one cannot transfer profits to affiliates abroad through over-invoicing in the import of inputs with a smaller share in the total cost of the product. As an illustration, if the net sales price is at least 60% higher than the total cost, provided that the cost of the imported input does not exceed 40% of the total cost, there will be no transfer pricing adjustment. For example, provided that the net sales price of the automobile is at least 60% higher than the total cost (imported inputs plus value added), the tyres may be imported from the affiliate abroad for up to 40% of the total cost of the automobile and no transfer price adjustment would be generated relative to this item. Logically, such exegesis is not the best, because it nullifies the purpose of the norm, and it is enough to manipulate only these two factors.

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 of translucent appearance the form does not reveal the entire content of the law, there always remains room for concepts and doubts; the letter itself does not always indicate whether it must be understood to the letter, or applied extensively; finally, even the external clarity deceives; under a single verbal wrapper several ideas, broader and deeper values than those resulting from the simple literal appreciation of the text, are concurrent and hidden" (in Hermeneutics and Application of Law, ed. Forense, 17th ed, p. 36).

With this thought, I also reject another line of interpretation that is attached to the literal content of article 18, item II 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, moreover, 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 parameter price, which is not true.

Therefore, the question is whether the exegete could conclude from the expression "decreased... of the value added in the country" that the portion of the net sales price proportional to the participation 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 controlling the transfer price at import, guaranteeing an isonomic treatment of taxpayers that find themselves in the same situation; adequacy, since it was not the legislator's duty to detail, in a law text, the calculation method of the price parameter, it was enough to give legal contours, which are observed by IN 243/02; and necessity, since it rectified the erroneous interpretation given by IN SRF 32/01, perfecting the calculation method of the PRL.

On the other hand, freight and insurance costs must compose the price of the imported input, as expressly provided in paragraph 6 of art. 18, and the profit margin set by the legislator took into account such basis. Moreover, it is so true that freight and insurance costs should be included in the price of imported inputs, regardless of the existence of a link between the importer and the transport company, that a new rule had to be enacted (Law 12,715/12) to provide that such costs should be taken into account only when there is a link. Nevertheless, it is not possible to retroact this rule, even if it is to benefit the appellant, since this is not a tax criminal rule. Thus, the position of the inspection is correct.

Once the transfer price adjustments in 2006 are perfect, the assessments of 2007 are to be fully maintained (item 002 of the IRPJ assessment notice on pages 3455 and item 001 of the CSLL assessment notice on pages 3469), relative to the rejections of offsetting of tax losses and negative basis, taking into account the relation of cause and effect between the infractions. In turn, the appellant's claim that the 2007 assessments should prevent the statute of limitations is totally unfounded. However, the tax credits of 2007 were not suspended when the assessment was made by the tax authorities. The 2006 assessment is only a preliminary issue in the judgment of the 2007 assessment, but both the 2006 and 2007 credits were created at the same time and their enforceability was only suspended in a later period when the opposition was filed.

With regard to the ex-officio fine of 75%, the appellant is not correct when challenging it, since its imposition is independent of the intention, since, in this case, it is an objective liability (article 136 of the CTN). In turn, claims of offense to the constitutional principle of non-taxation may not be judged by this Panel, by force of CARF Precedent no. 02.

With regard to the issue of the incidence of default interest on the ex-officio fine, I reiterate my request for the permission of my peers to reproduce, mutatis mutandis, a vote I rendered in the 1st Panel of the CSRF (judgment no. 9101001.474), which was upheld by the casting vote.

In advance, it is worth analyzing article 161 of the CTN, which reads as follows

"Article 161. The credit not fully paid on the due date shall be increased by default interest, whatever the reason for the default, without prejudice to the imposition of applicable penalties and to the application of any guarantee measures provided for in this Law or in tax law.

§ If the law does not provide otherwise, default interest shall be calculated at the rate of one per cent per month.

.................................................................................................................................................................. "

It should be noted that the term credit in the main section of article 161 is not accompanied by the adjective "tax", which clearly indicates the legislator's intention of also including fines (ad valorem or specific). The legislator had the same concern in §§ 1 and 3 of article 113 of the CTN, since when it stated that the penalty is converted into an obligation it only qualified the main adjective (obligation to give), but not the adjective "tax". Therefore, any argument of offense to the concept of tax of article 3 of the CTN is dismissed.

In turn, the claim that the expression "without prejudice to other applicable penalties" would lead to the conclusion that the ex-officio fine (punitive) would not be contained in the term "credit" does not hold. However, such expression authorizes the legislator to create default fines because a mere reading of the provision shows that the penalty dealt with therein is imposed only for late payment. In fact, in light of the main section of article 161 of the CTN, default interest is not levied on default fines, logically, when applicable. However, as to the ex-officio fine, whose cause does not lie in mere delay, it is part of the due credit and, consequently, is subject to the charge of interest on late payment.

Therefore, in the event of a regulatory gap, pursuant to article 161, paragraph 1, default interest will be charged at the rate of 1% per month. It is now time to verify whether the matter was actually covered by article 30 of Law 10,522/02. To this end, both article 30 and the provision to which it refers are transcribed, in verbis:

"Art. 29 - Debts of any nature owed to the National Treasury and those resulting from contributions collected by the Union, whether or not constituted, whose triggering events occurred up to December 31, 1994, which have not been the object of an installment payment request up to August 31, 1995, expressed in the number of Ufir, shall be reconverted into Brazilian real, based on the value of the Ufir fixed for January 1˚, 1997.

Declaration of Vote

Councillor Eduardo de Andrade.

In the case in question, I followed the vote of the illustrious Rapporteur Council Member, Alberto Pinto Souza Júnior, as I agree with his analysis and the conclusions he reached.

However, at this same session in September 2013, I cast my vote on PA 16643.000070/200989, for which I was rapporteur, which marked my change in position with regard to the legality of IN SRF no. 243/02, in relation to my vote on PA 16561.000185/200711.

In that case I explained in detail the reasons for my vote. Thus, in view of the coincidence in time, I also state here my reasons for voting, making it possible to understand the decision taken here.

PRL Method 60% Legality of IN SRF no. 243/02

The applicant requests the exclusion of IN SRF no. 243/02, since it changes criteria established in Laws 9430/96 and 959/00.

The issue of the legality of IN SRF no. 243/02 has already been examined by me in the judgment of PA 16561.000185/200711, Judgment 130200.915 (Laboratórios Pfizer Ltda), whose leading vote was cast by the illustrious Councilor Lavínia Moraes de Almeida Nogueira Junqueira in the judgment session of 04/10/2012.

At that meeting, although my vote was given orally, and no explanation of vote was presented, I expressed myself in session for the illegality of IN SRF no. 243/02, based on a study I made prior to the judgment of the matter.

And this study was necessary because the matter presents a complexity, created by IN SRF no. 243/02 when it established a criterion for determining the deductible cost of goods, services and rights acquired abroad, apparently incomparable to that established in art. 18 of Law 9430/96, which cannot be resolved without resorting to knowledge that goes beyond the merely legal.

In the context of administrative litigation, the appointment to conduct expert opinions and investigations necessarily falls to a tax auditor of the Brazilian Federal Revenue Office, pursuant to article 20 of Decree 70235/72, as amended by Law 8748/93. However, the complex and multidisciplinary issue involves knowledge of mathematics and economics, matters that are not part of the daily routine of the tax authorities, which are involved in federal tax matters.

As can be seen, the Councilor's power to instruct does not allow him to appoint a university professor, or a mathematics or economics department of a university, even a public university, to speak on the non-legal prejudicial issue. On the other hand, he is forbidden to pronounce a non liquet. This is a paradox, since although the administrative process is one that should reject formal rigor and strive for the search for material truth, the administrative judge is not given the power to seek it effectively.

And in this specific case, in which although there is no economic inequality, the entire regulation of the matter is in charge of one of the parties, leaving to the other simply to comply with the established precepts, is exactly where the lack of power to instruct incurs against the procedural equality of the parties. Under this approach, Bedaque¹ teaches us that

Each day increases the number of defenders of the idea that only an active behavior of the judge makes it possible to respect one of the procedural principles of greater social relevance: the real equality between the parties. This is a powerful instrument that the judge has in his hands, which allows him to correct the economic inequalities present in the procedural relationship.

The process must be equipped with means to promote equality between the parties.

One of them, without a doubt, is the provision that the judge effectively participates in the production of evidence.

Thus, the examination of the matter requires that the Council member either ignore the non-legal question - and on this point, also ignore the merit of the regulation made by IN SRF no. 243/02, or he may have to meddle in non-legal matters in order to understand the issue and render a judgment in accordance with the law.

¹ José Roberto dos Santos Bedaque, in Investigative Powers of the Judge, 5th Ed. Editora Revista dos Tribunais, 2011,

In the search for the fairest possible judgment, I have tried, with the shortcomings typical of those who practice in another branch of knowledge, to face the non-legal question. I avail myself, in this matter, of the lesson of Dinamarco² , for whom

The elimination of disputes without the criterion of justice would amount to a succession of arbitrary brutalities which, instead of erasing the moods of dissatisfaction, would end up accumulating definitive disappointments within society.

...

The judgePilatos is repudiated, which is the indifferent judge, in whose spirit reigns the undesirable premise of the process as a merely technical instrument, without commitment to the justice or injustice of judgements.

Thus, entering right away the field of transfer pricing legislation, it is necessary to keep in mind that it is a set of rules instituted to give application to transactions carried out between related parties to the arm's length principle.

Therefore, they are intended to replace the market, which does not exist in the transactions of related parties, imposing that the accounting profit reflects, as much as possible, the profit resulting from the transaction performed at market prices. Schoueri³ states that

Thus, the idea that accounting profit would serve to ascertain income gains a conditional: provided that profit reflects market prices.

Marcus Vinícius Neder de Lima, in his vote against PA No. 16327.004319/200231 (Judgement No. 10709.363), when addressing the issue, makes a historical summary that I beg leave to reproduce. The illustrious Councilor says

The Brazilian government, in line with the new international order, sought mechanisms to control the international allocation of revenues and costs among multinational companies. In the tax sphere, the legislation of several countries had already been adopting anti-tax rules that set standards for the pricing of goods used in commercial transactions between related parties.

In fact, the control of these transactions is accepted in the international practices and follow, in general lines, the model proposed by the Organization for Economic Cooperation and Development - OECD. This organization guides its affiliates to the control of international transactions based on the comparison with transactions between independent parties, free of pressures and other interests that are not related to the essence of the transaction, conditions that are called in our international literature as arm's length principle. Thus, the purpose of the legal instruments of control is to guarantee that the calculation basis is equivalent to that generated by market forces, without the interference derived from the corporate or commercial ties of the parties involved.

² Cândido Rangel Dinamarco, in A instrumentalidade do Processo, 14th ed, Malheiros, São Paulo, pg.347.

³ Luís Eduardo Schoueri, in Transfer Pricing in Brazilian Tax Law, p. 11, 2nd ed.

In effect, even though Brazil is not a member of the OECD, and has not expressly stated the arm's length principle, by adopting the model conceived by this institution (as per the explanatory memorandum⁴ that directed the bill that became Law 9430/96) - which was guided by the satisfaction of this principle to create the transfer pricing rules - it undeniably aligns itself to it.

With regard to the PRL 60 method, it is important to emphasize that it was not originally provided for in Law 9430/96, which only provided for the PRL 20 method. It was introduced by Law No. 9959/2000, which, by amending subparagraph "d" of subsection II of art. 18, made it possible to regulate differently the control of transfer prices of imported goods for resale from those imported to be used in national production.

The wording given by Law 9.959/2000 was the one in force at the time of the facts.

Thus, the post law to be applied to the present case is given by the wording below:

Art. 18 The costs, expenses and charges related to goods, services and rights, contained in the import or acquisition documents, in operations carried out with an associated person, shall only be deductible in the determination of the taxable income up to the amount that does not exceed the price determined by one of the following methods

...

II Resale Price Less Profit Method PRL: defined as the arithmetic average of the resale prices of goods or rights, less:

a) of unconditional discounts granted.

b) of taxes and contributions on sales.

c) of commissions and brokerage paid.

d) of the profit margin of:

The provision imposes as a limit for deductibility of costs, expenses and charges incurred in import transactions the price determined by the PRL 60 method. The problem arises when examining the composition of this price, determined by the PRL 60 method. This is because the wording of line "d" given by Law 959/2000 provides two interpretations for its composition.

In general, the price determined by the PRL60 method will be the arithmetic average of the resale prices of the goods or rights, less unconditional discounts granted, taxes and contributions on sales, commissions and brokerage paid and a profit margin of sixty per cent, calculated on the price of resale after deducting the amounts referred to in the preceding subparagraphs and the value added in the country, in the case of imported goods applied to production.

⁴ The rules contained in articles 18 to 24 represent a significant advance of the national legislation in face of the huge globalization process experienced by contemporary economies. In the specific case, in conformity with the rules adopted in the countries members of OECD, are proposed norms that allow the control of the denominated "Transfer Prices", in order to avoid the practice, harmful to the national interests, of transference of resources to foreign countries, through the manipulation of prices agreed in the importation or exportation of goods, services or rights, in operations with related persons, resident or domiciled in..

From the reading, one sees that there is no doubt as to the fact that the price given by the PRL60 method is given by the arithmetic average of the resale prices of the goods or rights, less the unconditional discounts granted, the taxes and contributions levied on the sales, the commissions and brokerage paid and the sixty percent profit margin. The question is on what basis this margin should be calculated. There are two possible interpretations given by the provision. Thus, the sixty percent margin should be calculated:

a) on the resale price after deducting the amounts referred to in the preceding paragraphs and (the price) of the value added in the Country, in the case of imported goods applied to production; (insertion and emphasis mine); or

b) on the resale price after deduction of the amounts referred to in subparagraphs earlier.

The first hypothesis is the most obvious and is the one initially derived from reading the

device. This is because there are four sub-paragraphs, and it is clear that each one of them provides an item to be decreased from the arithmetic average of the resale prices of the goods and rights. In this sense, the 60% margin would be applied on the net resale price (less the amounts referred to in subparagraphs "a", "b" and "c") and on the price of the value added in the Country.

The interpretation, thus made, involves a first clarification. Either the expression 'price of the product' is assumed to be hidden before the expression 'value added in the country', or a grammatical error is acknowledged in the text.

This is because, had such expression not been hidden, the wording, then, should have been "on the resale price... and (on) the added value in the Country". But the provision kept the particle "of" instead of the particle "the", preventing the agreement.

On the other hand, when analyzing the content of the expression "of the price", as necessarily preceded by the expression "and (the price) of the added value", one must finally conclude by the grammatical error of the legal text, since it, besides unnecessarily adding itself to a simple expression ("added value"), which already has complete semantic content, does not change it at all. In fact, the expression "value-added price" in no way differs, under a semantic point of view, from the expression "value added", since the word "value" already presupposes an equivalence to market parameters (which is precisely the function of price).

Still, it is not necessary to abandon this interpretation, without going deeper into it, since there are several examples that we have in the legislation of legislative ataxia, imposing extracting from the legal text its deontic essence, once the grammatical error is understood.

Finally, one must conclude that the legal precept, once this interpretation is adopted, although involving concepts that do not require conceptual clarification (e.g. the concept of value added in the country) may be perfectly reduced, through the formalization process, to a mathematical formula, since this was the legitimate intention of the legislator, otherwise he would have created a sterile rule, impossible to be applied.

Thus, it is possible to arrive at an expression that has in its first member the price determined by the PRL60 method and in the second member the composition of this price. In mathematical language:

PP = PLV - 60% x (PLV - VA)

Being :⁵

PLV = P - DIC - IV C

It can be seen, therefore, that the space assigned to the regulation allows one to enter into the field of the concepts integrating the formula, in order to clarify them. However, having adopted this interpretation, despite the ambiguity of the meanings of common language, I do not see how a different mathematical expression can be inferred, as well as, with all due respect to those who think otherwise, I cannot accept the statement that the legal text does not convey a mathematical formula.

Eurico de Santi⁶ , when commenting on the interruption of the statute of limitations, makes an astute warning, in the sense that the law, as a creator of its own realities, is the one who creates the reality, being incorrect to affirm that it does not correspond to it. Let us see.

Many authors criticize the wording of Art.173, II of the CTN simply because the doctrine does not accept such interruption. What can be done if positive law prescribes that the statute of limitations is interrupted or suspended? If we know that the law creates its own realities, how can we say that the law is wrong, that it does not correspond to such reality? What science is this that pretends to say that its object is wrong? It is as if the geologist, doing science, shouted to the earthquake: "You cannot happen, it is not in my calculations".

The acronym "PLV", adopted in the above formula, was coined by IN SRF no. 32/01 (item I, of §11, of art. 12), and its purpose is to simplify the mathematical expression. In fact, it should also be mentioned that the interpretation of the legal provision (item II, of article 18, of Law 9430/96, as worded by Law 959/2000) addressed above was that adopted by IN SRF no. 32/01, which can be clearly seen in the wording of §11, which determines that the profit margin of 60% is to be levied on the net sales price and the value added to the product produced in the country, verbis:

§ In the hypothesis of the previous paragraph, the price to be used as comparison parameter will be the difference between the net sales price and the profit margin of sixty percent, considering, for this purpose:

I net sales price, the arithmetic average of the sales prices of the goods produced, less unconditional discounts granted, taxes and contributions on sales and commissions and brokerage paid.

II profit margin, the result of applying a percentage of sixty percent on the arithmetic average of the sale prices of the goods produced, less unconditional discounts granted, taxes and contributions on sales, commissions and brokerage paid, and the value added to the goods produced in the country.

⁵ Where:

PP is the Price determined by the PRL60 method, according to art.18 of Law 9430/96.

The Net Sales Price (NPS) is the arithmetic mean of the sales minus the unconditional discounts granted (DIC), the taxes and contributions on sales (IV) and the commissions and brokerage paid (C).

VA is the value added in the country.

⁶ Eurico Marcos Diniz de Santi, in Decadência e prescrição no direito tributário, p.177, 2nd ed, Max Limonad, São

The second interpretation that may be given to the legal provision under analysis (subsection II of article 18 of Law 9430/96, as amended by Law 959/2000) is based on the assumption that the expression contained in subparagraph "d" of subsection II, "and of the value added in the country", complements the expression "decreased", which is in the body of subsection II. Thus, the 60% profit margin would be calculated only on the net resale price and there would be an implicit fifth item ("e"), which would contain a value (the value added in the Country) to be decreased from the arithmetic average of the resale prices of the goods and rights.

According to this expression, the legal precept would state that the price given by the PRL60 method would be defined as the arithmetic average of the resale prices of the goods or rights, less 5 items:

a) of unconditional discounts granted.

b) of taxes and contributions on sales.

c) of commissions and brokerage paid.

d) the 60% profit margin, calculated on the resale price after deduction of the amounts referred to in the previous sub-paragraphs.

e) of value added in the country.

Thus, using the same headings as defined above, this prescription could be reduced to the following mathematical expression:

PP = PLV - 60% x PLV VA

If we carry out the subtraction that is possible in the formula right from the start, regardless of further considerations (PLV - 60% PLV = 40% PLV), we arrive at the following expression in mathematical language:

PP = 40% PLV - VA

At this point, an observation is in order. If the formula above (PP = 40% PLV - VA) was intended by the legislator, and if it derives from a simplification of the formula immediately above (PP = PLV - 60% x PLV VA), why did it not state clearly, in the caput of art. 18, or in a specific paragraph, that the price parameter would be given by the simplified expression, i.e., equivalent to the margin of 40% of the arithmetic mean of the resale prices, less: a) the unconditional discounts granted; b) the taxes and contributions levied on sales; c) the commissions and brokerage paid and; d) the value added in the country? Good technique does not allow us to define a mathematical expression that is not yet irreducible.

Therefore, if the adoption of the first possible interpretation of article 18 of Law 9430/96 imposes the acknowledgment of a grammatical error, the acknowledgment of the second possible interpretation imposes, in turn, the admission of a bad technique in the construction of the provision.

This, however, at first sight, seems to be the interpretation that IN SRF no. 243/02, in force at the time of the facts, sought to give to the legal precept, it being as clear as daylight that it gave a new interpretation of the legal text (in relation to the interpretation made by IN SRF no. 32/01). However, such conclusion does not derive directly from the subsections of article 12, since the value added in the country is not listed therein:

Art. 12 - The determination of the cost of goods, services or rights, acquired abroad, deductible for the determination of the taxable income and the tax basis of the CSLL, may also be made by the Resale Price Less Profit (PRL) method, defined as the weighted arithmetic average of the resale prices of the…

However, the clauses of §11 create another calculation formula, and as they are even too specific, the formula above must be completely abandoned, as they present a very complete methodology which can be perfectly reduced to a formalized mathematical expression. Let us see.

a) By clause V, PP = PI - ML60, where:

"PP" is the price parameter.

"IP" is the share of the imported good, service or right in the sales price of the produced good, calculated in accordance with item III.

"ML60" is the 60% profit margin, calculated in accordance with sub-paragraph IV.

b) By clause IV, ML60 = 60% x PI, where:

"IP" is the share of the imported good, service or right in the sales price of the produced good, calculated in accordance with item III.

c) By clause III, PI = PIC x PLV, where:

"PIC" is the percentage of participation of the imported good, service or right in the total cost, ascertained in accordance with item II, over the net sales price calculated in accordance with item I.

d) By clause II, PIC = (ci/ct), where:

"ci" is the value of the imported good, service or right.

"ct" is the total cost of the good produced.

In this way, operating in the formalized language of mathematics, to reduce the defined expressions to a single expression, merging the expressions obtained by "a", "b", "c" and "d", it will be that:

PP = PI - ML60 → expression obtained in "a"; PP = PI - 60% x (PI) → merging of "a" and "b"; PP = 40% x (PI) → by simple subtraction.

PP = 40% x (PIC x PLV) → merger of "a", "b" and "c".

PP = 40% x (ci/ct) x PLV → fusion of "a", "b", "c" and "d".

The expression above (IN SRF no. 243/02) is similar to that obtained by the second interpretation made of subsection II of article 18 of Law 9430/96, as worded by Law 959/00 (PP = 40% PLV - VA). It may be verified that the 40% percentage applied over the net sales price is identical. However, it should be stressed that the identity ends there, since the expressions do not have an identical formula nor can both be immediately reduced to a common expression, contrary to what should occur.

But the fact that the forms are not exactly equal or immediately reduced to a common expression does not immediately evidence the illegality of the normative rule. At least not for violation of the principle of tax legality, as no loss to the taxpayer has been unequivocally demonstrated, given the technical impossibility of comparing the price parameter imposed by the normative rule with that determined by the second interpretation of article 18 of Law 9430/96.

This is the dilemma I described at the beginning of this vote. On the other hand, the claim that the wording of IN SRF no. 243/02 is illegal makes it necessary to confront the issue, a duty guaranteed by motion for clarification, and whose solution cannot be aided by referring the matter to an academic expert.

I will now deal with the matter, resuming the mathematical expression which, as per IN SRF no. 243/02, provides the parameter price (PP). Eila:

PP = 40% x (ci/ct) x PLV

On the other hand, the expression given by IN SRF no. 32/01, coinciding with the one resulting from the first interpretation of the text of item II of article 18 of Law 9430/96 (whereby the 60% margin would be applied on the net resale price, less the amounts referred to in items "a", "b" and "c", and on the value added in the country) is worded as follows

PP = PLV - 60% x (PLV - VA)

It is immediately noticeable that the variables inserted by IN SRF no. 243/02 ("ci" and "ct") innovate, making an immediate comparison impossible. Therefore, it is necessary to examine whether it is possible to reduce both expressions, respectively, to another expression, which contains equal variables, and which allows one to conclude something about the parameter price of each one of them.

As the total cost of the produced good ("ct", according to item II of §11 of art. 12 of IN SRF no. 243/02) is the sum of the production cost in the country added to the total cost of acquisition of the imported products, services and charges, it may be said, in formalized language, that

ct = cp + ci, where:

"ct" is the total cost of the good produced.

"cp" is the cost of production in the country.

"ci" is the total cost relating to the purchase of the products, services and imported charges, in respect of the product sold.

If we multiply the total cost (ct) by a coefficient called Mu (Mark up), which we define as (Mu = PLV/ct) we should arrive at the net sales price (PLV).

Similarly, if we multiply the coefficient "Mu" by "cp", we get the value added in the country, and if we multiply the coefficient "Mu" by "ci", we get the value added of the imported good, service or charge. In mathematical language:

ct x Mu = PLV ci x Mu = Vi cp x Mu = VA

Thus, since the total cost of the good produced ("ct", according to item II of §11 of art. 12 of IN SRF no. 243/02) was defined above as the sum of the production cost in the country added to the total acquisition cost of imported products, services and charges (ct = cp + ci), multiplying each of the two sides of this identity by Mu, we will have

Ct x Mu = cp x Mu + ci x Mu

Thus, the expression above is equivalent to this other one below:

PLV = Vi + VA (formation of PLV)

Thus, the variable "Vi" should be understood as the difference between PLV and VA, that is, the difference between the net sales price and the value added in the country, or even as the cost of the imported good, service or charge plus its mark up (Mu). ⁷

In graphic terms, the composition of the resale price would be as follows

divided:

Resale Price (P)
Net Resale Price (NRP)				DIC+IV+C
Vi		VA		DIC+IV+C
Ci	Profit margin	Ca	Profit margin	DIC+IV+C

I will therefore use the expression provided by IN SRF no. 32/01, which coincides with that resulting from the first interpretation of the text of subsection II of art. 18 of Law 9430/96:

PP = PLV - 60% x (PLV - VA)

It being already known that:

PLV = Vi + VA (formation of PLV) Then, it is concluded that:

PP = PLV - 60% x Vi

Or, more rigorously:

PP = PLV - 0.6 x Vi (equation provided by IN SRF no. 32/01, coinciding with that resulting from the first interpretation of the text of item II of article 18 of Law 9430/96)

If we take PLV as a constant in the above mathematical expression, we can conclude that it is a first degree equation of the type Y = k + a . x, where:

k is a constant.

"x" is a first degree variable.

"a" is a coefficient that provides the slope of the straight line Y.

In markets subject to perfect competition the resale price results immediately from the meeting of the supply and demand curves (point at which there is maximum profitability), and is therefore prior to any overpricing. But the premise that the resale price is constant holds true even in monopolistic markets - a common situation in many cases involving transfer pricing.

⁷ At the outset, I would point out that the adoption of this model has the advantage of dispensing with the possible addition of a profit parcel in the formation of the PLV. This is because the mark up applied to costs already reflects profit, as well as demonstrating its reflection in its component parts (national and imported).

The model assumes identical mark up for the national cost portion and for the imported portion. Any argument that this may not correspond to reality should be rejected outright, as it alludes to the fact that the transfer price aims to overvalue the imported input. This argument, however, is not correct, since any overpricing of the imported input is already reflected in the import documents, that is, it is prior to the composition of the resale price, and, therefore, it has nothing to do with the profit margin to be…

In monopolistic markets (patents, for example, give this type of market this quality), although the demand curve is the market curve, there is no supply curve, because in these markets it is the monopolist himself who decides how much he will offer, and he does this thinking about maximizing his profitability.

In this case - and it must be said, this occurs before the transfer pricing (if any) - the entrepreneur takes the real cost, revenue and demand curves (and not the unreal curves, assuming the inflated cost by transfer prices). Thus, as prescribed by the best microeconomics⁸ , the quantity to be produced, as in markets of perfect competition, is determined by maximizing the profit function (Profit = Revenue - Cost), when the first derivative equals zero (marginal revenue equals marginal cost) and the second derivative is less than zero, indicating a point of maximum profit.

In other words, the point that defines the selling price is the moment when the revenue of the next unit manufactured becomes equal to its cost (until that unit the unit revenue is higher than the unit cost, according to the monopolist's charts).

In microeconomics language, Rmg = Cmg (marginal revenue equal to the marginal cost).

In graphic terms, see below, the graphic representation of what was said above⁹ . Note that the point qm (quantity that provides maximum profit) is the value of the abscissa axis, at the moment when Rmg=Cmg. In turn, the ordered pair (qm, pm), belonging to the demand curve (D), provides, respectively, the quantity and price that provide maximum profit.

Now, once the quantity to be produced is decided, the price of the product (on the ordinate axis) is extracted from the demand curve. This price (of the product sold in a monopolistic market) is the one that will maximize profit.

I see no reason not to assume, as a rule of experience, that the monopolistic entrepreneur (in general, large companies) effectively knows this and follows the rules of profit maximization in pricing products.

⁸ Marco Antônio Sandoval de Vasconcelos e Roberto Guena de Oliveira, in Manual de Microeconomia, 2nd ed., Atlas, São Paulo, 2006, p.182/183.

Thus, the moment when the cost will be inflated by the transfer price, so as to reduce the profit here in the country (profit which, in advance, is already maximized by the formation of the sale price) is later, and does not influence, therefore, the price of the product (already previously stipulated). Thus, it is clear that the sale price behaves as a constant, even in monopolistic markets.

But not only the sale price. The net resale price (NRP) can and should also be considered a constant in this analysis model. This is because the net resale price (NRP) is given by the following expression:

PLV = P - DIC - IV - C (variables defined above)

But the taxes and contributions levied on sales (IV the largest portion of this addition) are, in our law, always ad valorem. In other words, they can be known in advance by applying a coefficient to the value of the resale price.

In mathematical terms:

IV = a . P (where "a" is the rate resulting from the application of all taxes and contributions on sales).

On the other hand, commissions and brokerage fees (C), according to the maxims of experience, are also calculated by means of percentages on sales (whether to remunerate sales teams or sales representatives). Thus, in mathematical terms, it can be stated that

C = b . P (where "b" is the average percentage applicable to sales for calculating the remuneration of sales teams).

Finally, the unconditional discounts granted, besides being the smallest part of this addition, are almost always the result of stable commercial policies, in the case of large companies.

So, in mathematical terms, it can be said that:

DIC = c . P (where "c" is an average percentage applied to the selling price to estimate the magnitude of unconditional discounts granted).

Thus, taking the initial mathematical formula (PLV = P - DIC - IV -C), one can easily conclude that:

PLV = P - c.P - a.P -b.P

So, by the associative property of subtraction:

PLV = P - P . (c + a + b)

PLV = P . (1 - (c + a + b)) → distributive property of multiplication It can be seen without difficulty that (1 - (c + a + b)) is a

constant. As we have already shown above that "P" (resale price) is also a constant, provided by microeconomics, we know that the product of two constants "P" and "(1 - (c + a + b))" is also a constant value. Thus, it is evidenced that also "PLV" (net resale price) can be considered as a constant in this model.

The equation provided by Law 9430/96 (as interpreted by IN SRF 32/01) can be graphed, adopting the following behaviour:

PP= PLV 0,6 . Vi → Equation given by the 1st interpretation of art. 18 of Law 9430/96

PP=PLV PP=0.4.PLV

Vi=PLV

"k" is a constant.

Such expression corresponds to a graph that cuts the abscissa and ordinate axis exactly in the centre of the axis, that is, at the ordinate pair (0,0). Such a graph can be represented as follows:

PP PP = 0,4.Vi Equation given by IN SRF nº 243/02

PP=0,4.Plv

Vi = Plv Vi

The comparison between the parameter price (PP) provided by Law 9430/96 (first interpretation, coinciding with the interpretation made by IN SRF no. 32/01) and IN SRF no. 243/02 is given in the chart below:

PP= PLV 0,6 . Vi Equation given by the 1st interpretation of art. 18 of Law 9430/96

PP = 0.4 . PLV

PP = 0.4.Vi Equation given by IN SRF no. 243/02

Vi=Plv Vi

The comparative graph shows that the equation given by IN SRF no. 243/02 always provides a parameter price (PP) lower than that which would be obtained under Law 9430 (as interpreted by IN SRF no. 32/01). It should be noted that the situations in which Vi is equal to or higher than Plv do not make sense in this analysis. This is because if Vi is equal to Plv, there is no industrialisation. On the other hand, it does not make sense for Vi to be greater than Plv, because the part is limited to the whole.

From this standpoint (adoption of the 1st possible interpretation of article 18 of Law 9430/96), one must conclude that IN SRF no. 243/02 is illegal, since only the Law can create or increase taxes. At the time of judgment of PA 16561.000185/200711 , this was my opinion, which was duly stated in the oral vote I delivered on that occasion.

Now, when hearing this voluntary appeal and becoming aware of this new possible interpretation of article 18 of Law 9430/96, I revisited the matter, since it is possible, in thesis, to reconsider the legality of said normative rule, should it be in accordance with the second possible interpretation to be given to article 18, II of Law 9430/96, provided that this second interpretation is preferable to the first. I will then proceed to this analysis.

In this case, the expression conferred by the Act would be as follows, as already explained above:

PP = 40% PLV - VA

But being, as shown above, PLV = Vi + VA, it follows that: PP = 40% PLV - (PLV -Vi)

PP = 40% PLV - PLV + Vi

PP = 0,4 x PLV - 1,0 x PLV + Vi

PP = 0,6 x PLV + Vi

Considering PLV a constant, it follows that the expression (0.6 x PLV) is also a constant. Thus, the expression above is a first degree equation of the type Y = a.x + k, where "k" is a constant and the coefficient "a" is equal to 1.0.

Thus, such expression can be described by the following graph, below:

PPEquação dada pela 2ª interpretação da Lei nº 9.430/96 PP = 0,6 x PLV + Vi

Vi=0.6PLV Vi

PP=

0.6PLV

And so, a new comparison may be made of this evolution of the parameter price (PP) given by the 2nd interpretation of item II of Law 9430/96 (with the wording given by Law 959/00) with the evolution provided by the equation given by IN SRF 243/02. Let us see.

PP = 0.4 . Vi (IN SRF no. 243/02)

PP=0,6.PLV + Vi (2nd Int. Law 9430/96)

0,6. PLVVi = PLV

0,6.PLV

Contrary to the previous comparison (between the 1st interpretation of article 18, II of Law 9430/96 and IN SRF no. 243/02), the price parameter provided by IN SRF no. 243/02 is always higher than that provided by Law 9430/96. Therefore, in view of this initial analysis, there is no evident illegality of the normative act (IN SRF no. 243/02), if the 2nd interpretation of article 18, II of Law 9430/96 is adopted. At least not with regard to the undue tax increase through a normative rule.

It can be seen that the analysis must, on this basis, go into the exclusive field of law and consider the two possible interpretations in order to ascertain which one should be applied to the case.

Therefore, a more detailed analysis of the legal possibility of this 2nd interpretation and its harmonization with the infra-legal rules on transfer pricing introduced in the Brazilian legislation is necessary.

In principle, however, it is salutary to address the shortcomings of the PRL method to control transfer prices. This is because, by dispensing with other information related to the market, which would be fundamental to accurately apply the arm's length principle, the method has its own inconsistency, intrinsic, which cannot be remedied and which compromises the effective control of the overpricing one wishes to avoid in the import of goods, services and charges.

This is because the plus that is added to the cost of the imported good, service or charge and that is intended exclusively to produce the overpricing that will result in the artificial reduction of the result in the country is not and cannot be known by the exclusive application of the method. There is no mathematical formula that allows it. It is an unknown factor that only the bound exporter knows (and that he does not let us know), especially in the case of inputs that, as such, do not have a market to trade.

In other words: the method aims to replace the market, but independently of any market parameter.

IN SRF no. 243/02 tried to get around this, using the parameter given by the ratio between the cost of the imported good, service or charge and the total cost of the good produced (ci/ct), since the plus will always be incorporated into the first of these (ci). But how much ci corresponds to overpricing that is not due to actual cost remains unknown.

In graphic terms, by resuming the diagram that breaks down the resale price into its elements, and complementing it to insert this complexity, one can verify this phenomenon. To make it easier to read, I call "Cri" the real (and unknown) cost of the imported good, service or charge, and "PTr" (transfer price), the artificial overprice (also unknown) created to produce an artificial reduction in profit.

Resale Price (P)
Net Resale Price (NRP)					DIC+IV+C
Vi			VA		DIC+IV+C
Ci		Profit margin	Ca	Profit margin	DIC+IV+C
Cri	ENr	Profit margin	Ca	Profit margin	DIC+IV+C

It is easy to verify from the graphic analysis that the proportion between Cri and PTr, which is unknown, cannot be discovered by applying the PRL method, since these variables are not found in any of the calculation formulas. But it is exactly this proportion that defines the quantum of the transfer price that composes the final industrialized good offered for sale. In the diagram above, we divide this proportion in half. But they could be the following:

Ci
Cri		ENr
Cri	ENr
Cri			ENr

Therefore, we conclude that none of the formulas (related to the 1st and 2nd interpretations of article 18 of Law 9430/96) is preferable under the arm's length principle. Both contain the inherent flaws of the PRL method, which is not able to accurately approximate the parameter price of the imported input to its market price, since it does not have market parameters in its composition.

It may therefore be concluded that all mathematical and economic analyses of the situation have been fruitless, so that the only decision criterion to be adopted is whether to opt for the parameter price calculation method set out in IN SRF 32/01 or the method set out in IN SRF 243/02. But this can only be said now. Not before.

Thus, we must return to the interpretation of art. 18, looking at the grammatical and final analysis of the provision.

The grammatical interpretation of the provision inclines towards the 2nd interpretation, adopted by IN SRF no. 243/02. The reason is that, as already stated above, the adoption of the interpretation made by IN SRF no. 32/01 leads to the lack of agreement between the expression "calculated on the resale price... and the added value in the Country", insurmountable by the possible consideration as implicit of the expression "of the price" placed before the expression "of the added value", as demonstrated above, revealing a grammatical error in the construction.

IN SRF no. 243/02, by concluding that the expression "decreased" refers both to the expression "of the profit margin of sixty percent..." and to the expression "of the value added in the country", removes the impropriety and resolves the issue.

Let us then proceed to the mathematical constructions that can be made of the 1st and 2nd interpretations, with a view to a finalistic interpretation of art. 18 of Law 9430/96.

The method under analysis, according to the main section of article 18, is called "Resale Price Less Profit Method - PRL". Thus, in principle, it must start from the resale price and subtract the profit from it, in order to then reach the deductibility limit price.

But, although the name of the method does not discriminate the value added in the country, since this portion of the resale price is totally excluded from the scope of the transfer pricing practice (since it refers to the cost and its margin in the country), it is logical that it is also excluded from the deductibility price limit of the imported input. Otherwise, the deductibility threshold price would be unduly increased, since it would contain in its composition part of the cost that is not imported, but produced in the country.

IN SRF no. 243/02 considers, when determining the price-parameter, the subtraction of the value added in the country from the net resale price and the 60% profit margin calculated on the net resale price. In the form of a diagram, this is the portion on which the price-deductibility limit falls:

PP = PLV - 60% x PLV - VA - (2nd interpretation of art. 18, Law 9430/96)

Resale Price (P)
60% PLV	40% PLV		DIC+IV+C
Vi		VA	DIC+IV+C
60% PLV	PP	VA	DIC+IV+C

PP is the deductibility limit, as per 2nd interpretation, art. 18, Law 9430/96.

It is clear that the price parameter, according to the 2nd interpretation of art. 18, is limited from zero (when VA is equal to or greater than 40% of the VLP) to 40% of the VLP (when VA is equal to zero). But it will always be part of Vi (which is composed of the cost of the input, ci, and the mark up applied on it, Mu), as can be seen in the above diagram. In other words, the parameter price is purged of costs incurred in the country, which is consistent with the proposal of the PRL method.

IN SRF no. 32/01, on the other hand, considers a profit margin of 60%, calculated on the net resale price less the value added in the country. But the result of the expression "net resale price" subtracted "from the value added in the country" is the equivalent to the added value of the imported input, as shown above. The fact is that, for the purpose of determining the price parameter, there is little sense in calculating a profit margin exclusively on the aggregate value of the imported input. It is clear from the main section of article 18 that the method requires that a profit margin be deducted from the resale price. But, in fact, it does not make sense for this margin to be levied on the value of the imported input, and not, as it should be, on the net resale price.

In the form of a calculation and diagram:

PP = PLV - 60% x (PLV - VA) - 1st interpretation, art. 18, Law 9.430/96 As PLV - VA = Vi, it follows that:

PP = PLV - 60% x Vi

Or again:

PP = 40% x PLV + 60% VA

So:

PP = 40% x VA + 40% x Vi + 60% x VA (since PLV = VA + Vi)

PP = VA + 40% x Vi

Resale Price (P)
60% PLV		40% PLV		DIC+IV+C
60% Vi	40% Vi		VA	DIC+IV+C
60% Vi	PP			DIC+IV+C

PP is the deductibility limit, according to 1st interpretation, art. 18, Law 9430/96

It should be noted that, contrary to the logic of the PRL method, the benchmark price, according to the 1st interpretation, is also composed of the portion relative to the value added in the country (PP = VA + 40% x Vi).

Therefore, there is incompatibility with the PRL method, which is to limit the cost, expense or burden of the imported good, service or right, since the deductibility limit allows for the inclusion of a portion of the value added in the country in this composition.

Therefore, also from the finalistic standpoint, now in this deeper analysis, the best interpretation given to art. 18 is that which derives from the 2nd interpretation of art. 18 of Law 9430/96, which was adopted by IN SRF no. 243/02, in which the expression "decreased" is related both to the expression "of the profit margin of As a consequence, the 2nd interpretation of article 18 of Law 9430/96 is preferable to the 1st interpretation.

Moreover, the benchmark price obtained from the formula disclosed by IN SRF 243/02, as seen above, is always higher than that provided by the 2nd interpretation of Law 9430/96, and is therefore more beneficial to the taxpayer.

I will then move on to the other considerations surrounding the matter.

Innovation of IN SRF no. 243/02

As to the consideration that IN SRF no. 243/02 innovated, I now believe it should be received with reservations. In fact, it created new concepts and variables for calculation; however, these are in accordance with article 18 of Law 9430/96. There was undoubtedly a change in the interpretation and application of the law by the administrative authorities, which certainly authorizes the application of article 146 of the National Tax Code (CTN), preventing the application of a prescriptive content similar to that of IN SRF 243/02 to a triggering event prior to its introduction (11/13/2002). But the Executive Branch's jurisdiction was certainly not exceeded in the issue of the mentioned administrative act.

MP 478/2009 and MP 563/2012 (converted into Law 12.715/2012)

As to the changes made to article 18 of Law 9430/96 with a view to approximating it to the prescriptive content of IN SRF no. 243/02, in light of the analysis made above, I see that the purpose of the changes was not to alter the prescriptive nature of the law until then in order to make it effective, since the interpretation previously made by IN SRF 243/02 was secundum legem with regard to the wording prior to such changes.

Thus, the intention of reducing the litigiousness of the matter, contained in the explanatory memorandum of MP no. 478/2009 and MP no. 563/2012 (converted into Law no. 12,715/2012) is real, since the lack of visual correspondence between IN SRF 243/02 and article 18 of Law no. 9,430/96 was the fuel for this litigiousness. However, as seen above, the conflict was due to the uncertainty generated by the innovation of the mathematical concepts brought by IN SRF 243/02 and the lack of visual correspondence between them and the Law rather than the actual disparity between what the IN advocated in relation to what was prescribed in the Law. It was thus a virtual uncertainty, but not a real one.

Also from the explanatory statement in MP no. 563/2012, I do not see any irregularity in the application of IN SRF no. 243/02 in a period prior to the effectiveness of the new legal wording. This is because, even though the explanatory memorandum stated that it was intended to "contemplate hypotheses and mechanisms not provided for when the rule was issued, updating it for the current legal and business environment", it is certain that the hypotheses intended to be contemplated referred to the mathematics brought about by IN SRF no. 243/02 (as proven by the wording of the items) and not to the eventual change in the conception of the methods or of any formulas contained therein, since the conception of IN SRF no. 243/02 brought with it the 2nd interpretation of the Law, which was not altered, but confirmed by the new wording.

Neutralization of Value Added by IN SRF no. 243/02

In fact, it is undeniable that IN SRF 243/02 isolated the portion related to the added value when determining the parameter price. However, this is a corollary of the adoption of the 2nd possible interpretation of article 18 of Law 9430/96, and, therefore, does not deviate from the Law.

The allegation is linked to the adoption of the 1st possible interpretation of art. 18 of Law 9430/96, which, as we have shown above, did not make such an isolation, and, as I have stated, this was one of its errors, with regard to the purpose pursued by the PRL method.

This is best shown in the formula obtained from this second interpretation. Let us see:

PP = PLV - 60%PLV - VA

Being:

PLV = P - DIC - IV -C (variables defined above)

It follows from this that the benchmark price is the portion of the net resale price that remains after deducting the 60% profit margin and the value added in the country; that is, the benchmark price is directly linked to the value of the imported input.

According to the 1st possible interpretation (adopted by IN SRF no. 32/01), the added value was not fully excluded from the parameter price, as can be seen from the formula obtained from this other interpretation:

PP = PLV - 60% x (PLV - VA), hence:

PP = PLV - 60%PLV + 60% VA (by the distributive property of

multiplication)

PP = 40%PLV + 60%VA (by addition)

Thus, by this interpretation, the price parameter is equivalent to the addition of 40% of the net resale price to 60% of the value added. In this way, the value added in the country makes up the price parameter.

It follows immediately that both the composition of the value added in the price parameter (1st interpretation - IN SRF no. 32/01) and its exclusion, in the composition of the price parameter (2nd interpretation - IN SRF no. 243/02) are not innovations to the prescriptive content of the law, since both can be derived from two possible interpretations of the Law.

However, as already pointed out above, when analyzing the interpretation of article 18, the exclusion of the added value in the calculation of the price benchmark is in harmony with the PRL method, and, therefore, with a teleological interpretation of article 18, since the price benchmark is the one set as a maximum limit for the deductibility of costs, expenses and charges related to goods, services and rights connected to imports or acquisitions abroad. Thus, it is correct that the portion aggregated in the country should not even compose the benchmark price.

Thus, the argument deserves to be rejected.

Establishment of a fixed margin of 60%.

One of the questions that arises on the matter is why the profit margin has been increased from 20% (for goods not used in production) to 60% (for goods used in production), if the added value in the country is deducted from the net resale price, which, in theory, would equalise the situations of mere resale and production in the country.

This point is not subject to administrative discussion, since the fixed margin of 60% is established by Law, and the CARF's collegiate bodies may not depart from it, except in the rare cases also provided for by law (according to §6º of art. 26A of Decree 70235/72).

But beyond this pragmatic discussion, which already resolves the issue, something more needs to be said on the matter. This is because, at first glance, it may seem that raising the percentage in the case of industrialization from 20% to 60% is unreasonable, given that in this case the possibility of control by the Treasury over any manipulation of inputs is greater (especially with regard to the value added in the country) than in the case of imports of finished goods, in which all industrialization, and therefore almost all cost formation, occurs abroad.

To this end, it is necessary to bring into discussion the context in which the law is inserted. This is because imported products for resale in general are consumer goods, which already suffer strong customs duties, especially with regard to the import tax. In this sense, the tax system itself scares away possible manipulations to produce a transfer price, justifying a 20% rate.

On the contrary, imported inputs used in industrialization, usually intermediate goods or capital goods, are, in turn, subject to reduced rates, Extariffs, and there are many cases, including non-taxation or zero rate. This is because, as they are inputs for national production, they have a simpler recording, since they also act in the extrafiscal sphere, increasing the employment of factors, reducing external dependence by national industrialization, enabling the generation of internal income, etc.

However, despite this positive effect, they are the great target of transfer pricing legislation, because industries, known as a result of the historical fact known as globalization, have distributed the production of goods in several countries, aiming to increase global profitability. In this sense, price manipulation has become a means to achieve that purpose.

Therefore, the increase of the margin to the 60% level is justified, since the risk of transfer pricing manipulation is high in these sectors.

I am not defending the percentage of 60%. It could be 50%, 40%, maybe 70%. In any case, it would never be able to reach, except by coincidence, the real overprice applied to the imported good, because this is inherent to each manufacture and to the market in which its commercialization is inserted. And the PRL 60 method at no time touches the market. Despite these weaknesses of the method, it follows prescribed by law, as one of the possible hypotheses, and should be applied.

Thus, arguments to this effect do not modify my position on the matter.

The proportionalization made by IN SRF no. 243/02

As I have shown above, IN SRF no. 243/02 is in accordance with Law 9430/96 and provides parameter price values that are, in theory, always higher than those provided for in the Law.

The curve provided by IN SRF no. 243/02 demonstrates this. Reproduce it.

PP = 0.4 . Vi (IN SRF no. 243/02)

PP=0,6.PLV + Vi (2nd Int. Law 9430/96)

0,6. PLVVi = PLV

0,6.PLV

In fact, the mentioned normative instruction (IN SRF 243/02) produces a proportionalization, making the parameter price (PP) a function of the ratio between cost of the imported good or input and total production cost. The greater the participation of the imported good or input, the greater the approximation of the parameter price to 40% of the net resale price. The smaller the share of the imported good or input, the closer the parameter price is to zero. In mathematical language:

PP = 40% x (ci/ct) x PLV

If ci=ct, then: PP = 40% x PLV If ci=0, then: PP = 0

It may be concluded that the parameter price will never exceed 40% of the net resale price. However, this does not differ from Law 9430/96 since, according to the equation it provides, when the aggregate value in the country is equal to zero (and therefore, there is a maximum participation of the imported good or input), the value of the parameter price will be equal to 40% of the net resale price. On the other hand, when the aggregate value is equal to 40% of the net resale price, the parameter price will be equal to zero. In mathematical language (more beneficial situation):

PP = 40% x PLV - VA

If VA=0 (ci=ct), then: PP = 40% x PLV

If VA=40% x PLV, then: PP = 0 (Vi equals 60% of PLV)

If VA is greater than 40% x PLV, (Vi less than 60% of PLV), then PP will be negative, indicating indeductibility.

Therefore, the proportionalization made by IN SRF no. 243/02 is beneficial to the taxpayer and, therefore, does not violate the principle of tax legality with regard to the allegation of undue tax increase.

I cannot accept, either, the request for the removal of the referred normative instruction, also under the allegation that it would have created a form of calculation different from that contained in the Law. It is almost unanimous that the Instruction was efficient in the sense that it provided a form of calculation much closer to the variables found in the daily life of companies than the form provided by law, and correct the distortions created by the countless relations between the value of the input and the value of the resale price, which was very well demonstrated in the vote of Councilor Sandra Maria Faroni, when analyzing the example of the windshield, as input of a vehicle, proffered in the judgment of case no. 16327.004012/200231.

There, the Honourable Councillor said:

In my view, the only possible way to determine the resale price of any input is to apply to the sale price of the end product the same proportion that the cost of the input represents in the total cost of the product. The use of this criterion does not depend on the existence of a normative act providing for it, as it is strictly within the law. The law determines the application of a profit margin on the resale price of the imported product. As there is no specific resale price for each element of the end product, it is up to determine it from the known elements. The known elements are the individual costs of the inputs (including labour) used in production, the cost of the final product (sum of the costs of the inputs) and the sale price of the final product. It is elementary that the only way to isolate the sales value of each component is to apportion the total sales value among all components of the total cost of the product in the same proportion in which they participate in that cost. Existing or not a normative act in this sense, if the taxpayer makes this segregation, the inspection cannot reject the calculation by the PRL. On the other hand, if the segregation is not made, the inspection may order the taxpayer to redo the calculation based on the segregated amount.

Council Member Marcos Takata, in his explanation of vote, in PA 10283.721301/200861, also endorsed the relevance of proportionalization. Let us see:

So, the proportionalization between the cost of inputs imported from a bound person and the total cost, in itself, does not seem to me to have broken the limits of the legal rule.

...

The proportionalization between the cost of the input imported from a bound person and the total cost makes it possible to define the scope of added value - which, I reiterate, the law does not define. On the other hand, the proportionalization in question isolates the input imported from a bound person from all the rest that may appear in the end product. This is the core of proportionalization.

Therefore, I conclude that the alleged proportionalization made by IN SRF no. 243/02 does not violate article 18 of Law 9430/96.

The circular effect

Another aspect of the issue that is always argued concerns the so-called "circular effect" caused by the application of IN SRF no. 243/02, in the sense that once the resale price and the percentage ratio between the cost of imported inputs and total cost are defined, the respective price parameter is initially obtained as a result of the formula. If, however, we redo the transaction, but this time adopting as the resale price the benchmark price obtained there, even so, there will be a new adjustment, and so on successively.

This assertion arises from the way the formula is constructed, which limits the benchmark price to 40% of the net resale price. Now, when a new net resale price is presented, the new benchmark price will correspond to 40% of this new net resale price. However, it should be noted that such value will always be lower than the previous one.

Initially, it should be stressed that this circular effect, although existing, does not result in losses to the taxpayer, in view of the provisions of article 18 of Law 9430/96, which always provides a higher adjustment value, even when the values obtained by repeating the circular experiment based on IN SRF no. 243 are adopted.

On the other hand, such exercise will never be done in the factual world, which deprives the argument of any relevance. This is because the resale price will never, under any hypothesis, be reduced to prevent or reduce adjustment, since it is defined by the market (in perfect or near-perfect markets) or by the monopolist's demand curve, aiming at maximum profitability (in monopolistic markets), but always in a phase prior to the creation of the transfer price.

In other words, if there is a different, lower resale price, we will certainly be facing a new product, and not the former one. The allegation, therefore, makes no practical sense and does not taint the adoption of said normative rule.

Therefore, considering all the above, I believe that IN SRF no. 243/02 does not violate article 18 of Law 9430/96 and, therefore, can be applied to this specific case.

Councillor Eduardo de Andrade.

MINISTRY OF TREASURY

Subject: Corporate Income Tax IRPJ

Report

Vote

Declaration of Vote

PRL Method 60% Legality of IN SRF no. 243/02

PP = 40% x (ci/ct) x PLV

PP = PLV - 60% x (PLV - VA)

PP = PLV - 60% x (PLV - VA)

PP = PLV - 60% x Vi

PP = 40% x (ci/ct) x PLV

PP = 0.4 x Vi (equation given by IN SRF no. 243/02)

PP = 0,6 x PLV + Vi

PP = VA + 40% x Vi

Innovation of IN SRF no. 243/02

MP 478/2009 and MP 563/2012 (converted into Law 12.715/2012)

Neutralization of Value Added by IN SRF no. 243/02

Establishment of a fixed margin of 60%.

The proportionalization made by IN SRF no. 243/02

The circular effect