According to a recent ruling by the Brazilian tax authority taxpayers should be able to better align their transfer pricing policies  to eliminate potential contingent liabilities, reduce taxable adjustments, and/or eliminate the double taxation arising from transfer pricing regulation mismatches.

Most companies face significant challenges in supporting their transfer pricing policies in Brazil due to the fact that the Brazilian transfer pricing requirements are not aligned with the global arm’s length principle. There can be a danger of double taxation arising from the differences in transfer pricing rules between different countries. However, despite the complexity resulting from this different criterion in Brazil, the Brazilian rules also provide for fixed profit margins that may be applied as “safe harbors” for taxpayers to use for their own benefit.

Also, under the Brazilian rules, taxpayers have flexibility when choosing the transfer pricing method. Moreover, taxpayers may change the method applied on a yearly basis without requiring any justification or approval from the tax authorities.

Among the methods for testing the import price, the law provides the “Cost Plus Method” (production cost plus 20% “Profit Margin Method”), which authorizes the supplier / related party to allow up to 20% gross margin on sales to its affiliates located in Brazil, provided that the supplier is the manufacturer of the goods. In instances when the 20% margin requirement is met, the taxpayer must concentrate its efforts on collecting documentation as evidence of the costs and margin tested. This compliance burden can add to the time and costs of the administration of transfer pricing by a taxpayer.

The ruling establishes that a report from an independent company is acceptable as evidence for costs incurred abroad by the related party. The report could supply adequate documentation and support for the costs incurred abroad. This may allow companies to adjust their transfer pricing strategy so as to reduce compliance costs in Brazil.