Prevalence of Law provisions over Normative Instructions issued by the Brazilian Federal Revenue Service

Brazilian transfer pricing rules are established by Law 9430/96 and regulated by Normative Instructions (IN) issued by the Brazilian Federal Revenue Service (currently IN 1312/12 and, formerly, IN 243/02).

In practical terms, Normative Instructions must simply regulate the legal provisions, without increasing the taxable basis of taxes, which is only accepted by means a proper legislative procedure.

In this sense, regarding the application of the Resale Price Less Profit method (PRL), there is a conflict between the rules established by Law 9430 and by IN 243. The Federal Regional Court of Appeals of the 3rd Region understood, in a relevant precedent (the second favourable precedent of the same Panel of the same court), that the transfer pricing adjustment resulting from the PRL calculated according to the revoked IN 243/02 is higher than that ascertained based on Law 9430/96, which could not be due by a simple Normative Instruction.

The decision also took into consideration that Law 12715/12, which modified certain provisions of Law 9430/96, used a wording that is almost the same as that of the rules of IN 243/02, indicating that the anticipation of these rules by a Normative Instruction was illegal.

When IN 1312/12 was issued, a new difference appeared between what is provided for by the law and its regulation in relation to the PRL method: the freight and insurance (provided that certain conditions are met) and the taxes levied on imports will not be considered in the calculation of the weighted average total cost of the imported products as well as in the weighted average costs of the products sold, according to the Law. The Normative Instruction, in turn, does not consider such amounts in the average of cost of imported items, but includes them in the average of products sold.

The taxpayer, therefore, has to decide whether to apply the higher transfer pricing adjustment (using the regulation of IN 1312/12), or to use the smaller amounts achieved with the use of Law 9430/96, assuming the risks of receiving a tax assessment.

The discussion on the matter in the administrative courts may not have a good perspective, given that taxpayers who have attempted to discuss the differences between Law 9430/96 and IN 243/02 have not prevailed in any administrative instance.

The judicial measures – which involve costs - seem to be the longest alternative, but could end favourably for the taxpayer, especially in view of the precedents mentioned above.