Brazil transfer pricing ruling addresses Pfizer Lab’s resale price method

by Francisco Lisboa Moreira, Bichara Advogados, São Paulo

On November 13, the Brazilian Administrative Council of Tax Appeals (CARF) published a transfer pricing decision on the application of the resale price method related to Pfizer Labs. 

Until the 2012 calendar year, the application of the resale price method has a fixed margin of 20 percent for all cases where no local value was added to the resold good and a 60 percent fixed margin in all the other situations.

The discussion on the extension of the “value added” has always raised several problems for taxpayers when applying the resale price method as a simple separation of goods from larger packaging into small packaging or a mixture, would require application of the 60 percent margin.

This latest ruling, Decision n. 1201-002.628, concludes that the “value added” criteria, as applied by the tax authorities, was introduced only by a normative instruction, which is a document issued by the federal tax authorities and has no status of law.

Judge Luis Henrique Maroti Toselli said that the normative instruction has been wrongly interpreted as holding that any addition to the cost of importation would disqualify a transaction from being considered for resale and thus ineligible for the 20 percent margin.

The simple addition of value, such as the addition of packaging or expenditures to comply with regulatory requirements, should not be considered as a reason to apply the 60 percent margin, the judge said.

However, the decision was from one of the lower chambers of the CARF.

Given the numerous divergent decisions from other lower chambers, expect this case to be reviewed by the Superior Chamber of the administrative judging body. There are still a large number of similar cases to be decided on this matter.

The “aggregation” discussion ended in the 2013 calendar-year, when the two methods were merged into one, and any imported good must be tested by verifying its ratio in the cost of the good sold, then applying such ratio to the final sales price to an unrelated party.

The transfer pricing fixed margin is now at 20 percent for all cases, except some specific sectors, such as pharmaceuticals (40 percent), and chemicals (30 percent), among others.