Brazil: Transfer Pricing And International Trade In Brazil

The major step to be taken by the Brazilian government regarding its future tax reform is to raise awareness of the role it has to play in the globalized world. Despite all the efforts to import transfer pricing widely applied rules to Brazil, local tax policy does not seem to take law and business globalization seriously enough.

Brazil has struggled to improve its economic performance in a new healthy global trade order where India and China have had impressive growth. There are many reasons why Brazil economic performance is well below its desired level, but one of the most important is its taxation policy.

Transfer pricing in Brazil is strictly regulated. Although the applicable rules were inspired by OECD (Organization for Economic Co-operation and Development) models, local statutes adopted certain criteria and restrictions that are not available in the OECD rules that initially guided them. For example, it is mandatory to apply inflexible gross margins in order to calculate transfer prices under the methods described by the Brazilian legislation. Corporations generally agree that the application of these fixed standards margins to all taxpayers and their related parties abroad is like ignoring the different business interests that legitimately lead them to establish transfer prices that differ from average market prices. There are countless transfer pricing international transactions that do not have any comparable standard in the national market. The current law forces corporations to create risks they would otherwise avoid. If they adopt Brazilian margins they go against foreign rules, and in case they adjust to the more flexible rule of the country where they export, they will probably have their transfer prices questioned and disregarded by the Brazilian Treasury.

Although fixed profit margins are widely used in Brazilian transfer pricing rules, the legislation authorizes the use of different profit margins as long as the taxpayer proves they are based on publications, official reports or on statements¹ from the government of the buyer or seller’s country. The use of researches conducted by prestigious institutions and/or companies that hold a high reputation for its technical expertise are also accepted to justify the application of different profit margins, as long as they carefully discriminate the sector, the period, the companies taken into consideration and the margins found, as well as each company’s data be identified. It is essential that these reports and researches apply international evaluation methods and refer to the same corporate tax base calculation period. However, even though this is a rule that should make the Brazilian regulation of transfer pricing more flexible, there are several ministerial acts ("instruções normativas") that make very difficult to adopt a profit margin other than that previously established by law.

The reason for Brazil adopting strict rules like these is the lack of expertise to carefully analyze the circumstances of each case. Strict rules come with a inevitable cost in international trade. On the one hand, Brazilian tax policy avoids the lost of income with its inflexible rules, on the other hand, it leads taxpayers to engage in complex tax transactions and therefore subject themselves to risks which could be avoided in case they were under more flexible rules and subject to lower tax rates.

According to a study of the Inter-American Development Bank (IDB) the difference between trade policy and tax policy is waning². Because there has been a strong rise in the creation of free-trade areas, there is a growing need for converging international tax policies. Mercosur is a good example of failure to provide a good coordination of international actions. Although Brazil international trade is relatively small compared to many developed countries, its transfer pricing laws reveal an inadequate and inflexible tax policy behind it. It is not difficult to see that Brazil does not take international tax policies into account in a way to improve its role in international trade.

Globalization provides a great opportunity to reconsider the ideas behind tax policies adopted to increase tax revenues. It is necessary to acknowledge the existence and necessity of many complex and legitimate business strategies widely used around the world.

^{1 Said rule mentions statements from governments when there is a bilateral agreement between the foreign country and Brazil to facilitate information exchange and avoid double taxation.}

2 Periodic Note on Integration and Trade in the Americas, January 2004, available at http://idbdocs.iadb.org/wsdocs/getdocument.aspx?, page 9, last seen on July 15th, 2007.