By Georgios Theodoros Anastassiadis[1]

1. Brief Introduction to the Brazilian Transfer Pricing Legislation

The Brazilian transfer pricing rules were introduced into the local legislation by means of Law 9,430, from 1996, coming into force in 1997. Having been inspired by the US legislation, these rules' main goal is to prevent the shifting of taxable profits from Brazil to other jurisdictions, be it via overvaluing imports or undervaluing exports carried out with affiliated companies abroad and entities established in low taxation countries.

The underlying principle of this mechanism is to set a parameter price, for each operation subject to the legislation, that reflects market conditions practiced by independent parties without any favoring situation, which is also known as the arm's length principle. In this context, methods were created to calculate the parameter prices, based upon this principle, for both import and export operations.

In the case of imports, the following methods have been established: (i) Comparable Uncontrolled Price ("PIC"), based on the criteria of comparability of identical or similar goods, services and rights, transacted between independent parties; (ii) Resale Price Minus ("PRL"), calculated using the sales price of the imported item minus a pre-fixed profit margin of 20%, 30% or 40%, depending on the industry sector; (iii) Cost Plus Method ("CPL"), consisting of the production cost plus a fixed margin of 20%; and, at last, (iv) the Commodities Method ("PCI"), for the cases of import of commodities subject to quotation in internationally recognized exchange markets.

On the other hand, in the case of exports, the following calculation methods have been created: (i) the Comparable Uncontrolled Price on Exports ("PVEx"), as described above; (ii) the Resale Price Minus, using 15% and 30% fixed margins, in the case of wholesale and retail markets abroad, respectively; (iii) Cost Plus Method, using a 15% fixed margin; and, at last, (iv) the Commodities Method, which uses the quotation of exchange markets as a comparison basis.

Having been briefly and preliminarily considered the overall framework of transfer pricing in Brazil, we shall now explore this subject from the standpoint of the joint effort that many jurisdictions have been recently employing towards a higher efficiency of these rules, in the context of BEPS and its action plans, more specifically Action Plan 13, which establishes the Country-by-Country Report ("CbCR").

2. The Global Context: Transfer Pricing and BEPS

The OECD member States have launched the BEPS Project, which means Base Erosion and Profit Shifting, aiming to detain the reduction of the taxable base and the departure of profits to low or no taxation jurisdictions.

Founded upon consolidated International Tax Law principles, such as transparency and substance, BEPS is nowadays being implemented by means of 15 Action Plans, all of them tackling subjects intimately related, in the international context, to the illegal reduction of the tax burden, the abuse on the use of tax treaties, the disclosure of aggressive tax planning and harmful tax practices, amongst others.

As far as transfer pricing is concerned, Action Plans 8, 9 and 10 approach the issues of intangibles, capital and risks, whereas Action Plan 13, once focused on tax transparency, discusses the documentation for purposes of transfer pricing, in which context the CbCR is created, consisting of an annual report by means of which the final controller of a conglomerate provides the tax authorities of its jurisdiction with data such as the location of the group's activities, income and tax paid, what would, then, be shared amongst the tax authorities of several countries, taking into account the international agreements for the exchange of tax information.

The main objective of this report would be to provide the tax authorities throughout the world with the necessary information for local tax inspections to take place, aiming to avoid the shifting of profits to low or no taxation jurisdictions.

3. The Brazilian Context: "Declaração País-a-País"

As a member of G-20, Brazil became an associate to the BEPS Project, having its membership been formalized via an approval by the National Congress in 2014[2].

Considering this, the Brazilian tax authorities ("RFB") have been following up on the progress of the Project and issuing rules in order to implement the Action Plans in the Brazilian context, such as, for example, the Normative Instruction 1,681, from December 28th 2016, which establishes the local CbCR – in Portuguese, "Declaração País-a-País" ("DPP") – based upon BEPS' Action Plan 13.

In general terms, all companies domiciled in Brazil that ultimately control a multinational conglomerate must file the DPP to the RFB, being dismissed from this obligation only in the cases where the total consolidated revenues of group, on the previous year, are lower than BRL 2,260,000,000.00 or EUR 750,000,000.00.

Such report must be provided on Register W of the Brazilian Corporate Income Tax Return ("ECF") as from 2017, related to the 2016 calendar-year, and shall contain information aggregated per jurisdiction where the group operates, such as income from affiliated and non-affiliated companies, profit or loss before income tax, income tax paid and due, share capital, retained earnings, head count, etc., besides the identification of each entity belonging to the group, along with its jurisdiction and nature of its main economic activities.

On the other hand, in very special situations, Brazilian entities which are not the ultimate controller of the multinational group may also be obliged to file the DPP to RFB in Brazil, as in the cases in which: (i) they are designated by the controlling company abroad, in a specific calendar-year, to act as a substituting entity, since some conditions are verified; or (ii) the controlling entity abroad is not obliged to file the DPP in its own jurisdiction and does not do it voluntarily within 12 months following the end of the calendar-year, or if its jurisdiction does not have an agreement with Brazil or, at last, if there has been systemic failure on its jurisdiction (please note that the occurrence of only one of these three situations is enough to trigger the need of filing by the Brazilian entity, since no other subsidiary abroad has been designated).

Important to highlight that the first DPP to be filed to RFB will relate to the group corporate year beginning from January 2016.

4. Non-Controlling Brazilian Subsidiaries – Need to Report

As said above, non-controlling Brazilian subsidiaries will most likely not need to file the DPP at RFB, unless they are designated or the controlling company does not do so within 12 months after year-end.

Considering that the CbCR observes internal rules throughout the jurisdictions that are very similar to each other, not to say identical, given that they all are standardized and basically derive from the same background (BEPS' Action Plan 13), the situation where a non-designated subsidiary will have to file the report on its jurisdiction tends to be quite rare.

This is because most countries determine that the local controlling companies must submit the CbCR "within 12 months after the end of the group's financial year". This is the case, for example, of France, the Netherlands, the United Kingdom, Portugal and most of the other OECD countries.

Therefore, considering that most of these countries have their financial years from January to December, we can assume that, for the 2016 financial year, the ultimate controlling companies in these countries will file the CbCR no later than December 31st 2017, what would clearly dismiss the Brazilian subsidiary to file this report locally.

Anyhow, in order to be prepared against occasional challenge by the local authorities, we recommend the Brazilian subsidiaries to request, to its headquarters, a copy of the CbCR submitted therein, and to keep it on its records for five years, so it could be presented to the tax auditor in order to prove the compliance to this obligation.

Notwithstanding, we recommend the analysis of each specific case, once there could be some tricky situations.

One example is Japan, where usually the financial year starts in April and ends in March. In that country, the CbCR will be required for fiscal years beginning on or after April 1st 2016, with the submission of the report 12 months later, i.e., until March 31st 2018. Note that, if the Brazilian subsidiary follows the same financial year (April-March), both deadlines, in Brazil and Japan, will coincide and, so, the Brazilian subsidiary would be dismissed from the obligation locally. However, if the Brazilian entity adopts, for some reason, the regular financial year (January 2016 to December 2016), considering that the headquarters in Japan will submit the CbCR only in March 2018, then we could have a problem, once the Brazilian subsidiary would have to file the DPP in Brazil for the same year as well, generating duplicity of information and cost and time inefficiencies

5. Conclusion

Considering the above, Brazil has clearly joined the global trend of exchange of tax information, so as to fight practices that reduce or even eliminate local taxation.

In this context, the DPP is not a lonely example, once it has been implemented, in Brazil, other mechanisms with the same objective, such as: thin capitalization rules; controlled foreign companies rules; amnesty regimes; amongst others.

However, it is important to notice that the Brazilian DPP lacks legal grounds, having been established by an administrative rule of the local tax authorities, and not by a proper Law issued by the National Congress, which is a reason why, in case the taxpayer feels somehow harmed by such ruling, it will be possible to challenge its legality before judicial courts, with reasonable legal arguments.

[1] Georgios Theodoros Anastassiadis is a partner at Gaia, Silva, Gaede & Associados in Sao Paulo, Master of Science in Law and Accounting at LSE (United Kingdom), Specialist in Corporate Law at PUC/SP and Graduated in Law at USP. E-mail:

[2] Law 12,995, from June 18th 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.