In recent experiences of tax audits and processes derived from these, we have observed a growing interest on the Tax Authority’s part in analyzing taxpayers’ commercialization margins. In this way, we have observed cases of presumptive tax assessment, due to questioning of the commercialization margins evidenced by the information presented by the taxpayer. In this article, we will address technical aspects, both legal and financial, that must be considered in these reviews.
Firstly, from a legal perspective, this practice raises questions about the limits of presumptive assessment. Assessment on a presumptive basis, under art. 160 of the Tax Code, should only proceed in the “absence of a tax return, books, records or documents, or when the existing ones are insufficient or contradictory”. In many cases, taxpayers have sufficient evidence to make a presumptive determination inadmissible. On the other hand, the specific questioning of the markup is not expressly regulated. In this sense, considering the principle of legality that should govern the actions of the public administration, no regulation would support the specific questioning of the markup.
Secondly, from a financial perspective, the marketing margin is a financial business indicator used to evaluate operational efficiency and, eventually, profitability. In the field of taxation, this indicator could be another reference in the determination of taxable income in the context of presumptive income determination, as we have said before, in the absence of other elements. Its eventual application should be carried out with demonstrable technical and objective criteria, avoiding incomplete analyses that do not reflect the true economic reality of each business.
Companies operating in competitive markets face different dynamics and cost structures. No two companies are the same and factors such as competition, market demand, clientele, product differences, and production and marketing costs, among other factors, mean that the analysis of the markup of a particular taxpayer cannot be carried out without consideration of their circumstances. Although the starting point could be the average sales margin of similar companies in an industry, the analysis would fall short without delving into other relevant elements.
For example, companies that sell mass consumer products tend to operate with lower margins, compensating them with high sales volumes. In contrast, companies that offer special and differentiated products, with lower inventory turnover, tend to work with higher margins due to the higher perceived economic value and their positioning in niche markets. Even so, such margins between comparable companies still differ. Otherwise, companies competing in an industry would all have similar margins and profitability, which is not the case in reality. That is why, in competitive markets, we can differentiate between leading companies that are sustainable and prosper, and those that are stagnant or face difficulties in staying in business. From a tax perspective, the Tax Authority can identify, based on the financial information provided and/or the annual returns, which companies show consistent growth and improve their operational efficiency, and which ones face greater volatility or even negative figures.
On the other hand, marketing margins are not static as they can vary due to changing market conditions, economic situations (national or international), and differences between business strategies in the market. Volume discounting practices differentiated prices according to the customer or region, promotions to position new products or the need to reduce inventories in certain periods are some of the tactics that companies use in a healthy competitive dynamic. Ignoring these factors and applying a uniform margin for all companies and for all products, at all times, can generate distortions in the determination of taxable income.
In this sense, it is striking that, in some cases, the Tax Authority has not accepted the taxpayer’s information derived from sales below the Marketing Margin that it considers applicable, particularly in the case of sales at a loss. In the business world this situation is not uncommon and is due to various situations such as lack of inventory turnover, the need to liquidate inventory, low acceptance of a product, the need to promote sales of other products, or even to defend oneself against a competitor’s campaigns that could result in the loss of market position, among other reasons. The promotions and discounts offered by companies are practices that we easily observe in advertising media, and they have been marketing tactics with many years of application.
Often companies, particularly small and medium-sized ones, must resort to these sales with reduced margins or at a loss because they simply have no other option. This is why, to avoid misinterpretation in these types of cases, the following must be documented:
- Its discount and promotion policies.
- Its promotional campaigns.
- Ensuring a clear accounting record that allows these sales to be identified.
- Evidence of the commercial context that justifies reduced margins.
This could reduce the risks of facing situations in which taxes on sales at a loss are determined (when they are duly justified and demonstrated). Otherwise, the taxpayer who, with such sales, has already absorbed a loss (possibly avoiding a greater one), would also have to pay additional taxes for the determination, aggravating the economic damage of these transactions.
Another very important aspect is the formula for calculating the marketing margin. To achieve greater certainty in tax matters, progress could be made in consistency and transparency in this area:
- Consistency: using the same formula, the one verified and recognized by international accounting and financial techniques, for all cases. The commercialization margin should be calculated by dividing the difference between net income and the cost of sales by net income and multiplying the result by 100 to obtain the percentage that gross profit represents of total sales.
- Transparency: making the criteria apply public knowledge (which should accept situations of loss or low margins by establishing mechanisms for assessing the economic reality of the company). This can be done at a legal or regulatory level, but at least a technical circular would suffice.
From a tax perspective, the marketing margin can serve as a benchmark indicator, but it should not be used as the sole criterion for estimating presumed income or making tax adjustments. To correctly determine a company’s tax base, the tax authorities should consider the following elements:
- Analysis of accounting documentation: Evaluate accounting records and financial statements.
- Sector comparability: Analyze marketing margins in companies in the same sector, averages and consideration of reasonable differences.
- Variability of sales prices: Recognize that price fluctuation is a common practice in business activity under competitive and market conditions.
- Recognition of discounts and promotions: Do not assume that all sales reflect a standard and identical margin for all transactions, recognizing such discounts and promotions under the law.
Applying a single margin uniformly without taking these factors into account can lead to an overestimation of taxable income and generate tax burdens that do not reflect the operational reality of companies. The tax overload can discourage investment and put the supply of products and services, as well as sources of employment, at risk.
Therefore, it is advisable to:
- Adequately document transactions and pricing and costing policies.
- Present clear and detailed information to reduce the risk of adjustments.
- Request preventive consultancy to assess these aspects in advance.
The markup is a useful tool for assessing the profitability of a business, but its application in the tax sphere must be based on a detailed analysis and considering the particularities of each company. A flexible approach, based on specific data and accounting documentation, contributes to a more equitable tax administration aligned with the principles of legal certainty and economic reasonableness.
In the face of increasing scrutiny of mark-ups, having technical and strategic support in tax management is essential.
If your company faces this type of review or wishes to strengthen its accounting and tax documentation, our team is available to offer specialized advice.