Historically, only transactions not registered with the Brazilian Central Bank ("BACEN") were subject to transfer pricing control in Brazil. The transfer price on such transactions should not exceed the Libor rate applicable to US Dollar deposits for a period of six months, plus an annual spread equal to 3%. In other words, the minimum value charged by the Brazilian lender and/or the maximum amount deductible by the Brazilian borrower should respect such limits, which have/had not been changed since Brazilian transfer pricing rules were enacted in 1996.
Since the Brazilian transfer pricing rules were applicable only to those situations where the transaction was not registered with BACEN, the list of transactions in which such rules had to be observed was relatively small. For this reason, this subject never received the attention it deserved (by neither the taxpayers nor the tax authorities).
This scenario changed with the publication of Law nos. 12.715/2012 and 12.766/2012. According to this legislation, all foreign loans must observe Brazilian transfer pricing rules (regardless of their registration with BACEN). These changes brought such problematic to taxpayer´s spotlight.
According to the provisions of Law 12.715/2012, no loan transactions made between related parties may exceed the Libor rate plus a 3% spread. This provision created a huge practical problem to the extent it so happened that the Libor rate was less than the interest usually charged in free market transactions. This is because when such limit was established in1996, the Libor rate fluctuated between 6% and 7%. However, by 2012, the same rate was fluctuating between 0.60% and 0.65%. In mathematical terms, this would mean that a Brazilian lender could only consider a maximum rate of 3.65% per year for income tax purposes.
In this context, Law 12.766/2012 was published, changing article 22 of Law no. 9.430/1996. According to the new provision of such article, the interest paid (or received) in consideration of foreign loans should observe the rate determined by the same article "plus a spread to be fixed by the Brazilian Finance Minister based upon the market average proportionately to the period to which it refers".
The abovementioned article provides for three rates to be considered by Brazilian taxpayers in the application of transfer pricing rules, as follows: (i) the Brazilian Federative Republic's sovereign bonds market issued overseas in US dollars, in the case of transactions conducted in US-dollars with pre-determined rates; (ii) the Brazilian Federative Republic's sovereign bonds market issued overseas in Reais in the case of transactions conducted overseas in Reais with pre-determined rates; (iii) Libor for a six-month period, in all other cases. At the same time, article 22 does not provide for the spread rate but empowers the Brazilian Finance Minister to establish such rate.
Within this context, on August 2, 2013, Finance Ministry Ordinance Ruling nr. 427 was published, establishing the spread percentages on overseas-linked loans as well as with individuals or companies resident and domiciled in tax havens.
According to Ordinance Ruling nr. 472/2013, as of January 1, 2013, the percentage margin in the form of a 'spread' to be added to the interest rates for the purposes of deductibility of financial expenses in establishing the actual profit and the basis for calculation of the CSLL tax, in transactions connected to or with residents in tax haven countries, was established at 3.5%.
It is worth mentioning that the rules established by Ordinance Ruling no. 472 entered into force on loans as of January 1, 2013. A 2.5% spread shall be considered by Brazilian lenders as financial income in consideration of loans granted as of August 1, 2013. In the case of loans granted before this date, no spread should be added to the rates mentioned in the paragraph above for the purposes of establishing financial revenue.
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.