Tax Management Transfer pricing REPORT D Volume 13 Number 12 Page 701 Wednesday, October 27 2004 lsSN15217760 Analy BRAZIL An Approach to Brazilian Transfer Pricing Practice By Napoleao dagnese and carlos Eduardo ayub Napoleao Dagnese, M.A., is a staff member of the European transfer pricing team at Deloitte Touche in Dusseldorf. Carlos Eduardo Ayub is a senior manager with Deloitte Touche in sao Paulo Since 1997, when Brazil began requiring taxpayers to document transfer prices, regulations prescribing fixed global profit margins have been fuel for ntensive criticism Before the introduction of Brazilian legislation containing transfer pricing rules,compliance with the arms-length principle for related-party transactions was governed through regulations on disguised or hidden distribution of profits. However, no straight disposition applied specifically to cross-border related-party transactions. This was remedied with the enactment of Law 9. 430/96. which covers cross-border transactions even though it reduced the significance of market price comparisons While Brazilian transfer pricing methods have names similar to those used internationally, the only methods that are similar are the comparable uncontrolled price(CUP)methods(there are two in Brazil: one for export and another for import transactions). Evidence of the differences in Brazil's methods include that the law imposed fixed gross profit margins on methods other than CUP for related-party export and import transactions. Several normative sources intending to limit price manipulations followed that 1996 aw,explaining, complementing, and even changing its interpretation and contents However, it is important to understand that although the profit margins are fixed-what could suggest a simplification of the transfer pricing practice- many details must be considered when Brazilian transfer pricing rules are applied because of the complexity of the legislation For example, the rules must be applied to each product, service, or right Subjects, Related Parties Not so controversial as the application of methods is the description of subjects that are focsued on the transfer pricing requirements, although such description may trespass the description of related parties contained in Brazilian tax treaties. The concept of related parties, pessoas vinculadas ncludes entities that are directly or indirectly involved somehow in the transaction. Art. 23 Law 9. 430/96 and art. 2 RI 243/02 describe constellations of interdependence for transfer pricing purposes. The usual direct and indirect relations of capital participation- 10 percent in the other companyVolume 13 Number 12 Wednesday, October 27, 2004 Page 701 ISSN 1521-7760 Analysis BRAZIL An Approach to Brazilian Transfer Pricing Practice By Napoleão Dagnese and Carlos Eduardo Ayub* *Napoleão Dagnese, M.A., is a staff member of the European transfer pricing team at Deloitte & Touche in Düsseldorf. Carlos Eduardo Ayub is a senior manager with Deloitte & Touche in São Paulo. Since 1997, when Brazil began requiring taxpayers to document transfer prices, regulations prescribing fixed global profit margins have been fuel for intensive criticism. Before the introduction of Brazilian legislation containing transfer pricing rules,1 compliance with the arm's-length principle for related-party transactions was governed through regulations on disguised or hidden distribution of profits. However, no straight disposition applied specifically to cross-border related-party transactions. This was remedied with the enactment of Law 9.430/96, which covers cross-border transactions, even though it reduced the significance of market price comparisons.2 While Brazilian transfer pricing methods have names similar to those used internationally, the only methods that are similar are the comparable uncontrolled price (CUP) methods (there are two in Brazil: one for export and another for import transactions). Evidence of the differences in Brazil's methods include that the law imposed fixed gross profit margins on methods other than CUP for related-party export and import transactions. Several normative sources intending to limit price manipulations followed that 1996 law, explaining, complementing, and even changing its interpretation and contents.3 However, it is important to understand that although the profit margins are fixed--what could suggest a simplification of the transfer pricing practice-- many details must be considered when Brazilian transfer pricing rules are applied because of the complexity of the legislation. For example, the rules must be applied to each product, service, or right. Subjects, Related Parties Not so controversial as the application of methods is the description of subjects that are focsued on the transfer pricing requirements, although such description may trespass the description of related parties contained in Brazilian tax treaties. The concept of related parties, pessoas vinculadas, includes entities that are directly or indirectly involved somehow in the transaction. Art. 23 Law 9.430/96 and art. 2 RI 243/02 describe constellations of interdependence for transfer pricing purposes. The usual direct and indirect relations of capital participation--10 percent in the other company--