Originally published in the September 3 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s Federal Revenue Department (FRD) has clarified, for transfer pricing purposes, the use of the resale price method (RPM) by companies that package imported products.
For purposes of the RPM markup, the FRD distinguishes between the packaging of imported goods for resale in Brazilian markets and the application of a trademark to the product. The higher the RPM markup, the lower the transfer price, which increases the possibility of a transfer pricing adjustment.
Private Letter Ruling (PLR) 22/08, issued by the Tax System General Coordination Office (Coordenação-Geral do Sistema de Tributação, or CST), was published in Brazil’s official gazette on August 20. It says a taxpayer that imports a product from a related party and packages it for resale in Brazilian markets may use the RPM with a 20 percent markup.
However, if the activity performed by the Brazilian taxpayer exceeds packaging and includes the application of a trademark to the product with a resulting increase in value, the applicable markup for the RPM is 60 percent.
The summary of PLR 22/08 reads as follows:
- TRANSFER PRICING — RPM METHOD. The legal entity subject to transfer pricing controls that imports goods from related parties and performs only packaging of the product may adopt the 20 percent markup for purposes of calculating the transfer price under the Resale Price Method. If, besides packaging, it performs application of trademarks, with a resulting increase in value, then the transfer price based on the Resale Price Method shall be used with the 60 percent markup.
PLR 22/08 seems to contradict the FRD’s earlier position on the applicable RPM markup in case of a packaging or repackaging. In PLR 5 of September 1, 2006, the FRD ruled that repackaging and labeling of imported products to comply with Brazilian regulations was considered a manufacturing process, so the applicable markup for the RPM should be 60 percent rather than the 20 percent markup applicable when no change is made to an imported product. Repackaging and labeling to comply with local laws are like packaging in that they usually don’t result in an increase in the value of the product.
Under PLR 22/08, the CST seems to agree that packaging or repackaging does not necessarily represent an increase in value for transfer pricing purposes, even though those activities are listed as manufacturing by the federal excise tax code. If the packaging activity adds no value to the product, the taxpayer could adopt the RPM with a 20 percent markup.
PLR 22/08 is binding only on the filing taxpayer and does not benefit other taxpayers in similar situations, but it may serve as a precedent. Taxpayers seeking the same tax treatment should pursue their own private letter rulings to avoid the unnecessary assessment of taxes, penalties, and interest.
David Roberto R. Soares da Silva