Brazil's new transfer pricing reporting requirement

On June 29, 2012, the Brazilian tax authority (RFB) published new reporting rules that require Brazilian taxpayers to electronically report information regarding all cross-border transactions related to the provision of services and the transfer of intangibles, as well as certain other transactions that affect a taxpayer's net wealth. This requirement went into effect on June 29, 2012, and impacts all Brazilian entities selling, providing, hiring or contracting services with a non-Brazilian entity, irrespective of whether the foreign party to such transactions is a related party or is domiciled in a low-tax or tax-advantaged foreign jurisdiction. Thus, U.S. multinationals investing in Brazil and U.S. subsidiaries of Brazilian parent companies must comply with the new rules. Since some taxpayers may have reporting obligations as early as the end of September 2012, companies should take immediate steps to analyze these rules.

Background
The unique Brazilian “formulary approach” to transfer pricing deviates from the standard methods under the OECD's Transfer Pricing Guidelines insofar as Brazil does not allow the use of any profit-based methods, including the transactional net margin method, comparable profits method and profit split method.

The Brazilian rules require transactions to be supported on a strict transactional basis, and fixed statutory profit margins must be applied. The Brazilian transfer pricing rules do not provide for functional or industry analysis. The mismatch between U.S. and Brazilian transfer pricing rules may cause certain transactions to result in double taxation, and the U.S. and Brazil currently do not have an income tax treaty in force. Also, there is no option to obtain an advanced pricing agreement (APA) in Brazil. This mismatch in rules is a common problem and viewed by many as part of the price of doing business in Brazil given the transfer pricing rules in Brazil do not generally conform to the typical OECD model rules that are a foundation for most jurisdictions.

Existing rules
Brazilian taxpayers must document cross-border, related-party transactions annually. The Brazilian tax return has five specific forms that require taxpayers to disclose information on cross-border intercompany transactions. The following information must be disclosed:

  1. Total value of transaction regarding the goods, services or rights
  2. Name and domicile of the related parties
  3. Methodology used to support the prices used in each transaction
  4. Calculated benchmark price
  5. Average annual transfer price
  6. Amount of any transfer pricing adjustments

Additional rules imposing new requirements
Under the new rules, Brazilian taxpayers must electronically report information regarding all cross-border transactions related to the provision of services and the transfer of intangibles, as well as certain other transactions that affect a taxpayer's net wealth. The information must be provided to the RFB within 30 days of the completion of the reportable transaction.

However, the new rules do not provide a list of covered transactions, but instead direct taxpayers to a specific law on covered transactions, which includes all common transactions involving the provision of services and the transfer of intangibles. The definition of “transactions that affect net wealth” remains unclear. It is expected that the RFB will issue further clarifications and the actual electronic forms in the near future.

McGladrey international tax members
Larry LeBlanc, partner, Vienna, Va.
Mark Kral, partner, Charlotte, N.C.
Mario de Castro, director, Vienna, Va.
Hyuck Oh, senior associate, Vienna, Va.

RSM International member
Cicero Alencar, São Paulo - Brasil
ACAL Consultoria e Auditoria S/S.
www.acal.com.br

Disclaimer
The information contained herein is general in nature and based on authorities that are subject to change. McGladrey LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. McGladrey LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

This article represents the views of the author or authors only, and does not necessarily represent the views or professional advice of McGladrey.