Alternative to the focus on the arm's length principle: The Brazilian approach Buenos Ayres, April 2013 General Assembly of CIAT

Positive Aspects and Opportunities for Improvement Developments in the Brazilian Legislation Transfer Prices in Brazil Sumário 2 Ministério da Fazenda

Transfer Prices in Brazil 01 3 Ministério da Fazenda Applicability: Operations for Import and Export of: Goods Rights or Services (including interest) Carried out by residents or domiciled in Brazil with related parties that are residents or domiciled abroad;

Transfer Prices in Brazil 01 4 Ministério da Fazenda Applicability: Examples of related parties with the Brazilian corporations: Head-office, agency or branch domiciled abroad; Controlled or related corporation domiciled abroad (Individual Taxpayer or Corporation); Corporation located abroad under common share control; An associated corporation domiciled abroad (Individual or Corporation); Individual domiciled abroad, relative or similar up third degree relation with the directors and controllers of the Brazilian corporation; Exclusive agent of the Brazilian corporation domiciled abroad (Individual or Corporation);

Transfer Prices in Brazil 01 5 Ministério da Fazenda Applicability: Independent of association, in the carried out transaction: By an interposed entity, which operates with another one domiciled abroad that is associated with the Brazilian corporation. With any Individual or Corporation domiciled in a tax heaven: -Country or dependency that does not tax income or tax it at a rate of less than 20%; or -Country whose legislation does not allow access to the composition or equity ownership of legal entities. In country or dependency with a Privileged Taxation Regime that: -Grants tax advantage to the non domiciled Individual or Corporation, without requiring substancial economic activity or conditioning to not performing that economic activity.

Methods of Import/Export (Law No. 9,430/96) Ministério da Fazenda

7 Methods in Importation IMPORT MethodMargin PIC – Compared Independent Prices N/A PRL – Resale Price minus Margin 40% (farmachemicals, tabacco, optical, photographic and cinematographic instruments, dental, medical and hospital equipment, oil) 30% (chemmicals, glass, cellulose, paper, metalurgy) 20% (other sectors) CPL – Production Cost plus Margin 20% PCI – Price under Quotation in Imports N/A (Commodities)

8 Ministério da Fazenda Methods in Exportation EXPORT MethodMargin PVEx – Export Sales Prices N/A PVA – Wholesale Price at Destiny, minus Margin 15% PVV – Retailer Price at Destiny, minus Margin 30% CAP – Acquisition or Production Cost plus Taxes and Margin 15% PECEX – Price under Quotation in Exports N/A (Commodities)

Developments in the Brazilian Legislation 02 9 Ministério da Fazenda

10 Transfer Prices in Brazil Defining hypothesis for disqualification of the method that was elected by the taxpayer – not showing useful elements for verifying the calculation (administrative litigation); Recent Changes in the Brazilian Legislation Creation of specific methods for import and export of commodities – PCI and PECEX. End of the method PRL 60 – Margin considered high by the taxpayers; Creation of the sector margins of 40% and 30% in the method PRL – Development of margins that are compatible with certain activities;

Positive Aspects and Opportunities for Improvement Ministério da Fazenda

12 Positive Aspects of the Brazilian Model Existence of multiple methods; Respect to the method chosen by the taxpayer; Margins expressly defined by law: Legal security; Objectivity in the calculation; Possibility of reviewing the margins;

13 Ministério da Fazenda Positive Aspects of the Brazilian Model Methods for commodities: Parameters defined by the stock exchange; Low degree of discretion by the administration; More objective methods for services and intangibles.

14 Ministério da Fazenda Critics and Opportunities for Improvement Fixed margins (equiparation of distinct sectors): Possibility for creation of sector margins; Complexity of calculation in the production chain: Computerized auxilliary tools (calculation method is the same for several taxpayers);

15 Ministério da Fazenda Critics and Opportunities for Improvement “Differentiated” Commodities: Possibility of adjustment based on the medium prize Correlative adjustments: Brazil does not adopt them due differences in methodology.

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