terms of providing support for the correct price As Brazilian transfer pricing per se already has been a complex theme, this initiative of the tax administration seems to raise an unnecessary pre-programmed clash between taxpayers and tax authorities Production Cost Plus profit Method The last possible method that can be used for import transactions is the Production Cost Plus Profit Method, which considers the production costs of the imported products in the country of origin added to a fixed gross margin of 20 percent calculated on such costs before taxes in the country of origin Under the list of accepted costs are raw materials, packaging, labor, rent, maintenance, repair, depreciation, and amortization related to the fiscal year in concern, reasonable breakage, losses, and other costs incurred in Use of this method is highly restricted due to the difficulty in finding and documenting all requested information from nonresident related parties, which can not be forced to deliver it. In addition, costs data used to be very sensitive, often involving special secrecy policies within the company. Furthermore problems may increase if, e.g., the imported products are resold in the foreign country by an interposed dealer, related party or not, whose profit will have to be inside the 20 percent margin, since the method requests the use of production costs and do not accept costs paid to resellers. The costs to b proved must be those incurred by the original producer Methods for Export Transactions In general, prices involved in export transactions may suffer adjustments caused by business and products characteristics, restricted to ● payment terms ● negotiated volumes; e liability for product warranty or for the applicability of the service or 9 liability for promotion of the goods, services or rights to the public by means of advertising and publicity; o liability for quality control, service and sanitary standards o agency costs for purchase and sale transactions carried out by d parties, taken into account for the purpose of price comparisons o freight and insurance; and ● risks of credit Once adjusted, the average export price to related parties must be compared with the average price of the same product applied by the same export company to sales within the brazilian domestic market, when existent. If the
terms of providing support for the correct price. As Brazilian transfer pricing per se already has been a complex theme, this initiative of the tax administration seems to raise an unnecessary pre-programmed clash between taxpayers and tax authorities. Production Cost Plus Profit Method The last possible method that can be used for import transactions is the Production Cost Plus Profit Method,17 which considers the production costs of the imported products in the country of origin added to a fixed gross margin of 20 percent calculated on such costs before taxes in the country of origin. Under the list of accepted costs are raw materials, packaging, labor, rent, maintenance, repair, depreciation, and amortization related to the fiscal year in concern, reasonable breakage, losses, and other costs incurred in production. Use of this method is highly restricted due to the difficulty in finding and documenting all requested information from nonresident related parties, which can not be forced to deliver it. In addition, costs data used to be very sensitive, often involving special secrecy policies within the company. Furthermore, problems may increase if, e.g., the imported products are resold in the foreign country by an interposed dealer, related party or not, whose profit will have to be inside the 20 percent margin, since the method requests the use of production costs and do not accept costs paid to resellers. The costs to be proved must be those incurred by the original producer. Methods for Export Transactions In general, prices involved in export transactions may suffer adjustments caused by business and products characteristics, restricted to: payment terms; negotiated volumes; liability for product warranty or for the applicability of the service or right; liability for promotion of the goods, services or rights to the public by means of advertising and publicity; liability for quality control, service and sanitary standards; agency costs for purchase and sale transactions carried out by unrelated parties, taken into account for the purpose of price comparisons; packaging; freight and insurance; and risks of credit. Once adjusted, the average export price to related parties must be compared with the average price of the same product applied by the same export company to sales within the Brazilian domestic market, when existent. If the
export price is higher than 90 percent of the sale price in the domestic price no adjustments may be done. Otherwise, one of the export price methods may be applied Sales Prices in Exports The Sales Prices in Exports Method(PvEx is the export version that utilizes compared independent prices. It involves the comparison of the average price of exports of the same resident company to independent parties or of other Brazilian exporters who are shipping to independent parties. Prices to b compared must make reference to equal or similar products and payment conditions In transactions dealing with commodities, stock exchange prices may apply under some considerations The main problem in applying this method is that it relies on the taxpayer accessing reliable data from independent companies, which can be difficult Wholesale price in the countr of destination Less profit The Wholesale Price in the Country of Destination Less Profit Method(PVA) is somewhat of an export version of the resale price less profit method, which is available for imports. Following this method the taxpayer must determine the average of the wholesale price of identical or similar goods charged in the country of destination, under similar payment conditions. This average reduced by the taxes included in the price that are collected in the country of To ascertain the legal transfer price, a profit margin of 15 percent must be subtracted from the wholesale price, as the following example illustrates Cin any tn country I s120 Adjust Related parties Retail Price in the Country of Destination Less profit Similar to the method above, the Retail Price in the Country of Destination Less profit Method(PW considers the average of the retail price of identical or similar goods charged in the country of destination, under similar payment conditions, but reduced by the taxes included in the price that are collected in the country of destination. Since no intermediary commerce is present, the gross profit margin applied to achieve the legal transfer price is 30 percent, which must be subtracted from the retail price
export price is higher than 90 percent of the sale price in the domestic price, no adjustments may be done.18 Otherwise, one of the export price methods may be applied. Sales Prices in Exports The Sales Prices in Exports Method (PVEx)19 is the export version that utilizes compared independent prices. It involves the comparison of the average price of exports of the same resident company to independent parties or of other Brazilian exporters who are shipping to independent parties. Prices to be compared must make reference to equal or similar products and payment conditions. In transactions dealing with commodities, stock exchange prices may apply under some considerations. The main problem in applying this method is that it relies on the taxpayer accessing reliable data from independent companies, which can be difficult. Wholesale Price in the Country of Destination Less Profit The Wholesale Price in the Country of Destination Less Profit Method (PVA)20 is somewhat of an export version of the resale price less profit method, which is available for imports. Following this method, the taxpayer must determine the average of the wholesale price of identical or similar goods charged in the country of destination, under similar payment conditions. This average is reduced by the taxes included in the price that are collected in the country of destination. To ascertain the legal transfer price, a profit margin of 15 percent must be subtracted from the wholesale price, as the following example illustrates: Retail Price in the Country of Destination Less Profit Similar to the method above, the Retail Price in the Country of Destination Less Profit Method (PVV)21 considers the average of the retail price of identical or similar goods charged in the country of destination, under similar payment conditions, but reduced by the taxes included in the price that are collected in the country of destination. Since no intermediary commerce is present, the gross profit margin applied to achieve the legal transfer price is 30 percent, which must be subtracted from the retail price. B wholesaler in country 1 A in Brazil C in any country $ 198 $ 120 Wholesale price 198 - Taxes 154 - 15% Gross Profit 131 Adjustment (131-120) 11 Related parties