What is Transfer Pricing
Transfer Pricing is the price practiced on purchase and sales transactions, of goods, rights and services between related parties
Due to the specific circumstances that may exist on operations between related parties, this price can be artificially determined and, consequently, may result in differences when compared with the market price negotiated between unrelated parties, under similar conditions - price based on the “arms length” principle. Transfer Pricing is part of a tax legislation (created by the Law # 9430/96), which main objective is to avoid the transfer of profits to related parties abroad by importing and exporting goods, services and rights, in addition to payment and receipt of interest between this Companies or creation of losses in Brazil. The objective of transfer pricing legislation, with reference to the operations performed with related parties abroad, is to determine: The maximum price charged on import transactions of goods, services and rights and the minimum price charged on export transactions of goods, services and rights. To audit compliance with transfer pricing, the Brazilian Internal Revenue Service has a team of specialists within the department of International Tax Matters.
Why has Transfer Pricing to be controlled by tax administration?
The audit of transfer pricing transactions is performed in order to avoid the loss of income tax revenues. This loss may occur by artificial allocation of revenues and expenses on sales transactions of goods, rights or services practiced between related parties, located in different tax jurisdictions.
Several countries have been establishing transfer pricing legislation as a means to protect their fiscal interests, as a result of Companies manipulating their prices in international transactions by forming Companies in countries with more favorable tax legislations. Therefore, this Companies transfer revenues from one jurisdiction to another that offers lower tax rates or provide tax exemptions, by under invoicing exports and over invoicing imports.
Who is subject to Brazilian Transfer Pricing legislation?
- The individuals or legal entities resident or domiciled in Brazil which perform transactions with individuals or legal entities, resident or domiciled abroad, considered related parties, even if it is performed by intermediaries.
- The individuals or legal entities resident or domiciled in Brazil, which perform transactions with any individuals or legal entities, even if it is not a related party, resident or domiciled in a country which exempts from tax or has a tax rate lower than 20% of taxable income.