Originally published in the December 18 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s Federal Revenue Department has suffered another defeat with regard to its restriction of pharmaceutical companies’ use of the resale price method (RPM) for transfer pricing purposes. The Superior Court of Tax Appeals (Camara Superior de Recursos Fiscais, or CSRF), Brazil’s highest administrative tax court, on December 4 upheld two previous Taxpayers’ Council decisions allowing pharmaceutical companies to use the RPM.
The CSRF voted 7-3 to overturn tax assessments issued against the Brazilian subsidiaries of Aventis and Merck Sharp & Dohme after they were denied the right to use the resale price less profit (PRL) method (the Brazilian equivalent of the RPM) for ingredients imported for use in the domestic manufacturing of pharmaceuticals. The Federal Revenue Department had prohibited use of the PRL method for ingredients imported before January 1, 2000, and had assessed the companies for using it.
The CSRF’s decisions were delivered in appeal 136,791 (Aventis) and 137,537 (Merck Sharp & Dohme). In both cases, the CSRF confirmed decisions by the Taxpayers’ Council that the companies were entitled to use the PRL method for active ingredients imported in previous years for use in the domestic manufacturing of pharmaceuticals. The decisions are final at the administrative level and will be used as precedent in other similar cases, notably by pharmaceutical companies.
The question now is whether the Federal Revenue Department will retry the cases before the judiciary. Although the wording is legally questionable, a 2004 legal opinion (no. 1807) by the Federal Revenue Attorney General’s Office says that in some circumstances when the tax at stake is relevant, the issue should be submitted for judicial review. The legal opinion also states that the Federal Revenue Department is entitled to seek a reversal of an administrative tax decision in a court of law if the decision may have serious negative consequences for public finances.
David Roberto R. Soares da Silva