prof. dr. luís eduardo schoueri challenges for the celebration of a tax treaty between brazil and...
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Why to celebrate a treaty USA: Treaties are assigned to avoid the double taxation; High taxation at source: Mechanism to force the celebration of treaties; Taxation is a “punishment” for those who do not have a treaty. BRAZIL: 1960: first treaties Military government, foreign investments and development Treaties are tools of economic policy Treaties are assigned to attract investments The decrease of the taxation at source must be in favor of the investor Matching credit and tax sparing provisionsTRANSCRIPT
Prof. Dr. Luís Eduardo Schoueri
Challenges for the celebration of a tax treaty between Brazil and
the USA
Brazilian tax treaty policy
1960 Decade:
Brazilian perspective: territoriality
The Source State must have the exclusive right to tax
Taxation at source: 25%
Double taxation: illegitimate intrusion of the Residence State
Why to celebrate a treatyUSA:
Treaties are assigned to avoid the double taxation;
High taxation at source:• Mechanism to force
the celebration of treaties;
• Taxation is a “punishment” for those who do not have a treaty.
BRAZIL:1960: first treaties• Military government,
foreign investments and development
• Treaties are tools of economic policy
Treaties are assigned to attract investments• The decrease of the
taxation at source must be in favor of the investor
• Matching credit and tax sparing provisions
Matching Credit25%
15%
25%
Internal rateTreaty rate
Credit
25%
15%
15%
10%
Internal rate (general)Treaty rate
Credit
Incentive internal rate
Tax Sparing vs Matching Credit
Tax Sparing
USA:Treaties are not an adequate way to grant benefits to Developing States;
Treaties are assigned to avoid double taxation;
Stanley S. Surrey (1957): refusal of the tax sparing.
BRAZIL:Benefit is by the Source;
There is no favor by the Residence;
Recognize the jurisdiction: • The tax power includes the
power not to tax;• Prerogative of each State in
deciding about its tax policy in its jurisdiction kept in the treaty
Treaties are assigned to promote investments.
Tax Sparing
USA:USA reserves the right of posterior law determines the non-application of treaties;
International criticism;
Override is rare:• Justified in cases of abuse• L.O.B should be used in such
cases
Difficult to renegotiate the treaty.
BRAZIL:Art. 98 CTN: treaties prevail over the internal law;
Override practiced by administrative authorities, but controlled by CARF/Judiciary.
Treaty Override
USA:Taxation at Residence• Where the technology
was developed• Deductibility of R&D
BRAZIL:Taxation at Source• Presence of the Market• Deductibility of royalties
Inclusion of Technical Services and Technical Assistance
Royalties
USA:Taxation under Art. 7 (Business Profits);
Art. 21: Taxation at Residence.
BRAZIL:Art. 21: Taxation at Source:• Normative Declaratory Act
COSIT nº 01/2000
Services not included in article 12 are taxed under article 21;
Brazil and Spain (2004):• Wide interpreation of article 12;• Brazil has promised not to
apply article 12.
Services
USA:Article 5 of the US-Model• Similar to OECD Model• Construction site PE: 12
months period
BRAZIL:Article 5 in Brazilian treaties• Construction site
PE: 6 months period• UN Model• Has already accepted
12 months (Ukraine and Ecuador) and 9 months (Portugal and Israel)
Concept of Permanent Establishment
USA:Plurality of Methods• Preference to profit-based
methods• Best Method Rule
Formulary Approach• Conflict with Arm´s length
Corresponding adjusments
APAs
BRAZIL:Rigidity in methods
Pre-determined margins
Arm´s Length• Prohibition of the “basket approach”
Royalties are excluded
No corresponding adjustments
No APA
Transfer Pricing
Major investors in Brazil (US$ millions)
Source: BACEN
Is a treaty really needed?
