Can a normative instruction alter the calculation methodology prescribed by law for determining the transfer price in import and export operations involving goods, services, or rights? Must the taxpayer calculate the transfer price pursuant to article 18, II, of Law 9,430/96 or apply the criteria of article 12, paragraphs 10 and 11, of SRF Normative Instruction 243/02 to determine the CSLL and IRPJ calculation basis?

These are questions that multinational groups with subsidiaries or related companies in Brazil have been asking, since the adoption of the methodology provided for in the normative act increases the calculation basis of the IRPJ and CSLL, besides reducing the balances of tax losses and a negative basis.

The answer to the controversy may be about to be given by the Superior Court of Appeals (STJ), which has been receiving appeals to consider the matter.

The transfer pricing arrangement was established in Brazil with the enactment of Law 9,430/96, later amended by Law 9,959/00. Article 18,[1] already with the new wording, contemplated methods for calculating the parameter price on imports:

  • Compared Independent Prices (PIC) method;
  • Production Cost Plus 20% Profit (CPL) method;
  • Resale Price Less Profit (PRL) method with the 20% margin (PRL 20); and
  • Resale Price Less Profit (SRP) method with a 60% margin (SRP 60).

With regard to PRL 60, Normative Instruction 113/00 was issued, later replaced by Normative Instruction 32/01, to regulate the calculation methodology. In its article 12,[2] the instruction kept the system provided for in Law 9,430/96.

On November 11, 2002, the Federal Revenue Service issued Normative Instruction 243/02, revoking Normative Instruction 32/01 and significantly changing the calculation for determining the parameter price according to the PRL 60 method.

The difference between the way of calculating the PRL 60 provided for in Law 9,430/96 and in the (illegal) Normative Instruction 243/02 concerns mainly the way of calculating the profit margin to be deducted from the net (re)sale price, which will set the concept of the parameter price to be compared with the prices charged in the taxpayers' operations for the purpose of applying or not applying adjustments with tax effects.

As for the profit margin to be discounted from the resale price, Law 9,430/96 provides that it will be obtained by applying a percentage of 60% on the net sales price of the product, less the added value of the country. Normative Instruction 243/02, in turn, provides that the 60% margin must be applied on "the participation of the imported good, service, or right in the sales price of the good produced.

In summary, while Law 9,430/96 provides that the 60% percentage must be applied on the final value of the resale price, which incorporates the added value of the product, Normative Instruction 243/02 imposed the proportionalization criterion by weighting the average and by defining that the 60% percentage must be applied on the participation of the good, service, or right in the resale price. The difference between the parameter price calculations is therefore wide.

The matter was resolved by Law 12,715/12, which incorporated into its text the contents of Normative Instruction 243/02, as to the calculation method, while reducing the profit margin from 60% to the levels of 20% (general rule) to 40% (exceptions).

With this, it evidenced that the previous calculation criterion was based exclusively on the normative act, besides acknowledging the taxpayers' grounds, by demonstrating that the 60% margin is incompatible with the proportionalization criterion of Normative Instruction 234/02, which transforms, in practice, the 60% profit margin into a 150% percentage over cost, by disregarding the value added in the country.

Once the proportionalization criterion of Normative Instruction 243/02 was incorporated into law, the margins were reduced. In any case, the dispute is time-bound because it is limited to 2012, the year when Law 12,715/12 came into effect.

The divergence between the provisions of Normative Instruction 243/02 and Law 9,430/96 raises the discussion about what the limit of regulation of the normative act is and whether it is possible to create new content to clarify the terms of the law.

The Federal Court of Appeals for the 3rd Circuit has been addressing the issue. The 3rd and 6th panels have been in majority in the sense of the legality of the normative instruction for (supposedly) establishing rules to clarify the normative content. The 4th Panel, on the other hand, believes that the normative act is illegal due to its having exceeded its limits by modifying the legal system for determining the price parameter, with consequent implications for the calculation of the IRPJ and CSLL.

The STJ, on May 24, 2022, resumed the judgment of the Interlocutory Appeal in Special Appeal 511.736 in which the following is discussed:

  • the (il)legality of Normative Instruction 243/02, which provided for a calculation formula for transfer pricing, for the purposes of identification of the IRPJ and CSLL tax bases, in light of the provisions of article 18, II, of Law 9,430/96; and
  • whether the alteration of the methodology, promoted by Normative Instruction 243/02, in substitution for Normative Instruction 32/01, could only produce its effects for taxable events occurring as of the beginning of the 2003 fiscal year, in attention to article 104 of the National Tax Code.

Justice Benedito Gonçalves, the only one to vote so far, understood that the normative act is supported by Law 9,430/96, insofar as the resale price less profit method must be based on the price at which the imported product is resold, and not on the sale price of the product produced.

Although the judgment was suspended due to a new request for review of the record, this is the first time that the STJ has overcome precedential obstacles in order to examine the merits of the dispute. Although the appeal was not submitted to the system for handling repetitive appeals, this precedent will be highly important in guiding future decisions by the federal courts of appeals regarding the correction application of the calculation method and its affects on the IRPJ and CSLL calculation basis.

 

[1] “Article 18. The costs, expenses, and charges related to goods, services, and rights, contained in the import or acquisition documents, in the operations carried out with an associated person, will only be deductible in determining the taxable income up to the amount that does not exceed the price determined by one of the following methods:

I - Compared Independent Price Method - PIC: defined as the arithmetic average of the prices of goods, services, or rights, identical or similar, ascertained in the Brazilian market or in other countries, in purchase and sale transactions, under similar conditions of payment; 

II - Resale Price Less Profit Method - PRL: defined as the arithmetic average of the resale prices of goods or rights, less: 

a) the unconditional discounts granted

b) taxes and contributions on sales; 

c) commissions and brokerage paid; 

d) the profit margin of          

1. sixty percent, calculated on the resale price after deducting the amounts mentioned in the previous paragraphs and the added value in the country, in the case of imported goods applied to production; (Text amended by Law No. 9,959, of 2000) 

2. twenty percent, calculated on the resale price, in the other cases. (As amended by Law No. 9,959, of 2000) 

III - Production Cost Plus Profit Method - CPL: defined as the average cost of production of goods, services, or rights, identical or similar, in the country where they were originally produced, plus the taxes and fees charged by that country on exportation and a profit margin of twenty percent, calculated on the cost ascertained. 

Paragraph 1. The arithmetic averages of the prices referred to in subsections I and II and the average production cost referred to in item III shall be calculated considering the prices charged and the costs incurred during the entire ascertainment period of the income tax basis to which the costs, expenses, or charges refer."  

[2] “Article 12. The determination of the cost of goods, services, or rights, acquired abroad, deductible from the determination of the taxable income, may also be made by the Resale Price Less Profit (PRL) method, defined as the arithmetic average of the resale prices of the goods or rights, less:

I - the unconditional discounts granted;

II - the taxes and contributions levied on sales;

III - the commissions and brokerage paid;

IV - the profit margin of:

a) twenty percent, in the case of resale of goods;

b) sixty percent, in the case of imported goods applied to production.

(...)

Paragraph 10. The method referred to in letter "b" of the subsection IV of the head paragraph will be used in the case of goods applied to production.

Paragraph 11. In the case of the prior paragraph, the price to be used as a comparison parameter shall be the difference between the net sales price and the profit margin of sixty percent, considering, for this purpose:

I - net sales price, the arithmetic average of the sales prices of the goods produced, less unconditional discounts granted, taxes and contributions on sales, and commissions and brokerage paid;

II - profit margin, the result of applying a percentage of sixty percent on the arithmetic average of the sale prices of the goods produced, less unconditional discounts granted, taxes and contributions on sales, commissions and brokerage paid, and the value added to the goods produced in the country."