1. Brazil transfer pricing regulations and the pharmaceutical industry
IMPORT TRANSACTIONS
EXPORT TRANSACTIONS
CUP/PIC
COST+20%
RPM / PRL (40% GM for Pharma)
CUP/PIC
COST + 15%
RPM / PRL (15%PVA/PVV30%)
Product comparability criteria are difficult to meet in our industry
C+ not applicable for imports as it fails to remunerate foreign assets & functions
SOLE POSSIBILITY FOR PRICING INTERCOMPANY SUPPLIES IN PHARMA: RPM/ PRL
Fixed gross margins defined by industry: for instance the same rate was retained for Pharmaceuticals and Medical Equipment
Product by product pricing with no room for compensation or intentional set offs
Technical possibility to account for importation of non finished goods
Asymmetry on inbound and outbound margins, both not taking into account important functional analysis items like assets, functions and risks.

2. PHARMA VALUE CHAIN AND BRAZILIAN TRANSFER PRICING REGULATIONS: HIGH LEVEL REVIEW (1/2)
Starting point: normalized consolidated Profit and Loss statement of a pharmaceutical multinational based on diversified Pharma MNEs accounts
FOR SOLE ILLUSTRATION PURPOSES
Distributor’s profits with a 40% GM
GM 40%
Local Selling expenses
22%
COGS
EBIT
18%
70%
GROSS MARGIN
Selling and general expenses
Local Selling expenses
Global/Regional
Foreign Related Parties
R&D
GM 30%
Global/Regional
26%
22%
EBIT
R&D
EBIT 8%

3. A mandatory gross margin of 40%, in our view:
PHARMA VALUE CHAIN AND BRAZILIAN TRANSFER PRICING REGULATIONS: HIGH LEVEL REVIEW (2/2)
A mandatory gross margin of 40%, in our view:
generates an allocation of profits that might not be in line with the global value chain of diversified pharmaceutical companies
And therefore generates a high pressure in audits of foreign related parties
Within pharmaceuticals, the generics segments and consumer healthcare face an increased pressure as their system gross margin is significantly lower
does not cope with the specificities of a given economic operator or of a given moment in the life cycle of a company
The EBIT generated by such policy -and therefore the taxable base- depends on the level of local expenditures
Which itself depends on the level of maturity of each product or portfolio of products: it could lead to excess profits or limited profits or losses in case of either a highly mature portfolio of products or conversely a series of significant launches of products
In other terms, a fixed GM% does not take into account facts and circumstances of the taxpayer

4. PHARMA VALUE CHAIN AND BRAZILIAN TRANSFER PRICING REGULATIONS: additional items of interest
The RPM method with a fixed level is deemed to have several benefits
Simplicity of application and creates a safe harbor
Copes with the absence of comparables / economic equivalents
It is based on a transactional approach => easier to implement and to verify
Over years what we have experienced can be summarized as follows
The application of the method is particularly burdensome for taxpayers
The deemed simplicity of the method over time has not prevented from significant audits
The transactional approach can generate a significant volatility of transfer prices to comply with the fixed margin on a product code by product code, raising customs questions.
It generates a certain volatility of the EBIT of the distributing companies in Brazil, and therefore of the taxable base
The industry operates by managing a portfolio of products and not in a product by product basis
A significant amount of controversy with the foreign tax administrations that in some cases has generated double taxation situations