BRAZIL Law and Practice Contributed by: Paulo Honório de Castro Júnior, Bruno Marques Feitosa and Urick Soares, William Freire Advogados
is eliminated. This issue may arise when employ - ing the other two traditional transaction meth - ods. These methods establish a transfer price based on the viewpoint of the tested party in the analysis. For instance, in the resale price method, the tested party in the transfer pricing analysis is the related party sales company. Con - versely, 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 unrelated par - ties. The use of other methods comprises generally accepted economic asset valuation techniques or models, in particular income-based valua - tion methods, such as the discounted cash flow methodology which, in general, is more appro - priate in the case of transactions that have as their intangible objects that are difficult to value or corporate interests for which it is not possible to identify reliable comparable at the time of their transfer between related parties. For this hypothesis, the taxpayer must maintain documents 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 presumably the most appropriate whenever there is reliable information on prices or consid -
eration amounts arising from comparable trans - actions carried out between unrelated parties. As this is a presumption, the taxpayer can use another method, even if there is reliable informa- tion 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 compara - ble independent prices for a traded commodity, including quotation prices or prices practised with unrelated parties (internal comparable), the PIC method will be considered the most appro - priate 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 func - tions, 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 transactions can be challenging due to the strict comparability standard required, espe - cially regarding product comparability. • External comparable uncontrolled transac - tions are typically hard to come by in practical applications. Aside from that, one should always seek which method is most appropriate for implementing the arm’s length principle.
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