Legislation - RIR

(Corporate Income Tax New Regulation, Decree n° 3.000 of March 26, 1999, Published in the Federal Official Gazette (DOU) of March 29, 1999)

SUBTITLE II

Transfer Pricing

CHAPTER I

REVENUES DERIVING FROM EXPORTS ABROAD

Article 240- Income earned in transactions with a related party shall be subject to arbitrarily determined price adjustments when the average sale price of goods, services or rights exported during the income tax period concerned is less than 90% of the average sale price of the same goods, services or rights in the Brazilian market during the same period and under similar payment conditions.

Paragraph 1- If the legal entity does not sell in the domestic market, the average price referred to above shall be determined from information obtained from other companies selling equivalent or similar goods, services or rights in the Brazilian market.

Paragraph 2- For comparison purposes the sales price:

I - in the Brazilian market shall be computed net of unconditional discounts granted, of the ICMS tax, of the ISS tax, of the COFINS and PIS/PASEP contributions;

II - in exports shall equal the value obtained after a reduction relating to freight and insurance costs, where such costs have been borne by the exporting company.

Paragraph 3- Once verified that the sales price of export transactions is lower than the limitation provided for by this article, the revenues from export sales shall be determined by adopting one of the methods established hereunder:

I - Export Sales Price Method PVEx: defined as the arithmetic mean of the sales price of exports made by the same company to other customers, or by another Brazilian exporter of equivalent or similar goods, services or rights during the same tax period and under similar payment conditions;

II - Wholesale Price in the Country of Destination Less Profit Method PVA: defined as the arithmetic mean of the sales price for equivalent or similar goods in sales made in the wholesale market of the country of destination, under similar payment conditions, reduced by the taxes included in the price of the country of destination and by a profit margin of 15% of the wholesale price;

III - Retail Price in the Country of Destination Less Profit Method - PVV: defined as the arithmetic mean of the price of equivalent or similar goods in sales made in the retail market of the country of destination, under similar payment conditions, reduced by the taxes included in the price and by a profit margin of 30% of the retail price;

IV - Acquisition or Production Cost Plus Taxes and Profit Method - CAP: defined as the arithmetic mean of the acquisition cost or production cost of exported goods, services or rights, increased by taxes paid in Brazil and by a profit margin of 15% of the total costs plus taxes.

Paragraph 4- The arithmetic means referred to in the preceding paragraph shall be computed based on the respective IRPJ tax determination period (Law n° 9.430, of 1996, article 19, paragraph 4).

Paragraph 5- In the event that more than one method is applied, the lowest amount determined shall be used for the adjustment, with due regard to the provision set forth in the next paragraph (Law n° 9.430, of 1996, article 19, paragraph 5).

Paragraph 6- If the amount determined under the methods mentioned in paragraph 3 is lower than the sales price disclosed in the export documents, the amount relating to the revenue recognized as per said documents shall prevail (Law n° 9.430, of 1996, article 19, paragraph 6).

Paragraph 7- The portion of revenues determined under this article which exceeds the amount registered in the company's books shall be added to net profit (article 249) for purposes of determining the IRPJ tax basis, as well as the deemed or arbitrarily determined profit (Law n° 9.430, of 1996, article 19, paragraph 7).

Paragraph 8- For purposes of paragraph 3, only purchase and sale transactions carried out between unrelated buyers and sellers shall be considered (Law n° 9.430, of 1996, article 19, paragraph 8).

Paragraph 9- Under special circumstances, the Ministry of Finance may change the percentages referred to in this article and items II, III and IV of paragraph 3 (Law n° 9.430, of 1996, article 20).

CHAPTER II

GOODS, SERVICES AND RIGTHS PURCHASED ABROAD

Article 241- Costs, expenses and charges relating to goods, services and rights set out in the import or purchase documentation for operations carried out with a related party shall be deductible upon determination of the corporate income tax (IRPJ) tax basis only up to the amount that does not exceed the price determined by one of the methods under this Section (Law n° 9.430, of 1996, article 18):

Comparable Uncontrolled Price Method- PIC: defined as the arithmetic mean of prices of goods, services or rights equivalent or similar to goods, services and rights selected within the Brazilian market or in other countries in purchase and sale operations under similar payment conditions;

Resale price Minus Profit Method- PRL: defined as the arithmetic mean of the resale price for the goods or rights less:

a) unconditional discounts granted;

b) taxes and contributions levied on the sales;

c) commission and brokerage fees paid;

d) profit margin of twenty percent;

Production Cost Plus Profit Method- CPL: defined as the average cost of production of equivalent or similar goods, services or rights in the country of origin increased by the taxes and fees applied to the export transaction and by a profit margin of twenty percent of the total cost.

Paragraph 1- The weighted arithmetic means referred to in items I and II and the average acquisition cost referred to in item III shall be computed taking into consideration the prices used and costs incurred during the whole period for purposes of determination of the IRPJ tax basis relating to the costs, expenses or charges (Law n° 9.430, of 1996, article 18, paragraph 1).

Paragraph 2- For purposes of the provisions set forth in item I, only purchase and sale transactions carried out between unrelated buyers and sellers shall be considered (Law n° 9.430, of 1996, article 18, paragraph 2).

Paragraph 3- For purposes of the provisions set forth in item II, only prices adopted in transactions with unrelated buyers shall be considered (Law n° 9.430, of 1996, article 18, paragraph 3).

Paragraph 4- If more than one method is used, the highest amount thus determined shall be deducted, with due regard to the provisions of the next paragraph (Law n° 9.430, of 1996, article 18, paragraph 4).

Paragraph 5- If the amounts determined under said methods is higher than the acquisition cost disclosed in the respective documents, the deductibility amount relating to the cost as per said documents shall prevail (Law n° 9.430, of 1996, article 18, paragraph 5).

Paragraph 6- For deductibility purposes, amounts paid by the purchasing company in relation to freight and insurance as well as to taxes levied on imports are included in the purchase cost (Law n° 9.430, of 1996, article 18, paragraph 6).

Paragraph 7- The portion of costs which exceeds the amount determined in accordance with this article shall be added to the IRPJ tax basis (Law n° 9.430, of 1996, article 18, paragraph 7).

Paragraph 8- The deductibility of amortization or depreciation charges relating to the goods and rights will be limited, in each determination period, to the amount calculated based on the price determined by one of the methods under this article (Law n° 9.430, of 1996, article 18, paragraph 8).

Paragraph 9- The provisions set forth under this article are not applicable to the payment of royalties and payment of fees for technical, scientific, administrative or similar assistance referred to in articles 352 to 355 (Law n° 9.430, of 1996, article 18, paragraph 9).

Paragraph 10- Under special circumstances, the Ministry of Finance may change the percentages referred to in this article (Law n° 9.430, of 1996, article 20).

CHAPTER III

DETERMINATION OF AVERAGE PRICES

Article 242- . The average costs and prices referred to in articles 18 and 19 shall be determined based on:

I - official publications or reports from the government of the country of origin of seller or buyer, or a declaration of such country's tax authorities if the country concerned has signed a double taxation or information exchange treaty with Brazil;

II - market research conducted by a recognized, technically qualified firm or institution or technical publication, which specifies the industry sector, the period, the companies researched and the profit margins, and which identifies, for each company, the data collected and analyzed.

Paragraph 1- The publications, research or technical reports under this article shall be accepted as evidence only if carried out in compliance with internationally accepted appraisal methods and provided they are concurrent to the Brazilian IRPJ tax period in question (Law n° 9.430, of 1996, article 21, paragraph 1).

Paragraph 2- Profit margins other than those stipulated by articles 18 and 19 shall be accepted provided that the taxpayer provide evidence of their adequacy based on technical publications, research or reports prepared in conformity with the provisions set forth by this article (Law n° 9.430, of 1996, article 21, paragraph 2).

Paragraph 3- The technical publications, research and reports referred to in this article may be rejected by the Federal Revenue Service if deemed to be inconsistent or unreliable (Law n° 9.430, of 1996, article 21, paragraph 3).

CHAPTER IV

INTEREST TO RELATED PARTIES

Article 243- Interest paid or credited to a related party, which arises from a loan agreement which has not been registered with the Central Bank of Brazil, shall be deductible upon computing the IRPJ tax basis only up to the amount not exceeding the Libor rate for six-month US dollar deposits increased by an annual spread of 3% or applicable prorated percentage (Law n° 9.430, of 1996, article 22).

Paragraph 1- With respect to a loan to a related party, a lender resident in Brazil shall recognize at least the amount determined as provided for under this article as financial income (Law n° 9.430, of 1996, article 22, paragraph 1).

Paragraph 2- For purposes of the limitation established hereunder, the interest payments shall be calculated based on the agreement value translated into the equivalent Brazilian currency amount at the foreign exchange rate, published by the Central Bank of Brazil, prevailing on the final date for calculation of such interest (Law n° 9.430, of 1996, article 22, paragraph 2).

Paragraph 3- The interest amount which exceeds the deductibility limit and the difference in interest income determined in accordance with the provisions set forth in the preceding paragraph shall be added to the legal entity's IRPJ tax basis, or to its deemed or arbitrarily determined profit (Law n° 9.430, of 1996, article 22, paragraph 3).

Paragraph 4- Interest rates stipulated in agreements registered with the Central Bank of Brazil shall be accepted (Law n° 9.430, of 1996, article 22, paragraph 4).

CHAPTER V

RELATED PARTY- CONCEPT

Article 244- For purposes of articles 240, 241 and 243, a related party of a Brazilian company is (Law n° 9.430, of 1996, article 23):

I - its nonresident head office;

II - its nonresident branch or branch related entity (sucursal);

III - a nonresident individual or legal entity which has a capital participation and is deemed to be a controlling or affiliated party as provided for by paragraphs 1 and 2 of article 243 of Law no. 6404 enacted on December 15, 1976;

IV - a nonresident legal entity which is deemed to be its controlled or affiliated entity as provided for by paragraphs 1 and 2 of article 243 of Law no. 6404/76;

V - a nonresident legal entity in which the same shareholder has at least a 10% capital participation in that entity and in the Brazilian company or holds administrative or equity control of both companies;

VI - a nonresident individual or legal entity which, together with a Brazilian resident company, holds a capital participation in a third company which renders these parties controlling or affiliated parties as provided for by paragraphs 1 and 2 of article 243 of Law no. 6404/76;

VII - a nonresident individual or legal entity which is associated with the Brazilian company in a consortium or joint venture as established under Brazilian law;

VIII - a nonresident individual which is a relative up to the third degree, spouse or common-law spouse of any officer, partner or direct or indirect controlling shareholder;

IX - a nonresident individual or legal entity which is an exclusive agent, distributor or concessionaire in Brazil for the purchase and sale of services, goods or rights;

X - a nonresident individual or legal entity which has an exclusive agent, distributor or concessionaire in Brazil for the purchase and sale of goods, services, or rights;

CHAPTER VI

COUNTRIES IMPOSING LOW TAXATION

Article 245- The rules for the transfer prices, costs and interest rates under articles 240, 241, 242 and 243 are also applicable to transactions carried out by an individual or legal entity resident or domiciled in Brazil with any individual or legal entity, whether related or unrelated, resident or domiciled in a jurisdiction that imposes no taxation on income or a taxation at a rate of less than 20% (Law n° 9.430, of 1996, article 24).

Paragraph 1- For purposes of the end of this section, the tax legislation of said country shall be considered, being applicable to individuals or legal entities, according to the nature of the entity with which the transaction has been carried out (Law n° 9.430, of 1996, article 24, paragraph 1).

Paragraph 2- In case of an individual resident in Brazil (Law n° 9.430, of 1996, article 24, paragraph 2).

I - the amount determined under one of the methods under article 241shall be treated as acquisition cost for purposes of computing a capital gain on the sale of goods or rights;

II - for purposes of computation of the capital gain on the operation, the price corresponding to the goods or rights sold shall be determined in accordance with the provisions set forth by article 240;

III - the price of services rendered determined in accordance with the provisions set forth by article 240 shall be treated as taxable revenue;

IV - interest charges determined in accordance with article 243 shall be considered as taxable revenue.