BRAZIL Law and Practice Contributed by: Paulo Honório de Castro Júnior, Bruno Marques Feitosa and Urick Soares, William Freire Advogados
• Cost Plus Profit (MCL) – which consists of comparing the gross profit margin obtained over the supplier’s costs in a controlled trans - action with the gross profit margins obtained over the costs in comparable transactions carried out between unrelated parties. • Transaction Net Margin (MLT) – which con - sists of comparing the net margin of the controlled transaction with the net margins of comparable transactions carried out between unrelated parties, both calculated based on an appropriate profitability indicator. • Profit Sharing (MDL) – which consists of the division of profits or losses, or part thereof, in a controlled transaction in accordance with what would be established between unrelated parties in a comparable transaction, consider - ing the relevant contributions provided in the form of functions performed, assets used and risks assumed by the parties involved in the transaction. The most appropriate method is that which provides the most reliable determination of the terms and conditions that would be established between unrelated parties in a comparable transaction, including the following aspects. The PIC method will be considered the most appropriate when there is reliable information on prices or consideration amounts arising from comparable transactions carried out between unrelated parties, unless it can be established that another method is more appropriately appli - cable. The legislation under discussion deter - mines that this is the preferred method adopted for transactions with commodities. Tested Party Another innovation to be highlighted is the con - cept of “tested party” .
Unlike the provisions then in force in Law No 9,430/1996, which determined that the transfer pricing test be carried out from the perspective of the Brazilian taxpayer, Law No 14,596/2023 brings the possibility that the tested party is the entity abroad, when the method can be applied more appropriately and for which more reliable data from comparable transactions carried out between unrelated parties is available. It should be noted the alignment of this new rule with the OECD Guidelines, which define tested party as “that to which a transfer pricing meth- od can be applied in the most reliable way and for which the most reliable comparable can be found, that is, most of the time it will be the one that has the least complex functional analysis.” The functions performed, the assets used, and the risks assumed by the parties to the con - trolled transaction may influence the definition of the tested party. The following methods require the selection of one of the parties to the controlled transac - tion, whose respective financial indicator will be examined: • the first stage of the CDM residual analysis (CDM is the method in which profits and losses are divided on the basis of the contri - butions made by the relevant 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 • PRL; • MCL; • MLT; and
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