BRAZIL Law and Practice Contributed by: Paulo Honório de Castro Júnior, Bruno Marques Feitosa and Urick Soares, William Freire Advogados
differences, with demonstrations of the basis for making the adjustments, the procedures adopted and the calculations carried out, with details of all steps followed, variables used and results obtained in comparables. Examples of comparability adjustments are: • adjustments to accounting standards and consistency, including exchange rate adjust - ments; • adjustments for differences in functions, risk assumption, assets and capital, including working capital; and • adjustments to contractual terms, includ - ing, for example, sales conditions (volume, payment term and International Commercial Terms – Incoterm), conditions for amortisation or early settlement of debt and contractual options. Although Law No 14,596 dedicates a specific section to deal with transfer pricing on intangi - bles, the matter still pending detailed regulation by the Federal Revenue Service. Therefore, controlled operations with this asset class are subject to the general rules for transfer pricing. 4.2 Hard-to-Value Intangibles Law No 14,596 dedicates a specific section to deal with transfer pricing on intangibles, how - ever the matter still pending detailed regulation by the Federal Revenue Service. 4. Intangibles 4.1 Notable Rules Under the terms of the Law, in controlled trans - actions involving intangibles that are difficult to
value, the following must be considered for the purpose of valuing the transaction: • uncertainties in pricing or valuation existing at the time of the transaction; and • the reflections of these uncertainties in the formatting of the contract between the par - ties, especially with regard to the adoption of short-term contracts, the inclusion of price adjustment clauses or the establishment of contingent payments, as well as unrelated parties would have done in comparable cir - cumstances. Information available in periods after the con - trolled transaction was carried out can be used by tax authorities to verify the correct use of the criteria listed above. Once these criteria are not met, the governing legislation determines that the value of the trans - action be adjusted for Income Tax and Social Contribution purposes, and the adjustment must be measured based on annual contingent pay - ments that reflect the uncertainties arising from pricing or evaluation of the intangible assets involved in the controlled transaction. By regulating the possibility of using another method, other than those listed in the legislation, the standard points out that the use of alterna - tive methods, especially those based on income, such as the discounted cash flow methodology will, in general, be more appropriate in the event of transactions involving intangibles that are dif - ficult to value or corporate interests for which it is not possible to identify reliable comparable at the time of their transfer between related parties. However, this is a mere recommendation, and it is not mandatory that taxpayers follow this cri -
94
CHAMBERS.COM
Powered by FlippingBook