RoyaltyStat Blog

New Brazilian Transfer Pricing Legislation on Path to Approval

Brazil's Federal Senate approved Provisional Measure No. 1,152/2022 (MP 1,152) on May 11, 2023.  It was previously passed by Executive Power and in force pending full congressional approval and potential changes. The Chamber of Representatives made only few changes to the original "bill of law," and the Senate did not make any change in the version approved by the Chamber. It is now pending ratification by the President of the Republic. 

Two-Equations Profit Indicators

Posted by Ednaldo Silva

Determining an arm’s length profit indicator (aka profit ratio) requires two equations, and not one equation, as prescribed in financial statement analysis textbooks. E.g., Bernstein (1993), Drake & Fabozzi (2012). An accounting critique of univariate profit ratios is found in Whittington (1986).

Brazil to Adopt the Arm’s Length Principle and OECD-aligned Transfer Pricing Rules

Posted by Julia Vasconcellos

At the 90th minute (or 11th hour to those in the U.S.) of 2022, the Brazilian government issued draft legislation to align Brazil’s transfer pricing regulations with the international standards set by the OECD Transfer Pricing Guidelines.

Operating Profit Indicators Using Robust Regression

Posted by Ednaldo Silva

Operating profit indicators such as the operating profit margin (μ), defined as the quotient of operating profits to net sales revenue, can vary between enterprises in the same industry:

Reliable Profit Indicators Using Regression Analysis

Posted by Ednaldo Silva

The U.S. transfer pricing regulations prescribe under 26 CFR 1.482-1(e)(2)(iii)(B): “The interquartile range [IQR] ordinarily provides an acceptable measure of this [arm’s length] range; however[,] a different statistical method may be applied if it provides a more reliable measure.”

The U.S. transfer pricing regulations refer to “most reliable” or “more reliable” -- which means (following the statistical principle of minimum variance) the narrowest range computed from the dataset. See Wonnacott (1969), Chapter 7-2 (Desirable properties of estimators), pp. 134-139.

Return on Assets is Détaché from Economics

Posted by Ednaldo Silva

"The true theorist in economics has to become at the same time a statistician."

– Ragnar Frisch (1930), p. 30.

Many transfer pricing reports (against Ragnar Frisch’s advice) are devoid of economics or statistics principles. Here, I show that the usual transfer pricing application of "return on assets" (ROA) is disreputable.

Rate of Return on Capital Employed is Misconceived

Posted by Ednaldo Silva

U.S. transfer pricing regulations about the “rate of return on capital employed” (ROA) are misconceived because they rely on untested assumptions. For example, 26 CFR 1.482-5(b)(4)(ii), states:

Crude Oil and Natural Gas Prices are Random Walks

Posted by Ednaldo Silva

It’s often stated that crude oil and natural gas (hereafter energy) prices are determined by supply and demand conditions. The empirical evidence shows that this notion is false because energy prices follow an autoregressive mechanism. Energy prices approach a random walk in which the autoregression slope coefficient is not different from one.

Asset Intensity Adjustments in Transfer Pricing Lack Merit

Posted by Ednaldo Silva

Asset intensity adjustments to operating profits, which I reviewed performing audit assistance, lack economic or statistical merit and are inconsistent with guidance provided in the transfer pricing regulations.

ITAT Transfer Pricing Decision on Use of the Resale Price Method

Posted by Piyush Gupta

The Income Tax Appellate Tribunal (ITAT) of Bangalore, India issued its decision on 04 January 2022, in the case of Randox Laboratories India Private Limited V. The Assistant Commissioner of income tax (IT(TP)A No 2576/Bang/2019) that the Resale Price Method (RPM) is the most appropriate method (MAM) for benchmarking inter-company transaction pertaining to import and resale (without any value addition) of finished goods.

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