BRAZIL Law and Practice Contributed by: Paulo Honório de Castro Júnior, Bruno Marques Feitosa, Matheus Di Felippo and Urick Soares, William Freire Advogados
The functions performed, the assets used, and the risks assumed by the parties to the controlled trans - action may influence the definition of the tested party. The following methods require the selection of one of the parties to the controlled transaction, whose respective financial indicator will be examined:
For this hypothesis, the taxpayer must maintain docu - ments and records that demonstrate the calculation methodology applied in the adopted method, the established parameters and criteria, as well as proof that it is the most appropriate method. 3.3 Hierarchy of Methods The PIC method (CUP in OECD Guidelines) is presum - ably the most appropriate whenever there is reliable information on prices or consideration amounts aris - ing from comparable transactions carried out between unrelated parties. As this is a presumption, the taxpayer can use anoth - er method, even if there is reliable information about prices and values of the transaction (which would give rise to the application of the PIC), as long as he/she proves that in view of the facts and circumstances of the transaction. The chosen method must be the most appropriate for the operation being evaluated. When there is reliable information on comparable independent prices for a traded commodity, includ - ing quotation prices or prices practised with unrelated parties (internal comparable), the PIC method will be considered the most appropriate to determine the value of the commodity transferred in the controlled transaction, unless it can be established, according to the facts and circumstances of the transaction and the functions, assets and risks of each entity in the value chain, that another method is applicable more appropriately, with a view to observing the arm’s length principle. The limitations of the PIC method are as follows. • Finding closely comparable uncontrolled transac - tions can be challenging due to the strict com - parability standard required, especially regarding product comparability. • External comparable uncontrolled transactions are typically hard to come by in practical applications. Aside from that, one should always seek which meth - od is most appropriate for implementing the arm’s length principle.
• PRL; • MCL; • MLT; and
• the first stage of the CDM residual analysis (CDM is the method in which profits and losses are divided on the basis of the contributions made by the rel - evant parties). The CUP method (known as PIC in Brazil) involves a two-sided analysis where the price is negotiated between two parties participating in the transaction. By using this method, the need to determine which of the related parties should be the tested party for transfer pricing purposes is eliminated. This issue may arise when employing the other two traditional trans - action methods. These methods establish a transfer price based on the viewpoint of the tested party in the analysis. For instance, in the resale price meth - od, the tested party in the transfer pricing analysis is the related party sales company. Conversely, in the cost-plus method, the tested party is the related party manufacturer. 3.2 Unspecified Methods The Brazilian standards authorise the use of another method, other than those described in the governing law, as long as the alternative methodology produces a result consistent with that which would be achieved in comparable transactions carried out between unre - lated parties. The use of other methods comprises generally accept - ed economic asset valuation techniques or models, in particular income-based valuation methods, such as the discounted cash flow methodology which, in gen - eral, is more appropriate in the case of transactions that have as their intangible objects that are difficult to value or corporate interests for which it is not pos - sible to identify reliable comparable at the time of their transfer between related parties.
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