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TAX NEWS - FEBRuary 2010

Brazil introduces changes to transfer pricing regulations

Brazil's Provisional Measure 478, published December 29, 2009, introduces significant changes to the country's transfer pricing regulations, and establishes a new method for justifying the import prices on cross-border transactions with related companies. The new method, known as PVL from its Portuguese acronym, is a new version of the resale price minus method, or PRL. The new measure, effective January 1, 2010, also establishes new procedures for audits by the tax authorities.

PM 478 provides for the unification of the statutory gross margins: before MP 478, the statutory gross margins were 20 percent for pure resale transactions and 60 percent for transactions involving raw materials. Under PM 478, the new statutory gross margin is 35 percent for all imports from a related party.

The Minister of Finance may establish other statutory profit margins for each industry sector, whether at a taxpayer's request, or on his or her own initiative. Prior to December 2009, the minister had the authority to establish different statutory profit margins for all Brazilian transfer pricing methods (not just the resale price minus method), but only at the taxpayer's request. However, that authority has not been exercised heretofore.

The formula to calculate the resale price minus method has also been changed. Under the old method,
- Statutory gross margin (SGM) = (Total Net Sale - Value Added) * 60%
- Resale Price Method (PRL) = Total Net Sale - SGM

Under the new method,
- Proportional Sales Cost (PSC) = (Total Import Value / Total Sale Cost)*100
- Proportional Net Sale (PNS) = Total Net Sale * PSC
- Sale Price Method (PVL) = PNS *65%

The new measure also introduces a definition of materiality for purposes of the comparable uncontrolled price method (PIC) and the PVL. Under the materiality criteria, comparables should represent at least 10 percent of the imported amount from related parties.

PM 478 also requires taxpayers to provide a final and formal declaration of the method used to justify the import price on their income tax returns, which may not be changed after the start of a tax authority audit. This declaration must be made on a product-by-product basis.


New controversies

As a result of changes to three different provisional measures (472, 476, and 478) published within the last 15 days of December 2009, some controversy regarding the application of the PRL 20%/60% method for the 2009 calendar year is expected. In fact, PM 472 partially revoked changes on the margins of PRL, which was subsequently reintroduced by PM 476. PM 478 reinforces the intention of the tax authorities to keep the "old" PRL 20%/60% applicable for the 2009 calendar year, and makes clear that PVL is applicable only for the 2010 calendar year and thereafter.
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