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A recently issued Normative Instruction (NI) allows the Brazilian Federal Revenue Office (RFB) to use information from the taxpayer's transfer pricing analysis, in general, to determine whether the customs value of goods in an import transaction between related parties was affected by that relationship.

Background

There have been frequent discussions on whether the information from a local transfer pricing analysis may be used as a reference for customs valuation, for purposes of determining how the taxes and duties levied on the import of goods are calculated.

The starting points for transfer pricing rules and customs valuation criteria are the recommendations of the OECD¹ and the WTO's² GATT.³ There also are international efforts to bring together or harmonize these rules and criteria, which were previously applied independently.

Normative Instruction

Locally, Brazil has gone a step further towards harmonizing the transfer pricing rules and customs valuation criteria. In June, the RFB published NI 2,090/22, which has provisions related to the declaration and control of the customs valuation of goods in import operations. Among the provisions of the NI, there are references to the Brazilian transfer pricing rules, establishing that the RFB may use information, such as the parameter price from the taxpayer's transfer pricing analysis, to evaluate if the price on import transactions between related parties was affected by their relationship. Depending on the outcome of the RFB's analysis, the RFB might contest the use of the transaction value method for purposes of the customs valuation.

By regulating the intersection between the transfer pricing rules and customs valuation criteria, the RFB formalizes in writing the procedure already seen in practice as part of the tax audit processes, when the RFB rejects the transaction value originally declared for customs purposes and draws upon the parameter price from the local transfer pricing study as a reference value.

In Brazil's Administrative Board of Tax Appeals (CARF), the procedure adopted by the RFB and formalized in NI 2,090/22 is under discussion, and so far, there is no consensus, with precedents both favorable and unfavorable with respect to the procedure currently adopted by the RFB. In its defense, the RFB argues that the comparative analysis (i.e., parameter price vs. transaction value) allows it to investigate the circumstances under which the foreign trade transaction took place, and this procedure would be in accordance with the Customs Valuation Agreement (AVA-GATT).

Brazilian transfer pricing rules currently in force prioritize aspects related to the application and validation of the local transfer pricing methods, whose statutory margins are used only as assumptions. As such, assuming the fixed margins required for transfer pricing purposes will reliably reflect the taxpayers' economic reality might lead to distorted expectations when it comes to market-compatible prices.

The comparison between (1) the actual prices agreed upon in import transactions between related parties and (2) the parameter prices, calculated in Brazil in accordance with local transfer pricing rules, should not be enough to reject the application of the transaction method for customs purposes. Notwithstanding, the lack of robust supporting documentation provided by taxpayers has made it difficult to have the RFB's comparison approach withdrawn.

Implications

In light of the guidance in NI 2,090/22, taxpayers should have well-structured supporting documentation that supports the rationale behind the taxpayers' definition of declared prices. The documentation should justify the reasoning that the prices were not influenced by the fact that the parties were related.

If Brazil becomes an OECD member and adopts a new transfer pricing system that aligns with the OECD Guidelines, it will become even more important for taxpayers to have robust material providing details on economic factors and policies in place for intercompany pricing processes.

Taxpayers should evaluate if it makes sense to change their internal structure to have their tax team work together with their business/operations teams to develop better controls and supporting documentation in preparation for transfer pricing vs. customs valuation discussions, as well as tax audits.

Additionally, taxpayers should define a strategy both to avoid fines and respond to potential tax audits, if there is a difference between the declared prices and the parameter prices, especially if the intercompany transactions are materially relevant.

In summary, because it is unknown what effect Brazilian transfer pricing rules will have on the customs valuation process, the provisions in NI 2,090/22 allowing the RFB to use the parameter price should be a call to taxpayers to be extra diligent about their processes. They should take action to revisit their processes before they are subject to potential challenges by the RFB.

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ENDNOTES

¹ Organization for Economic Cooperation and Development

² World Trade Organization

³ General Agreement on Tariffs and Trade