Brazil clarifies transfer pricing rules, approves protocol to tax treaty with Denmark

by Francisco Lisboa Moreira,  Bocater, Carmargo, Costa e Silva, Rodrigues, São Paulo

The Brazilian government has issued guidance clarifying several aspects of the transfer pricing rules. Also, last Wednesday, February 14, the Brazilian Congress finally approved a protocol to the double tax treaty signed between Brazil and Denmark.

The transfer pricing changes, Normative Instruction 1.870/19 issued January 29, clarify that the definition of commodities provided by the Brazilian revenue authority is solely those products listed in Annex I and that have active negotiations and quotations in a Futures Exchange listed in Annex II.

Clarifications were also made to the formula to determine the 5% deviation margin, for which no adjustment to the taxable basis will have to be made.

Further, the document confirms the understanding that, for applying the internal comparable uncontrolled price method (PIC), any purchase made by any party in the same business group located in a foreign jurisdiction is taken into account, as long as such jurisdiction is not considered a tax haven or a privileged tax regime.

It is expected that Brazilian transfer pricing guidance will be further harmonized with OECD practices, including the allowance of a profit split or a transaction net margin method, or even a change in the fixed margins for the resale price method.

However, we believe that this may require a change in the legislation, which may be why the Normative Instruction did not address these matters.

Brazil-Denmark tax treaty protocol

The newly approved Brazil-Denmark tax double tax protocol was signed March 23, 2011, but only sent to the Congress in 2015. It aims to add some anti-abuse measures to Brazil-Denmark tax treaty.

The most important measure is a change to the wording of article 23 (methods for avoiding double taxation) which results in the termination of the tax sparing regime for those situations.

The existing wording foresees the granting of a 25% tax credit for interest (article 11) and royalties (article 12), situations in which, normally, Brazil would exercise its source tax powers at 15%. Instead, a credit will be allowed as a deduction to the tax paid in Brazil (ordinary imputation).

Items 5 and 6 of article 23 of the treaty were removed.

Reference is made to article 23, item 5, where the undistributed profits of a subsidiary held by a controlling person from the other state would not be subject to taxation.

The exclusion of this item is a Brazilian request to counter tax avoidance against its universal taxation regime for corporations. The new provision responds to the Brazilian Superior Court of Justice ruling that the Danish treaty (along with Belgium and Luxembourg) would prevail against the universal taxation regime in Brazil (REsp 1.325.709/RJ).