On January 29, 2019, the Brazilian federal tax authorities published Normative Act 1.870 (IN 1.870) changing articles of Normative Act 1.312/2012 (IN 1312), which governs transfer pricing.
Among the main changes, we point out:
i. General Changes:
a) adjustments on the wording and organization of some articles/paragraphs to let the position of the federal tax authorities more clear on certain aspects of control over intragroup pricing;
b) clarification that the determination of transfer pricing should be made in the fiscal year in which the good, service or right is imported, with the exception of the Resale Price less Profit Method in which the transfer pricing calculation is allowed in the year when the good (imported or manufactured based on imported inputs) is written-off from inventory as a result of a sale, with the counter-entry in the income statement;
c) introduction of a new divergence margin for 2019 on – the new rule sets forth that the acceptable divergence margin is the one in which the effective price diverges, for more or less, up to 5% from the transfer price found based on a weighted average in the relevant year, in case of adoption of any of the following methods Comparable Independent Prices, Cost Plus Profit, Resale Price less Profit, Export Sales Price, Wholesale Price less Profit, Retail Price less Profit, or Cost Plus Taxes and Profit, and up to 3%, in case of use of Quotation Price on Imports or Quotation Price on Exports. Before, the divergence margin was determined based on the effective price (and not on the transfer price).
i. Comparable Independent Prices Method (PIC):
a) transactions accepted for transfer pricing determination under PIC – substitution of the expression “transactions of purchase and sale entered into by non-related third parties” by “transactions of purchase and sale entered into by third parties which are not related between themselves”, letting clearer that transactions between related companies (even not in relation to the Brazilian company) will not be accepted as comparable;
ii. Resale Price less Profit Method (PRL):
a) value of freight, insurance, import taxes and customs clearance expenses will be included in the cost of the imported good (in the effective price) if they are an exporter burden in the international purchase and sale conditions (Incoterms) specifically used in the relevant import;
b) clarification that the taxpayer should determine the weighted average transfer price considering the purchases made in the relevant fiscal year and the inventory balances existing at the beginning of the year, excluding values and remaining quantities at the end;
c) reversal of paragraph 13 do article 12 of IN 1312 which determined that the profit margin under PRL should be calculated based on the sales price with exclusion only of unconditional discounts, which, in addition to not having legal basis, conflicted with the provided by items I to V of article 12 of IN 1312, which establish that the profit margin should be applied over the sales price less discounts, taxes and commissions;
iv. Quotation Price on Imports Method (PCI) and Quotation Price on Exports Method (PECEX) (applicable to commodities):
a) the taxpayer should calculate the transfer pricing for each import and export transactions, not being applied to PCI and to PCEX the calculation of weighted averages, which is required for the other methods;
b) inclusion of the Beijing Iron Ore Trading Center Corporation (COREX) as a commodities and future exchange with the respective quotations being used as basis for identification of the transfer pricing for commodities subject to said methods.
The subject of transfer pricing continues being one of the most important in international taxation and demands careful attention by multinationals.
The tax team of Dias Carneiro Advogados is prepared and available for analyzing possible impacts deriving specifically from the new transfer pricing regulation.