It is important to note that the Brazilian transfer pricing rules apply to import and export transactions between a Brazilian company and a foreign related party and that the concept of related parties for transfer pricing purposes include not only companies with corporate relations but also commercial relations (such as exclusive distributors), as well as transactions with non-resident parties domiciled in low tax jurisdictions or carried out under a privileged tax regime.

According to such rules, in the import of goods, services and rights from related parties, if the import price exceeds the highest benchmark, the difference between such amounts must be added to the taxable bases of corporate income tax (IRPJ) and social contribution on net profit (CSLL). Similarly, in case of exports, if the taxpayer’s export price is lower than the lowest benchmark ascertained according to one of the methods described in the law, the difference between such amounts must be added to IRPJ and CSLL taxable bases. The taxpayer is relieved of these adjustments if the difference does not exceed the variation margin accepted by applicable rules.

Therefore, in case of an import, it is possible that the import price is fully considered as taxable revenue of the foreign exporter, but part of such amount is treated as a non-deductible expense in Brazil as a consequence of the transfer pricing rules.

Also, in the case of exports, the taxation in Brazil will apply not only on the invoiced amount but also on the difference resulting from the transfer pricing rules while the amount considered as a cost or expense for the foreign importer will be only the invoiced amount.

It is important to remember that Brazilian double taxation agreements have not adopted the corresponding adjustments set forth by paragraph 2 of article 9 of the OECD model convention to eliminate the double taxation caused by transfer pricing adjustments. For this reason, to avoid double taxation, some multinational groups have decided to remit to the Brazilian company the amounts corresponding to the transfer pricing adjustments.

One of the most relevant topics in the analysis of this alternative is the nature of the amounts received by the Brazilian company and if they must be included or not in the taxable bases of contributions levied on the company’s revenues (PIS and COFINS).

It is very reasonable to argue that the amounts remitted to Brazil in view of transfer pricing adjustments are closely related to the import or export prices. Thus, in the case of imports, the amounts received by the Brazilian company would correspond to a reduction in the price previously paid or, in other words, a retroactive reduction of the price. As for the values received in connection with exports previously made, we understand that they would also represent a retroactive adjustment of the prices previously charged to increase it to the amount acceptable in light of transfer pricing rules.

According to IAS 18 “Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants” (the Brazilian Accounting Committee Recommendation number 30 provides the same definition). A retroactive adjustment of the price of goods, services or rights imported does not represent, in our view, a revenue, but only a cost recovery, that should be registered as a reduction of the cost (or of the value of the asset accounted if it has not been sold yet or completely amortised/depreciated).

Considering that the taxable event of PIS and COFINS contributions is the earning of revenues and that the amounts received in connection with a cost reduction do not have the nature of revenue, it is understood that it would not be appropriate to include them in the taxable bases of PIS and COFINS.

In the case of exports, the amounts remitted to Brazil would be no more than a supplement of the price charged from the foreign importer and, therefore, should be qualified as export revenues. Thus, these revenues should not be subject to PIS and COFINS since export revenues are tax exempt according to the Brazilian Federal Constitution.

This subject has already been discussed by one of the federal administrative court chambers, but the decision was unfavourable to the taxpayer. Most of the judges understood that the payments received by the Brazilian taxpayer related to adjustments resulting from the Brazilian transfer pricing rules: (a) do not qualify as export revenues and, therefore, cannot benefit from the exemption granted to export revenues; and (b) do not qualify as a reduction of the import prices, but should be considered as new revenues (resulting from discounts obtained) that must be included in the taxable basis of the PIS and COFINS contributions.

However, it is important to stress that one of the judges issued a dissenting opinion. He understood that the amounts received by the Brazilian taxpayer in connection with its imports did not qualify as revenues, but mere rectifications of the cost of acquisition of the imported products, thus recovering undue amounts previously paid by the Brazilian company.

In any case, as shown by the disagreement among the federal administrative court judges, the subject is not settled, and the adjustment of actual prices to avoid the addition of transfer pricing differences is a feasible option to avoid the double taxation resulting from the Brazilian transfer pricing rules.

Cristiane Magalhães (cmagalhaes@machadoassociados.com.br) and Fábio Lima da Cunha (fcunha@machadoassociados.com.br), Machado Associados, Brazil