Legislation - Regulatory Instructions

"Regulatory Instruction no. 243/02, issued by the SRF of November 11, 2002

Published in the Federal Official Gazette (DOU) of November 13, 2002

Provides for the prices to be adopted in operations relating to purchase and sale of goods, services and rights carried out between individuals or legal entities resident or domiciled in Brazil and individuals or legal entities resident or domiciled abroad deemed to be related parties.

THE FEDERAL REVENUE SERVICE SECRETARY, in the capacity conferred upon him by article 209, item III of the Internal Statute of the Federal Revenue Service (SRF), approved by Administrative Ruling (Portaria) no. 259 of August 24, 2001 issued by the Ministry of Finance (MF), and in view of the provisions set forth by articles 18 to 24 and 28 of Law no 9430, of December 27, 1996, by article 2 of Law no. 9959, of January 27, 2000, by articles 3 and 4 of Law no. 10451, of May 10, 2002, by article 46 of Provisional Measure (MP) no. 66, of August 29, 2002, and by Administrative Ruling no. 95 issued by the MF on April 30, 1997, hereby establishes that:

Article 1 For purposes of the income tax and Social Contribution on Net Profit (CSLL) legislation, the deductibility of costs of imported goods, services and rights and the recognition of revenues and earnings deriving from exports, in transactions carried out by individuals or legal entities resident or domiciled in Brazil with individuals or legal entities resident or domiciled outside of Brazil deemed related parties, shall be determined in accordance with the provisions of this Regulatory Instruction.

Paragraph 1 - In this Regulatory Instruction, the word "resident" will be applied to an individual or legal entity resident or domiciled in Brazil, and the term "nonresident", to an individual or legal entity resident or domiciled outside of Brazil.

Paragraph 2 - The rules governing the tax treatment relating to transactions carried out by legal entities domiciled in Brazil with an individual or legal entity resident or domiciled outside of Brazil, are applicable, to the extent deemed possible, to transactions carried out by individuals resident in Brazil with an individual or legal entity resident or domiciled outside of Brazil.

Related Parties

Article 2 - For purposes of this Regulatory Instruction, a related party of a Brazilian company is:

I - its head office resident or domiciled abroad;

II - its branch or branch related entity (sucursal) resident or domiciled abroad;

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

VII an individual or legal entity resident or domiciled abroad which is associated with the Brazilian company in a consortium or joint venture as established under Brazilian law;

VIII - an individual resident or domiciled abroad 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 - an individual or legal entity resident or domiciled abroad which is an exclusive agent, distributor or concessionaire in Brazil for the purchase and sale of services, goods or rights;

X an individual or legal entity resident or domiciled abroad which has an exclusive agent, distributor or concessionaire in Brazil for the purchase and sale of goods, services or rights.

Paragraph 1 - For purposes of item V, the legal entity domiciled in Brazil and a legal entity resident or domiciled abroad are deemed to be under:

I - joint corporate control, when the same individual or legal entity, irrespective of residence or domicile, has rights with respect to each company under conditions that ensure prevalence over corporate resolutions and power to elect the majority of its officers;

II joint administrative control, when:

a) the position of Chairperson of the Board or President-Director of both companies are held by the same person;

b) the positions of Chairperson of the Board of one company and President-Director of the other company are held by the same person;

c) the same person holds a management position with decision-making power in both companies.

Paragraph 2 - In the case of item VII, the companies will be deemed to be related only for the duration of the consortium or joint venture under which the association occurs;

Paragraph 3 - For purposes of item VIII, the common-law spouse of a controlling officer, partner or shareholder of the company domiciled in Brazil will be a person living with him/her as a spouse, as set forth by Law no. 9278 of May 10, 1996.

Paragraph 4 - For purposes of items IX and X:

I - Characterization as a related party only applies to the operations with goods, services and rights with respect to which there is exclusivity;

II - An exclusive distributor or dealer is construed as an individual or legal entity holding an exclusive right with respect to part or the entirety of the country's concerned territory, including Brazil;

III - Exclusivity shall be evidenced by means of a written agreement or, otherwise, by the performance of commercial operations relating to types of goods, services or rights, performed exclusively between both companies, or exclusively through one of them.

Paragraph 5 - The transfer price rules established hereunder are also applicable to the operations carried out by a legal entity domiciled in Brazil via an unrelated appointed person, through which this unrelated appointed person conducts operations abroad with a person deemed related to the Brazilian entity.

Paragraph 6 - The existence of any relationship with individuals or legal entities resident or domiciled abroad with respect to purchase and sale operations performed during the calendar year shall be reported to the Federal Revenue Service (SRF) via the corporate income tax return (DIPJ).

Costs of Goods, Services and Rights Purchased Abroad

Article 3 - 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) and CSLL tax bases only up to the amount that does not exceed the price determined by one of the methods under articles 8 to 13.

Common Rules for Import Costs

Article 4 - For purposes of determining the price to be used as a parameter for importation of goods, services or rights from a related party resident or domiciled abroad, the importing legal entity may opt for any of the methods referred to in articles 8 to 13, except for the case provided for in paragraph 1, irrespective of any prior notice to the Federal Revenue Service.

Paragraph 1 - The price to be used as a parameter for comparison with the price disclosed in the importation documents, when the goods, services or rights have been purchased for use in or application to the production of other goods, services or rights by the importing party itself shall be determined only on the basis of the methods under article 8, article 12, item IV, b, and article 13.

Paragraph 2 - If more than one method is used, the highest amount thus determined shall be deducted, and the method adopted by the company shall be consistently applied with respect to goods, services or rights throughout the tax computation period.

Paragraph 3 - The deductibility of depreciation, depletion or amortization charges relating to the goods and rights will be limited, in each tax computation period, to the amount calculated based on the price determined by one of the methods under articles 8 to 13, where the utilization of the method referred to in article 12 is forbidden if there were no resale operations.

Paragraph 4 - For purposes of determining the price to be used as a parameter, calculated based on the method established in article 12, the transportation and insurance costs borne by the importing company as well as non-recoverable taxes due on import will be included in the price charged in the import operation.

Paragraph 5 - As for prices calculated based on the methods referred to in articles 8 and 13, the amounts referred in paragraph 4 hereunder may be added to the cost of imported goods, provided that they are also taken into consideration in the adopted price, for comparison purposes.

Article 5 - In case of imports from related parties, after determination of the prices to be used as parameter in accordance with one of the methods applicable to imports, these prices shall be compared to the prices disclosed in the purchase documents:

Paragraph 1 - If the purchase price paid by a related party domiciled in Brazil exceeds the price used as a parameter, in view of the difference between the prices thus compared, the amount resulting from the excess cost, expenses or charges that were treated as nondeductible item for purposes of computing IRPJ and CSLL tax bases, shall be adjusted in the account books by means of a debit entry posted to accumulated results in stockholders equity as per contra to a credit entry posted to:

I - the asset account in which the purchase of the goods, rights or services was recorded and where they remained through the closing or the tax computation period; or

II - the appropriate cost or expense account of the tax computation period in which the value of the goods, rights or services was recorded, upon being written off of the asset account in which their purchase had been originally recorded.

Paragraph 2 - In the case of goods posted to Fixed Assets that generated depreciation, amortization or depletion quotas in the tax year in which they were imported, the excess import price shall be posted to books as explained in paragraph ', item II hereunder. In the event of amount not yet written off, the excess import price shall be credited directly to the asset account, having an entry to the accumulated results account referred to in paragraph 1 as per contra.

Paragraph 3 - Should the legal entity opt to add back to its IRPJ and CSLL tax bases the value of the excess determined in each tax computation period only upon the realization of the asset, right or service through sale or write down at any title, the total excess price determined in the tax computation period in which acquisition took place shall be excluded from its stockholders equity for purposes of determining the equity interest referred to in article 9 of Law no. 9249, of December 23, 1995.

Paragraph 4 - In the hypothesis formulated in paragraph 3 hereunder, the legal entity shall record the value of total excess price in a subaccount of the account in which the value of the good, service or right purchased abroad was recorded.

Paragraph 5 - If the purchase price paid by a related party domiciled in Brazil is inferior to the price used as a parameter, no adjustment implying tax effects shall be made.

Article 6 - For purposes of determining the price to be used as a parameter based on the method prescribed by articles 8 and 12, the computed prices will be multiplied, prior to the comparison, by the volumes related to the respective transaction and the results will be consolidated and divided by the total volume, thus determining the weighted average price to be compared with the price booked as cost by the company in its results.

Sole paragraph - For the comparison purposes, the weighted average prices of goods, services and rights purchased by the related party, domiciled in Brazil, shall be calculated by reference to the volumes and amounts corresponding to all purchase transactions carried out during the concerned fiscal year.

Article 7 - The amount expressed in foreign currency upon import of goods, services and rights will be converted into Brazilian reais (R$) at the selling exchange rate established by the opening quotations schedule issued by the Central Bank of Brazil, for the date:

I - of customs clearance, in case of goods;

II - of the recognition of the costs or expense corresponding to the rendering of the service or the acquisition of the right, with due regard to the accrual method of accounting.

Comparable Uncontrolled Price Method PIC

Article 8 - The cost of imported goods, services and rights that is deductible upon the determination of IRPJ and CSLL tax bases may be determined in accordance with the Comparable Uncontrolled Price Method, defined as the arithmetic mean of prices of goods, services and 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.

Sole paragraph: Under this method, the price of imported goods, services and rights purchased from a related party shall be compared with the prices of equivalent or similar goods, services and rights:

I sold by same exporter to resident or nonresident unrelated parties;

II purchased by the same importer, from resident or nonresident unrelated parties;

III - in purchase and sale transactions carried out between other resident or nonresident unrelated parties.

Article 9 - The amounts of goods, services or rights shall be adjusted so as to minimize the effects of differences in the business conditions, physical nature and contents on the prices to be compared.

Paragraph 1 - As regards equivalent goods, services and rights, the only adjustments permitted relate to:

I - payment terms;

II - negotiated volumes;

III - liability for product fitness warranty or for the applicability of the service or right;

IV - liability for promotion of the goods, services or rights to the public by means of advertising and publicity;

V - liability for quality control, service and sanitary standards;

VI - agency costs for purchase and sale transactions carried out by unrelated parties, taken into account for the purpose of price comparisons;

VII - packaging;

VIII - freight and insurance.

Paragraph 2 - The payment term differences shall be adjusted for the amount of interest corresponding to the period between the terms granted for payment of the liabilities under consideration, based on the interest rate applied by the supplier when such interest rate is applied consistently with respect to all installment sales.

Paragraph 3 - With respect to paragraph 2 hereunder, if a rate is not proven to be applied consistently, the adjustment shall be made by reference to:

I - the Special Liquidation and Custody System - SELIC rate for federal bonds, prorated for the period, when both buyer and seller are resident in Brazil;

II - Libor, prorated for the period, for six-month-US-dollar deposits increased by 3% per year as a spread, if one of the parties is nonresident.

Paragraph 4 - The adjustments in view of differences in the negotiated volumes shall be made based on documents issued by the selling company, demonstrating the use of lower prices for higher volumes purchased by the buyer.

Paragraph 5 - For purposes of adjustment for the warranties for product fitness under Section III of paragraph 1, the price may not exceed the value arrived at by dividing total expenditures within the previous tax computation period by the quantity of goods, services and rights under warranty for product fitness within the domestic market over the same period.

Paragraph 6 - Where under paragraph 5 hereunder the goods, services or rights have not yet been sold in the Brazilian market, the cost in local currency shall be accepted corresponding to the same warranty for product fitness provided in another country.

Paragraph 7 - With respect to adjustments by virtue of the provisions set forth in items IV and V of paragraph 1, the price of the goods, services or rights purchased from a related party resident or domiciled abroad which bears the cost of promotion of the goods, services or rights in Brazil may exceed the price adopted by another company which does not bear the same cost limited to the amount spent per unit of the product by the exporting company bearing said liability.

Paragraph 8 - For purposes of paragraph 7 hereunder, in case of advertising and publicity for promotional purposes:

I - relating to a business name or trademark, the costs will be split on a pro rata basis into all goods, services or rights sold in Brazil, in proportion to the volumes and respective values of each type of goods, services and rights;

II - relating to a product, the pro rata split will be effected on the basis of such product volumes.

Paragraph 9 - When data from a purchasing company which has borne agency costs with the purchase of goods, services or rights are used and the price is a parameter for comparison with the price adopted in a purchase transaction with a related party not subject to this cost, the latter price for the goods, services or rights may exceed the former price up to the amount corresponding to the agency cost.

Paragraph 10 - For purposes of comparison, the price of goods, services or rights will be also adjusted to take account of the differences in the cost of materials used in packaging and the freight and insurance charged in each case.

Article 10 - In the case of similar goods, services or rights the prices shall be adjusted to take account of the differences of physical nature and differences in contents in addition to the adjustments provided for under article 9 hereunder, considering the costs relating to the production of the goods, the performance of the service or the constitution of the right exclusively for the parts corresponding to the differences between the models subject to comparison.

Article 11 - If identification of purchase and sale transactions within the same tax computation period is not possible, the comparison may be made against prices adopted for transactions carried out in previous or subsequent periods provided these prices are adjusted for foreign exchange rate variations in the reference currencies from the date of one transaction to the date of the other transaction.

Paragraph 1 - In the case of adjustments to take account of exchange variations, the prices used as parameters for comparison, when derived from transactions carried out in countries for which currency has no exchange rate in local currency, shall be first converted into US dollars and subsequently into Brazilian reais, using as a basis the respective exchange rates for the date of each transaction.

Paragraph 2 - In the event that this article applies, fluctuations in commodity prices shall be taken into account when evidenced by national or international stock market quotations verified during the period.

Resale Price Minus Profit Method - PRL

Article 12 - The cost of imported goods, services or rights that is deductible from IRPJ and CSLL tax bases may also be determined using the Resale Price Minus Profit Method (PRL), defined as the weighted average of the resale price for the goods, services or rights, less:

I - unconditional discounts granted;

II - taxes and contributions levied on the sales;

III - commission and brokerage fees paid; and

IV - profit margin of:

a) twenty percent, in case of resale of goods, services or rights.

b) sixty percent, in case of imported goods, services or rights used in the production process.

Paragraph 1 - The resale prices to be taken into account shall be the prices used by the importing company in retail and wholesale transactions with unrelated individual or corporate buyers.

Paragraph 2 - The average purchase and resale prices shall be weighted as a function of the negotiated volumes.

Paragraph 3 - Upon determination of the weighted average price the total values and volumes relating to existing inventories at the beginning of the tax computation period shall be computed.

Paragraph 4 -For purposes of this method, the weighted arithmetic mean of the price shall be verified by taking into account the resale transactions carried out from the purchase date through the end of the tax computation period.

Paragraph 5 - If the transactions used to determine the average price include cash sales made and installment sales, the prices relating to the latter shall be taken into account net of interest imputed thereto as computed at the rate applied by the company when such rate is proven to be applied consistently to all installment sales throughout the term granted for payment.

Paragraph 6 - In the hypothesis formulated in paragraph 5 hereunder, if no evidence is produced that an interest rate is consistently applied, the adjustment shall be made by reference to:

I - the Special Liquidation and Custody System - SELIC rate for federal bonds, prorated for the period, when both buyer and seller are resident in Brazil;

II - Libor, prorated for the period, for six-month-US-dollar deposits increased by 3% per year as a spread, if one of the parties is nonresident.

Paragraph 7 - For purposes of this article:

I - discounts will be deemed unconditional when not dependent on future events, i.e. discounts that are granted on each resale and that appear in the respective sales invoice;

II - taxes, contributions and other charges imposed on sales will be deemed as such when assessed by the government on the sales and included in the price, such as ICMS, ISS, PIS/Pasep and Cofins;

III - commission and brokerage fees shall be understood as amounts paid or amounts payable as such with respect to the sale of goods, services or rights that are subject to examination.

Paragraph 8 - The profit margin under the heading of item IV, "a" shall be applied to the resale price disclosed in the tax invoice excluding - only - any unconditional discounts granted.

Paragraph 9 - The Resale Price Minus Profit method where a twenty-percent gross margin is used shall only be applicable to those cases in which no value is added in the Country to the cost of imported goods, services or rights, that is, cases which represent a mere resale of the said imported goods, services or rights.

Paragraph 10 - The method under item IV, "b" of this article shall be applied in case of imported goods, services or rights that are used in the production process.

Paragraph 11 - In the hypothesis formulated in paragraph 10 hereunder, the parameter price of imported goods, services and rights shall be determined excluding the value added to them in the Country and the gross margin of sixty percent, according to the following methodology:

I - net sale price: the weighted average of sale prices of the finished good produced, less unconditional discounts granted, taxes and contributions levied on the sales as well as commissions and brokerage fees paid;

II - percentage participation of imported goods, services or rights in the finished good produced: the percentage ratio, computed in accordance to the entity's costing system, between the value of the imported good, service or right and the produced good's total cost;

III - participation of imported goods, services or rights in the produced good's sale price: the application of the percentage participation of imported good, service or right in the produced good's total cost, computed according to item II, to the net sale price computed in accordance with item I;

IV - profit margin: the application of the sixty percent rate to the "participation of imported good, service or right in the produced good's sale price", computed according to item III;

V - parameter price: the difference between "participation of imported good, service or right in the produced good's sale price", computed in accordance with item III, and the sixty percent profit margin, computed according to item IV.

Production Cost Plus Profit Method - CPL

Article 13 - The cost of imported goods, services or rights that is deductible from IRPJ and CSLL tax bases may also be determined by use of the 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 20% of the total cost.

Paragraph 1 - The price determination under this method shall take into account exclusively the costs referred to in article 4 incurred in the production of the goods, services or rights, excluding any other costs, even though these costs may affect the profit margin of the wholesaler.

Paragraph 2 - The production cost shall be itemized per component, value and respective suppliers.

Paragraph 3 - Information from the supplying unit may be used as well as information from production units located in the country of origin of the goods, services or rights.

Paragraph 4 - For purposes of determining the price under this method, the following items may be included as part of the cost:

I - the acquisition cost of raw materials, feedstock and packaging materials used in the production of the goods, services or rights;

II - the cost of any other goods, services or rights applied to or consumed in production;

III - the cost of manpower applied to production, including to the cost of direct supervision, maintenance and custody of production facilities and the respective payroll taxes incurred, required, or provided for by prevailing legislation in the country of origin;

IV - the rental, maintenance and repair costs, and depreciation, amortization or depletion charges relating to the goods, services or rights used in production;

V - amounts corresponding to reasonable levels of breakage and loss incurred in production, as provided for by the tax legislation in the country of origin of the goods, services or rights.

Paragraph 5 - Upon determination of the cost of the goods, services or rights purchased by the Brazilian entity, the costs referred to in paragraph 4 hereunder and incurred by the foreign production unit will be considered in proportion to the volume sold to the Brazilian entity.

Paragraph 6 - Where a similar product is used to establish the price, the production cost will be adjusted to reflect the differences between the goods, services or rights acquired and the goods, services or rights used as a parameter.

Paragraph 7 - The profit margin referred to in the heading of this Section shall be applied to the costs computed before taxes and duties collected by the country of origin on the value of goods, services or rights purchased by the Brazilian company.

Income from Export Transactions

Article 14 - Income earned in transactions with a related party shall be subject to price adjustments when the average sale price of goods, services or rights exported during the corresponding IRPJ and CSLL tax computation period is less than 90% of the average sale price of equivalent or similar goods, services or rights in the Brazilian market during the same period and under similar payment conditions.

Paragraph 1 - The average price hereunder shall be obtained by multiplying prices by the volumes of each transaction and the results achieved shall be consolidated and divided by the total volume, thus determining the weighted average price.

Paragraph 2 - If the legal entity does not sell in the domestic market, the average price shall be determined based on information obtained from other companies selling equivalent or similar goods, services or rights in the Brazilian market.

Paragraph 3 - For purposes of this article, only purchase and sale transactions carried out in the Brazilian market between unrelated buyers and sellers shall be considered.

Paragraph 4 - 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, of other charges assessed by the government, of the freight and of the insurance costs borne by the selling company.

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

Common Rules for Export Revenues

Article 15 - The value of goods, services or rights shall be adjusted so as to minimize the effect on the prices to be compared by differences in business conditions, physical nature and contents.

Paragraph 1 - In the case of equivalent goods, services or rights, only adjustments relating to the following shall be allowed:

I - payment terms;

II - negotiated volumes;

III - liability for product fitness warranty or for the applicability of the service or right;

IV - liability for promotion of the goods, services or rights to the public by means of advertising and publicity, pursuant to provisions set forth in article 9, paragraphs 7 and 8;

V - liability for quality control, service and sanitary standards;

VI - agency costs for purchase and sale transactions carried out by unrelated parties, taken into account for the purpose of price comparisons;

VII - packaging;

VIII - freight and insurance;

IX - credit risks.

Paragraph 2 - The payment term differences shall be adjusted for the amount of interest corresponding to the period between the terms granted for payment of the liabilities under consideration, based on the interest rate applied by the supplier when such interest rate is applied consistently with respect to all installment sales.

Paragraph 3 - With respect to the paragraph 2, if a rate is not proven to be applied consistently, the adjustment shall be made by reference to:

I - the Special Liquidation and Custody System (Selic) rate for federal bonds, prorated for the period, when both buyer and seller are resident in Brazil;

II - Libor, prorated for the period, for six-month-US-dollar deposits increased by 3% per year as a spread, if one of the parties is nonresident.

Paragraph 4 - The adjustments in view of differences in the negotiated volumes shall be made based on documents issued by the selling company, demonstrating the use of lower prices for higher volumes purchased by the buyer.

Paragraph 5 - For purposes of adjustment for the warranties for product fitness under Section III of paragraph 1, the price may not exceed the value arrived at by dividing total expenditures within the previous tax computation period by the quantity of goods, services and rights under warranty for product fitness within the domestic market over the same period.

Paragraph 6 - Where under the hypothesis formulated in paragraph 5, the goods, services or rights have not yet been sold in the Brazilian market, the cost in local currency shall be accepted corresponding to the same warranty for product fitness provided in another country.

Paragraph 7 - With respect to adjustments by virtue of the provisions set forth in items IV and V of paragraph 1, in order to compare the price of the goods, services or rights sold to a related party resident or domiciled abroad which bears the cost of promotion of the goods, services or rights to the price charged by another company which does not bear the same cost, such burden shall be deducted, by product unit, from the price charged by the company that bears such costs.

Paragraph 8 - The rule under paragraph 7 hereunder shall also be applied with respect to agency charges to the sale of goods, services or rights.

Paragraph 9 - The prices of goods, services or rights shall also be adjusted to take account of the differences in the cost of materials used in the packaging and the freight and insurance charged in each case.

Paragraph 10 - For purposes of item IX of paragraph 1, the adjustments for credit risks shall be:

I - allowed only with respect to the transactions carried out between buyer and seller domiciled in Brazil;

II - made based on the percentage resulting from comparing total losses and total credits relating to the previous calendar year.

Article 16 - The average price charged on exports and the parameter price shall be obtained by multiplying the prices by the quantities relating to each operation and the results thus obtained shall be added and divided by the total quantity, giving rise, therefore, to the weighted average price.

Article 17 - In the case of similar goods, services or rights, in addition to the adjustments provided for under article 16, the prices shall be adjusted to take account of the differences of physical nature and differences in contents considering the costs relating to the production of the goods, the performance of the service or the constitutions of the right exclusively for the parts corresponding to the differences between the models subject to comparison.

Article 18 -If identification of sale transactions within the same tax computation period of the prices under examination is not possible, the comparison may be made with prices adopted for transactions carried out in previous or subsequent periods provided these prices are adjusted for foreign exchange rate variations in the reference currency from the date of one transaction to the date of the other transaction.

Sole paragraph In the event that this article applies, fluctuations in commodity prices shall be taken into account when evidenced by national or international stock market quotations verified during the period.

Article 19 - Once verified that the sales price of export transactions is lower than the limitation provided for by article 14, including the adjustments referred to under articles 15 to 18, the revenues from export sales shall be determined by adopting one of the methods under articles 23 to 26.

Paragraph 1 - For purposes of application of the methods referred to in this article, the weighted arithmetic means shall be computed with respect to the tax computation period, unless the company is using data from other periods, in which case the arithmetic means shall be related to the respective period.

Paragraph 2 - In the circumstances described in paragraph 1, the prices determined in foreign currency shall be adjusted to take into account variations in the foreign exchange rate of the reference currency, determined between the transaction dates.

Article 20 - 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 sole paragraph hereunder, and the method giving rise to said lower revenue shall be applied by the Company, consistently, to each good, service or right, during the entire tax computation period.

Sole paragraph - If the amount determined under said methods is lower than the sales price disclosed in the export documents, the amount relating to the revenue recognized as per said documents shall prevail.

Article 21 - The portion of revenues determined under this Regulatory Instruction which exceeds the amount registered in the company's books shall be added to net profit for purposes of determining IRPJ and CSLL tax bases, as well as taken into consideration upon computing the deemed or arbitrarily determined profit.

Sole paragraph - Upon computing the exploitation profit [profits generated by tax exempt activities], the amount to be added shall be taken into consideration in the corresponding revenues, whether or not said revenues are eligible to the tax incentive.

Article 22 - The sales revenue deriving from exports of goods, services and rights expressed in foreign currency will be converted into Reais at the purchase exchange rate established by the opening quotations schedule issued by the Central Bank of Brazil, for the date:

I - of shipment, in case of goods;

II - of the effective provision of the service or transfer of the right.

Paragraph 1 - The date of the effective provision of the service or transfer of the right is the date to recognize the revenue as earned, deemed as the moment at which title thereto arises, when it shall be accounted for on an accrual basis.

Paragraph 2 - In case the taxpayer has opted for the deemed profit taxation regime, on a cash basis, the revenue shall be construed as earned on an accrual basis.

Export Sales Price Method PVEx

Article 23 The revenue from export sales may be determined on the basis of the Export Sale Price Method (PVEx), defined as the weighted average of sale prices charged on exports effected to other clients by the entity itself, or by another domestic exporting entity, for equivalent or similar goods in sales made during the same IRPJ tax basis computation period, under similar payment conditions.

Paragraph 1 - For purposes of this method, only the sales to customers unrelated to the Brazilian entity shall be taken into account.

Paragraph 2 - The adjustments referred to under articles 15 to 18 are applicable to the prices that are used as a parameter, under this method.

Wholesale Price in the Country of Destination Less Profit Method PVA

Article 24 The revenue from export sales may be determined on the basis of the Wholesale Price in the Country of Destination Less Profit Method (PVA), defined as the weighted average of the sale prices 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, collected in the country of destination, and by a profit margin of 15% of the wholesale price.

Paragraph 1 - The taxes to be deemed included in the price are those which bear a similarity to the ICMS and ISS taxes, and Cofins and PIS/Pasep contributions.

Paragraph 2 - The profit margin to which this article refers shall be applied to the gross wholesale price.

Paragraph 3 - The adjustments under articles 15 to 18 are applicable to the prices used as a parameter.

Retail Price in the Country of Destination Less Profit Method PVV

Article 25 - The revenue from export sales may be determined on the basis of the Retail Price in the Country of Destination Less Profit Method (PVV), defined as the weighted average 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.

Sole paragraph - The rules contained under paragraphs 1 and 2 of article 24 and the adjustments under articles 15 to 18 shall be applicable to this method.

Acquisition or Production Cost Plus Taxes and Profit Method CAP

Article 26 - The revenue from export sales may be determined on the basis of the Acquisition or Production Cost Plus Taxes and Profit Method (CAP), which is defined as the weighted average 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 1 - Amounts paid for freight and insurance by the purchasing company are included in the purchase cost with respect to exported goods, services and rights.

Paragraph 2 - The portion of deemed IPI credit granted as reimbursement of Cofins and PIS/Pasep contributions corresponding to the exported goods shall be excluded from the purchase and production costs.

Paragraph 3 - The profit margin under this article shall be applied to the outstanding amount, after exclusion of the portion of the deemed credit described under paragraph 2 hereunder.

Paragraph 4 - The price with respect to direct exports made by the producer itself, determined using this method, may be deemed a parameter for the price charged by the entity in exports carried out through a trading company, where no additional adjustment relating to the trading company's profit margin need to be made.

Interest

Article 27 - 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 IRPJ and CSLL tax bases 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.

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 above as financial income.

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.

Paragraph 3 - The interest amount which exceeds the deductible limit and the difference in interest income determined in accordance with the provisions set forth in paragraph 2 hereunder shall be added to the IRPJ tax basis, or the deemed or arbitrarily determined profit, and the CSLL tax basis.

Paragraph 4 - Interest rates stipulated in agreements registered with the Central Bank of Brazil shall be accepted.

Paragraph 5 - In the case of interest payments in which the paying individual or legal entity bears the withholding income tax burden imposed thereon, the amount thereof shall not be taken into account for purposes of the deductible limit.

Paragraph 6 - The computation of interest referred to in this article may be made based on agreements or set of financial operations with identical dates, rates and terms.

Paragraph 7 - For purposes of this article, operations are deemed financial if resulting from agreements, including those relating to investment of funds and capitalization of credit lines, executed with an individual or legal entity resident or domiciled abroad and that were not registered with the Central Bank of Brazil, which remittance or transfer of the principal was carried out in foreign currency or by means of an international transfer of Brazilian currency.

Paragraph 8 - For purposes of the limits referred to in this article and in paragraph 1 hereunder, the Libor rate to be used is the one prevailing on the date on which the agreement's initial term commenced, and shall be changed at each 183 days, up to the date on which the term for computation of interest ends.

Miscellaneous

Concept of Similarity

Article 28 - For purposes of this Regulatory Instruction, two or more goods under conditions in which they are used for their intended purposes shall be deemed to be similar when such goods, concurrently,

I - have the same nature and the same function;

II - may substitute for each other in their intended function; and

III - have equivalent specifications.

Supplemental Documentary Evidence

Article 29 - In addition to the documents regularly issued by companies in their purchase and sale operations, evidence of prices to which this Regulatory Instruction refers may also be produced by way of:

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 criteria and provided they are concurrent to the Brazilian entity's IRPJ tax computation period.

Paragraph 2 - Price publications acceptable as evidence comprise:

I - national stock market quotations;

II - quotations from internationally recognized stock markets, such as those in London, United Kingdom, and Chicago, United States of America.

III - research conducted under the auspices of multilateral entities, such as the Organization of Economic Cooperation and Development (OECD) and the World Trade Organization (WTO).

Paragraph 3 - With regard to research relating to a period other than that referring to the price used by the company, the amount determined shall be adjusted to take account of the variation in the foreign exchange rate for the reference currency from one period to another.

Paragraph 4 -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.

Capturing New Markets

Article 30 - Exports to a related party carried out for purposes of capturing a market in a country for the goods, services or rights produced in Brazil may be transacted at average prices lower that 90% of the average prices used in Brazil, irrespective of any adjustment to the underlying revenues, provided that:

I - the goods, services or rights exported have not been traded in the country of destination by the exporting company or by a related party located elsewhere;

II - the goods, services or rights are resold to consumers at a price which is lower than other equivalent or similar goods, services or rights traded within the country of destination;

III - the exports are made in compliance with the conditions established in a specific export plan previously approved by the SRF's General Taxation Coordination (Cosit);

IV - the export plan demonstrates that the related party resident in the country of destination shall not earn a profit from the transaction and, if a loss is anticipated for the Brazilian company due to the lower price charged, it should disclose the period of time within which profitability is expected to be achieved.

Paragraph 1 - For comparison purposes, the adjustment rules set forth in articles 15 to 18 are applicable to the prices of equivalent or similar goods, services or rights under item II;

Paragraph 2 - The export plan under this article should contain:

I - the business name of the related party in charge of distributing the goods, services or rights in the country of destination, including the respective business address;

II - the volume of each good, service or right exported in order to capture the market;

III - the distribution methods in the market of destination;

IV - the local companies through which the distribution shall be made;

V - the margins, in terms of percentage, contracted with dealers;

VI - the period in which the plan shall be implemented, informing the respective commencement and conclusion dates;

VII - a forecast of expenditures in connection with the promotion of exported goods, services or rights, in the country of destination.

Paragraph 3 - Only export plans with implementation terms of 12 months or less shall be approved.

Paragraph 4 - The provisions set forth in this article are not applicable to the case of goods, services or rights exported to a country imposing low taxation, or to countries with internal legislation imposing secrecy, as defined under article 39.

Special Kinds of Transactions

Article 31 - The adoption of prices of goods, services or rights used in special kinds of purchase and sale transactions, such as liquidation of inventory, discontinuance of operations or sales made subject to government subsidies shall not be allowed as a parameter.

Changes in Percentages

Article 32 - The percentages under articles 12, 13, 14, 24, 25 and 26 may be altered by resolution of the Minister of Finance.

Paragraph 1 - Changes in the percentages under this article shall be of general, sectoral or specific nature, ex officio or in compliance with a request from an entity representing an industrial sector with respect to the goods, services or rights traded by the represented companies, or upon request from a concerned company.

Paragraph 2 - The rules applied to the inquiry procedures provided for by Decree no. 70235 of March 6, 1972 - Tax Administrative Proceeding , as amended by articles 48 to 50 of Law no. 9430 of December 27, 1996, shall be observed in the applications for changes in percentages filed by business sector or by company.

Article 33 - Cosit shall examine applications for changes in percentages under paragraph 2 of article 32, and shall make proposals to the Secretary of the Federal Revenue Service, on a case-by-case basis, to be submitted for approval by the Minister of Finance.

Paragraph 1 - In the case of a refusal, the decision shall be reported in the application; if approved, the decision shall be published in its entirety in a Ministerial Administrative Ruling in the Federal Official Gazette.

Paragraph 2 - The publication procedure for decisions awarded by the Minister of Finance described in paragraph 1 shall also be applicable to cases of partial approval.

Paragraph 3 - If an application is approved, Cosit shall disclose whether it agrees to the period of time suggested by the applicant, or otherwise propose a time period which it deems appropriate.

Article 34 - Applications for changes in percentages made by trade associations or by a company shall contain information about the period during which the proposed margins will be effective and shall be submitted accompanied by the following documents:

I - a statement of the production cost of goods, services or rights, issued by the nonresident supplier;

II - a statement of annual total of purchases and sales per type of good, service or right which is the subject of the application;

III - a statement of amounts paid as freight and insurance, with respect to the goods, services or rights;

IV - a statement of the deemed IPI credit granted as reimbursement of PIS/Pasep and Cofins contributions, corresponding to the goods which are the subject of the application.

Paragraph 1 - The statements shall be supported by the following documents:

I - Copies of the purchase documents relating to goods, services or rights, the tax collection documents on imports and other charges computed as cost, relating to the previous calendar year;

II - Copies of the fiscal documents evidencing payment of taxes and duties levied on exports charged in the exporting country;

III Copies of the sales fiscal documents issued in the last calendar year for transactions between the nonresident related party and the unrelated wholesale companies acting as distributors of the goods, services or rights which are the subject of the applications;

IV - Copies of the sales fiscal documents issued to consumers by retailers located in the country of destination of the goods, services or rights, which disclose the respective prices charged.

Paragraph 2 - The documents described in paragraph 1 shall not be annexed to the application, but shall be kept on file for presentation at the fiscal domicile of the applicant company or the company represented by the applicant trade association whenever so required by Cosit.

Paragraph 3 - In addition to the documents referred to in this article, applications for changes in percentages may be justified on the basis of the documents referred to in article 29.

Exemption from Providing Evidence

Article 35 - A legal entity which realized pre IRPJ and CSLL taxes net profits deriving from revenues from export sales to related companies, in an amount equivalent to a minimum of 5% of the total revenue from said exports may demonstrate the adequacy of prices charged in referred exports, during the same period, exclusively with the documents relating to the operation itself.

Paragraph 1 - For purposes of this article, the net profits corresponding to exports to related parties shall be determined in accordance with the rules set forth in article 187 of Law no. 6404 of December 15, 1976 and in the income tax legislation.

Paragraph 2 - Upon determination of the net profits corresponding to said exports, shared sales cost and expenses will be prorated based on the respective net revenues.

Article 36 - A legal entity whose net revenue originating from exports during the calendar year does not exceed 5% of the total net revenue realized in the same period may demonstrate the adequacy of prices charged in referred exports exclusively with the documents related to the operation itself.

Sole paragraph - The net revenue originating from exports shall include revenues from sales made to individuals or legal entities resident or domiciled in countries imposing low taxation.

Article 37- The provisions set forth by articles 35 and 36:

I - do not apply to sales transacted with related or unrelated party domiciled in a country or dependency imposing low taxation, or with internal legislation imposing secrecy, as defined under article 39;

II - do not entail definitive acceptance of the revenue amount recognized on the basis of the price adopted, which may be adjusted, if deemed inadequate, via ex officio procedures on the part of the SRF.

Margin of Difference

Article 38 - When in transactions with related parties, the adjusted price used as a parameter is either in excess of or lower than the price disclosed in import or export documents by a difference of up to 5%, the price shall be deemed acceptable.

Sole paragraph - In this case, no price adjustment shall be required from the company for purposes of computation of IRPJ and CSLL tax bases.

Country Imposing Low Taxation or with Legislation Imposing Secrecy

Article 39 - The rules for the transfer prices of goods, services and rights and for interest rates under this Regulatory Instruction 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 country or dependency that imposes no taxation on income or a taxation at a rate of less than 20% or, yet, with an internal legislation that imposes secrecy with respect to the legal entities' capital composition or ownership.

Paragraph 1 - With respect to a country or dependency imposing low taxation, the tax legislation to be considered is the one applicable to individuals or legal entities of the given country, according to the nature of the entity with which transactions were undertaken.

Paragraph 2 - In the case of a Brazilian resident individual:

I - the value determined by the methodology provided for under articles 8 to 13 shall be deemed as the cost basis for purposes of calculating capital gains on the sale of an asset or right;

II - the price related to the sale of an asset or right for purposes of calculating the capital gain shall be determined in accordance with the provisions set forth by articles 14 to 26.

III - the price of services rendered as determined by articles 14 to 26 shall be deemed to be taxable revenues.

IV - the interest payments determined according to article 27 should be deemed to be taxable revenues.

Paragraph 3 - For purposes of this article, the effective tax rate, in the jurisdiction of the individual or legal entity, shall be determined by comparing the total tax paid on profits by legal entities and the withholding tax on the distribution of such profits, with profits determined in accordance with Brazilian tax law before imposition of such taxes.

Paragraph 4 - For purposes of characterizing a foreign country or dependency as imposing low taxation, imposition of taxes on earned income and on capital shall be separately considered.

Inspection Procedures

Article 40 - The entity subject to inspection procedures shall provide to SRF's Tax Auditors (AFRF) responsible for the inspection:

I - the identification of the methodology it has adopted;

II - the documentation used to support the determination of the price adopted and the corresponding computation of the parameter price, and including the documentation that supports the fact that the entity is released from providing evidence of its prices adequacy, pursuant to articles 35 and 36.

Sole paragraph - If the methodology is not described and the documents required by item II are not submitted, or if upon submission of the documents are incomplete or unreliable as evidence of transfer pricing, the AFRF in charge of the inspection may determine the price, based on other information available, by applying one of the accepted methods under this Regulatory Instruction.

Article 41 - The determination of the transfer prices under this Regulatory Instruction shall be effected on an annual basis, on December 31, except in the hypotheses of commencement or discontinuance of activities and suspicion of fraud.

Article 42 - Cosit has jurisdiction over the response to inquiries about transfer prices under this Regulatory Instruction.

Article 43 - The transfer price rules under this Regulatory Instruction are not applicable to the payment of royalties as well as fees for technical, scientific, administrative or similar assistance.

Article 44 - SRF Regulatory Instruction no. 32, of March 30, 2001 is hereby formally revoked, without discontinuance of its normative effectiveness.

Article 45 - This Regulatory Instruction is effective as from its publication date.

EVERARDO MACIEL"