FROM THE POINT OF VIEW OF AN UNDERDEVELOPED COUNTRY

ALEXANDRE ALKMIM TEIXEIRA

ALEX

AN

DR

E A

LK

MIM

TEIX

EIR

Ata

x s

pa

rin

g

editora 2588647885849

ISBN 9788584258864

ISBN 978-85-8425-886-4

The coexistence of the principle of non-discrimination due to Tax Treaties and of the specific regime of Bilateral Tax Treaties on Income and Capital has caused intense discus-sions among specialists.This is because, by permitting the sustenance of a bilateral tax regime, the grounds for non-discrimination arising from the Commercial Treaties are, sometimes, called into question.This conflicting relationship is aggravated when the deve-loped countries oppose to the fictitious tax credit clauses (matching credit and tax sparing) in the Bilateral Tax Con-ventions, despite the system of subsidies control created by means of the Commercial Treaties.Therefore, developed countries often impose restrictions to matching credit and tax sparing clauses, framing these provisions as if they were subsidies, against which this work is diametrically opposing.

This book is the result of my PhD thesis defended on may, 2009 at the University of São Paulo - USP School of Law, published in portuguese with the name “Tributação Interna-cional e Incentivos Fiscais”. We propose a hermeneutic twirl to reason that exemptions or credits granted by a Contract-ing State in favor of the per-sons taxed by other Contract-ing State, in the enforcement of Bilateral Tax Convention, do not constitute, anytime, a tax benefit which can be thought of as a subsidy. They are, actu-ally, mechanisms used to avoid double taxation, privileging one of the tax regimes, of the Country source of the income or the Country of residence of the party that accrues it.

PhD in Tax Law by the USP School of Law (University of São Paulo), Master in Tax Law by UFMG School of Law (Federal University of Minas Gerais). Professor of the graduation and post-gradu-ation courses of Faculdades Milton Campos; and of the post-graduation course of Tax Law of PUC-Minas. Di-rector of the Brazilian Asso-ciation of Tax Law – ABRADT. Member of The International Association of Tax Judges – IATJ, International Fiscal As-sociation – IFA and Instituto Latinoamericano de Derecho Tributario – ILADT. Former Ad-ministrative Tax Judge at the Brazilian Council of Tax Ap-peals (CARF). Attorney-in-law.

ALEXANDRE ALKMIM TEIXEIRA

FROM THE POINT OF VIEW OF AN UNDERDEVELOPED COUNTRY

FROM THE POINT OF VIEW OF AN UNDERDEVELOPED COUNTRY

ALEXANDRE ALKMIM TEIXEIRA

Catalogação na Publicação (CIP)Cataloguing

TEIXEIRA, Alexandre Alkmim.Tax Sparing: from the point of view of an underdeveloped country -- Belo Horizonte, Brazil: Editora D’Plácido, 2018.

Bibliography.ISBN: 978-85-8425-886-4

1. Law. 2. Tax Law. 3. International Law. I. Title.

CDU341 CDD341.1

Copyright © 2018, D'Plácido Editora.Copyright © 2018, Alexandre Alkmim Teixeira.

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SUMÁRIO

INTRODUCTION 11

1. FUNDAMENTALS OF INTERNATIONAL TAXATION 191. The Definition of Tax 19

2. Globalization and Taxation 20

3. International Tax Law and International Law Taxation. Fundaments of International Taxation Legitimacy 22

3.1. Sovereignty and Taxing Power 23

3.2. Territory as Element of Legitimacy for the Tax Rule Institutionalization 26

3.2.1. Territoriality and Taxing Power 27

3.2.2. The Positive and Negative Aspects of Territoriality 28

3.3. People as a Legitimacy Factor of Tax Rule Institutionalization 29

4. Genesis of International Taxation: Elements of Connection 30

4.1. Territorial Sovereignty vs. Personal Sovereignty on the Tax Matter 33

4.2. Limitations imposed by the International Tax Law 34

4.3. Limitations to the Normative Prescription – Jurisdiction to Prescribe 35

4.3.1. Source of payment as an Element of Connection 39

4.4. Limitations of the Enforcement Rule - Jurisdiction to Enforce 41

2. THE NORMATIVE QUESTION IN INTERNAL LAW 451. Normative Extraterritoriality 45

2. The International Taxation Rule and the Tax Levy 47

2.1. The Option for the Monist Theory of Tax Levy in International Taxation 50

3. The Element of Connection and its Provision in the Tax Rule 55

3.1. Alberto Xavier and the Definition of Subjective Territoriality 58

3.2. Sacha Calmon and the Personal Element of Abstract Taxable Event 60

3. TAXATION IN BRAZIL UNDER AN INTERNATIONAL PERSPECTIVE 67

1. Taxes and Contributions 67

1.1. Consequences of the Division into Species: Taxes and Contributions in the Brazilian Law 72

2. Consequences of the Division into Species: Taxes and Contributions in the International Logic 74

2.1. When Contributions Started Being Equated with Taxes under the Brazilian Law for International Purposes 76

2.2. The So-called Contributions – “Taxes” under an International View 78

2.2.1. CSLL 78

2.2.2. CIDE-Royalties (contribution of intervention in the economic domain on royalties) 81

3. The Special Contributions (Sonderabgaben) in German Law 82

4. The Law number 13.202/2015 and the Recognizing of the CSLL in the Treaties 82

4. INCOME AND INTERNATIONAL TAXATION 831. The Income Taxation and the Principle

of the Ability to Pay 83

2. The Role of International Organizations in the Delimitation of Income Taxing Power on a Global Basis 87

5. SUBSIDY, TAX STATE AIDS AND THE INTERNATIONAL INCOME TAXATION 93

1. The so-called Tax Subsidies as the Greatest Challenges of the Multilateral Economic Organizations 93

1.1. Tax Subsidies from an International Perspective 94

1.1.1. Prohibited Subsidies 96

1.1.2. Actionable Subsidies 100

1.1.3. Non-Actionable or Permitted Subsidies 102

2. Income Taxation and Tax Subsidies 104

3. Tax Subsidies under the Internal View 106

3.1. Exemption as a Taxation Technique 107

3.2. Exemption and Ability to pay 109

6. DOUBLE TAXATION AND TAX NEUTRALITY 1131. The Phenomenon of Double Taxation 113

1.1. Effects of Double Taxation 116

1.1.1. Legal Double Taxation and Economic Double Taxation 116

2. Double Taxation and Neutrality 117

2.1. Control of Double Taxation as a Matter of Fiscal Policy 118

3. Neutrality on the Control of Double Taxation 122

3.1. Double Taxation 122

3.2. Neutrality on the Taxation of Capital Movements 125

3.3. Capital Export Neutrality 126

3.4. Capital Import Neutrality 127

7. MECHANISMS OF CONTROL OF DOUBLE TAXATION AND NEUTRALITITY 131

1. Mechanisms of Control: Tax Credit 131

1.1. Full Credit System and Ordinary Credit System 132

1.2. Ordinary Limited Credit or Ordinary Proportionate Credit 134

2. Mechanism of Control: Exemption 136

3. Double Non-Taxation as an Effect of Control by Exemption 138

3.1. Subjective Double Non-Taxation 139

3.2. Objective Double Non-Taxation 141

3.2.1. Double Non-Taxation in the Credit System 141

3.2.2. Double Non-Taxation in the Exemption System 142

3.3. International Conventions and Double Non-Taxation 142

3.3.1. Imposed Double Non-Taxation 143

3.3.2. Induced Double Non-Taxation 144

3.3.3. Allowed Double Non-Taxation 145

3.3.4. Exclusion of Double Non-Taxation 145

3.4. Brazil-Peru Convention to Avoid Double Taxation 148

3.4.1. Limitation to the Definition of Resident for the Implementation of the Convention 149

4. The Questioning of the Double Taxation Control Mechanisms Such as Prohibited or Actionable Subsidies before the ASCM 150

8. FICTITIOUS TAX CREDIT CLAUSES IN CONVENTIONS 153

1. Credit System, Exemption and Fictitious Credit – Tax Sparing and Matching Credit 153

1.1. Tax Sparing 154

1.2. Matching Credit 156

2. The Rejection of Tax Credit Clauses in Conventions Concluded by the OECD Members 157

3. The UN Model of Fiscal Convention and the Fictitious Tax Credit Clauses 161

9. A DEFENSE OF THE FICTITIOUS TAX CREDIT IN THE CONVENTIONS BETWEEN DEVELOPED AND DEVELOPING COUNTRIES 167

1. Rethinking Fictitious Tax Credit Clauses from the Perspective of Developing Countries 167

9

2. The Prevalence of Taxation in the Country of residence of Article 7 from the OECD Model and the Fictitious Tax Credit Clauses 170

3. Brazilian Fiscal Policy Regarding Taxation of Dividends, Interest and Royalties Paid Overseas. 174

3.1. Dividends Taxation and Fictitious Tax Credit Clauses 174

3.1.1. Definition of Dividends in the Brazilian Law and on Treaties 174

3.1.2. Dividends of Controlled and Affiliate Companies 176

3.1.3. Taxation of Controlled Companies Overseas: an Upcoming Tax Treaty Overriding? 182

3.2. Taxation of Interest Payment Overseas and the Fictitious Tax Credit Clauses 186

3.3. Taxation of Royalties Remitted from Brazil to a Foreign Source and the Fictitious Tax Credit Clauses 187

10. TAX SPARING AND MATCHING CREDIT CLAUSES IN THE CONVENTIONS CONCLUDED BY BRAZIL 191

1. The Brazil-Germany Convention and the Matching Credit Clause 191

2. The Brazil-Austria Convention and the Matching Credit Clause 194

3. The Brazil-Belgium Convention and the Matching Credit and Tax Sparing Clauses 196

4. The Brazil-Canada Convention and the Matching Credit Clause 197

5. The Brazil-South Korea Convention and the Mutual Matching Credit Clauses 200

6. The Brazil-Denmark Convention and the Matching Credit Clause 201

7. The Brazil-Ecuador Convention and the Mutual Matching Credit Clauses 202

8. The Brazil-Spain Convention and the Matching Credit Clause 203

10

9. The Brazil-Philippines Convention and the Mutual Matching Credit Clauses 205

10. The Brazil-Finland Convention and the Matching Credit Clause 206

11. The Brazil-France Convention and the Matching Credit Clause 207

12. The Brazil-Hungary Convention and the Matching Credit and Tax Sparing Clauses 209

13. The Brazil-India Convention and the Mutual Matching Credit Clauses 211

14. The Brazil-Italy Convention and the Matching Credit Clause 212

15. The Brazil-Japan Convention and the Matching Credit and Tax Sparing Clauses 214

16. The Brazil-Norway Convention and the Matching Credit Clause 216

17. The Brazil-Netherlands Convention and the Matching Credit Clause 217

18. The Brazil-Czech Republic and Brazil-Slovakia Convention and the Mutual Matching Credit Clauses 219

19. The Brazil-Sweden Convention and the Matching Credit Clause 220

CONCLUSION 223

REFERENCES 225

11

INTRODUCTION

After seven years of frustrated negotiations, on November 29th of 2008 the Member State Ministers of WTO – World Trade Organiza-tion met in Doha to continue the Doha Round, named after the City.

In his opening speech, Pascal Lamy, a French political advisor, at the time Director-General of the WTO, gave a straightforward message: it would be mandatory that the Doha Round send a clear message that the liberalization of commerce must be accompanied by the help of rich countries to developing countries, with the de-veloped countries shouldering their responsibility for the rest of the World.1. In his words:

The launch of the Doha Round was based on the shared belief that trade can be an engine for development and that a more open, more transparent, more equitable rule-based global trading system, more sensitive to the challenges of its poorer members, was necessary to realize this potential. The WTO was simply translating in its field of activity the aspirations contained in the United Nations Millennium Development Goals adopted in 2000. World leaders recog-nized their collective responsibility in laying the foundations of a more peaceful, prosperous and just world. They pledged greater cooperation to address global economic challenges, trade being part of them. The launch of the Doha Round was based on the shared belief that trade can be an engine for development and that a more open, more transparent,

1 WORLD TRADE ORGANIZATION. Follow-up International Conference on Financing for Development to Review the Implementation of the Monter-rey Consensus, Doha, Qatar. Pascal Lamy. Doha, 29 Nov. 2008.

12

more equitable rule-based global trading system, more sensi-tive to the challenges of its poorer members, was necessary to realize this potential. The WTO was simply translating in its field of activity the aspirations contained in the United Nations Millennium Development Goals adopted in 2000. World leaders recognized their collective responsibility in laying the foundations of a more peaceful, prosperous and just world. They pledged greater cooperation to address global economic challenges, trade being part of them. Concluding the Doha Development Round is, therefore, delivering on the Millennium Development Goals. While trade can be an enabler, a new realization has emerged during the last decade. For trade to fully contribute to sustainable develop-ment, growth and job creation, it has to be accompanied by financial resources to address infrastructure and supply-side constraints. It requires Aid for Trade. Making trade possible is one of two twins. Making trade happen is the other twin. We have all heard the old debate about trade and not aid, later turned into aid and not trade. The United Nations Millennium Declaration established a new consensus: they said yes to a more open and fairer global trading system, but also yes to financing for the development of the members of our global family with limited resources. It is trade for development and it must be Aid for Trade.

In line with this perspective and fostered by the deadlock cre-ated between the interests of developed and developing countries, the ministerial meeting in Doha was interrupted and rescheduled to December 17th of that same year, in order to avoid a setback in the next Round. Lastly, in December of 2013, negotiations between the member States of the group were resumed after a timid deal in Bali.

Since then, this has been the tendency of the debates about the future of world commerce: the speeches tend to advocate liberaliza-tion as a means to promote the development of poor countries; the developed countries, however, refuse to take responsibility for the growth of the system they created, while the developing countries seek a better balance in the bilateral and multilateral relations.

In this context, neutrality can only be achieved by the mitigation of the economic differences between the parties involved. Inspired by this, this paper has as its main subject the relation between the Commercial Treaties and the Tax Conventions on Income and Capital, mainly when executed by the developed and developing countries.

13

In the context of the negotiations carried out by the Interna-tional Organizations and guided by the non-discriminatory treatment in commercial relations, the States have, at least apparently, sought the concretization of a free trade environment.

However, as a result of the adoption, by the States, of the taxation in a worldwide basis, a concern has emerged regarding the possibility of double taxation.2, which led to the formation of a web of Bilateral Conventions on the tax matters, dedicated to control the nefarious effects of double taxation.

Each one of these Tax Conventions convened to form a spe-cific regime of taxation for the residents in signatory countries, a relevant factor on the conduction of investments to be made in a foreign country.

The coexistence of the principle of non-discrimination due to Tax Treaties and of the specific regime of Bilateral Tax Treaties on Income and Capital has caused intense discussions among specialists.

This is because, by permitting the sustenance of a bilateral tax regime, the grounds for non-discrimination arising from the Com-mercial Treaties are, sometimes, called into question.

This conflicting relationship is aggravated when the de-veloped countries oppose to the fictitious tax credit clauses (matching credit and tax sparing) in the Bilateral Tax Conventions, despite the system of subsidies control created by means of the Commercial Treaties.

Therefore, developed countries often impose restrictions to matching credit and tax sparing clauses, framing these provisions as if they were subsidies, against which this work is diametrically opposing.

The opposition advocated by First World Organizations is based on the principle of non-granting of subsidies, set forth in the Com-mercial Treaties.

However, what is argued herein is that the States have sovereignty to define a tax policy that can mitigate the economic disparities, in order to, at least, reduce the commercial advantage of the developed

2 Heleno Tôrres presented the concept of multiple taxation, a phenomenon which occurs with the tax ation of one given income by more than one country. However, as the the focus of this paper will be Bilateral Tax Conventions, the term “double taxation” will be used. On international multiple taxation, see: TÔRRES, Heleno Taveira. Pluritributação internacional sobre as rendas de empresas. 2. ed. São Paulo: Revista dos Tribunais, 2001.

14

countries, many times obtained, historically, through the oppression of developing and undeveloped countries3.

Likewise, countries have sovereignty when choosing the mecha-nisms to avoid double taxation, by adopting Bilateral Tax Conventions in which the Contracting Parties seek to mark out their taxing power when imposing income. States use, basically, two mechanisms with this purpose, namely, ax imputation system or exemption4.

By the mechanism of imputation, the tax paid to the Country of source of the income is recognized as credit for deduction of the tax due to the Country of residence of its beneficiary.

Therefore, both States maintain their sovereignty, eliminating the effect of double taxation by the composition of credits of taxes paid in the Country of source and due in the Country of residence, whereas by the mechanism of exemption, the Convention, against a determined type of income, reserves its taxation exclusively to the Country of source, or exclusively to the Country of residence of its beneficiary.

3 In Brazil, before the Royal family’s arrival in Brazil (1808), the policy of Portugal had been exclusively oriented to exploring the natural resources of its opulent possession and avoid, by all means, any activity that could put the economic and finantial interests of the Crown and its sovereignty in jeopardy, by favouring the political independence of the colony. Isabel Vaz highlights that the situation of the Brazilian Colony became even more uncertain with the conclusion of the Methuen Treaty in 1703, between Portugal and Spain, which proscribed the production of any manufacture in the Metropole and mainly in the Colony. The outcome of this prohibition is reported by the scholar: “If, for some commentarists, Brazilian’s gold alowed England to go throught the napoleon wars, it can also be deducted that it was due to the accumulation of Brazilian precious metals that the Industrial Revolution could be financed. A protecionist policy, the availability of resources to pay the import of technicians and specialists and the granting of privileges could have made that possible by means of the outcomes of the Methuen Agremeent and the cosntant entry of the Brazilian gold in England”. Original version: “Se, para alguns comentaristas, o ouro do Brasil permitiu à Inglaterra atravessar as guerras napoleônicas, pode-se deduzir também ter sido graças à acumulação dos metais preciosos brasileiros que a Revolução Industrial pôde ser financiada. Uma política protecionista, a disponibilidade de recursos para pagar a importação de técnicos e especialistas e a concessão de privilégios podem ter-se tornado possíveis mediante os desdobramentos do Acordo de Methuen e o ingresso constante, na Inglaterra, do ouro do Brasil”. VAZ, Isabel. Direito econômico da concorrência. Rio de Janeiro: Forense, 1993. P. 59/60.

4 TÔRRES, Heleno Taveira. op. cit.

15

However, as a rule, when there is a bilateral negotiation between a developed country, in which residence taxation often prevails, because this State is primarily a capital exporter, and a developing country, which often prefers the source taxation, for being primarily a capital importer, the difference in their levels of taxation makes it impossible for neutrality to be attained simply with the adoption of methods of credit or exemption.

Thus, if an exemption exists in a developing country, routinely a source of income, but the taxation is maintained by the residence criteria, in the developed country, the exemption granted to the South of the Ecuador line will be nullified, fiscal neutrality coming only to the benefit of Northern States.

The simple use of credit imputation would not resolve the un-balance, because, in the great majority of situations, the developing nations tax lower incomes; not higher incomes.

The entrepreneur resident in the developed State would then always be in unbalance with relation to the other entrepreneurs from the places where they chose to produce wealth.

As a solution to this imperfection, the Tax Conventions began to adopt (a resource already not accepted by developed countries) ficti-tious tax credit clauses, called matching credit and tax sparing, by which the States of residence recognize credits of unpaid taxes, resulting in the prevalence of the exemptions granted in the States responsible for taxing in the source, accepting them in the payment of the tax due to the countries of residence, generally, as mentioned, developed nations.

Hence, although the taxpayer has not, effectively, paid the tax, totally or partially, the wealth producer in the source country, a de-veloping one, keeps a credit for the deduction of the tax due in the Country of residence. It favors, on a global basis, the neutrality in relation to the source country, generally a developing country, and not only to the capital exporters. This practice, naturally, is a devel-opment measure, which has to be defended by the nations in need of attracting investments, no matter how adverse their historical contingencies might be.

However, as a result of the General Agreement on Tariffs and Trade (GATT), in force since 1947, the developed countries, so-called “market economies” have committed themselves to not conceding, between them or their commercial partners, benefits that could in-fluence transactions globally.

16

With that objective, the GATT members Concluded, in 1994, in the Age of Globalization, the Agreement on Subsidies and Counter-vailing Measures – ASCM, regulating what was established in Article XVI5 of the GATT and creating specific sanctions for the countries that refuse to accept the subsidy granting rules.

For doing so, the ASCM, in its Article 1, defines as situations of sanctionable subsidies those which occur when there is a financial contribution by a government or a public organism to a territory of a Member, or when a public revenue is waived or is not taxed, granting, therefore, an advantage6.

On the other hand, the “Illustrative List of Export Subsidies”, included in Annex I of the ASCM, expressly describes, as subsidies, “The full or partial exemption remission, or deferral specifically related to exports, of direct taxes or social welfare charges paid or payable by industrial or commercial enterprises.”7.

Therefore, preferential regimes in direct taxation, besides being measures of double taxation control, were, many times, deemed as subsidies by the ASCM, a practice which this paper opposes.

In fact, the note 59 of the ASCM illustrative list of subsidies recognizes that Tax Conventions are potential sources of subsidies, this requirement being disregarded only when it comes to transfer pricing treatment, since the principle of the arm’s length is applied. The note 59 describes:

5 Artigo XVI: “1. If any contracting party grants or maintains any subsidy, includ-ing any form of income or price support, which operates directly or indirectly to increase exports of any product from the mentioned Contracting Parties, or to reduce imports of any product within its territory, it shall notify the CON-TRACTING PARTIES in writing of the extent and nature of the subsidiza-tion, of the estimated effect of the subsidization on the quantity of the affected product or products imported into or exported from its territory and of the circumstances making serious losses to the interests of any other contracting party caused or threatened by any such subsidization, the contracting party granting the subsidy shall, upon request, discuss with the other contracting party or parties concerned, or with the CONTRACTING PARTIES, the possibility of limiting the subsidization.”.

6 Annex 1A – Agreement on Subsidies and Countervailing Measures, of the final minutes which incorporate the results of the multilateral commercial negotiatins of the Round of Uruguai, approved by the Brazilian Legislative Decree 30, of 15, December, 1994 and enacted by the Decree 1355, of 30, December, 1994.

7 Item ‘e’ of the Annex I – Illustrative List of Export Subsidies of the Annex 1A.

17

59. The Members recognize that deferral need not amount to an export subsidy where, for example, appropriate interest charges are collected. The Members reaffirm the principle that prices for goods in transactions between exporting enterprises and foreign buyers under their or under the same control should, for tax purposes, be the prices which would be charged between independent enterprises acting at arm’s length. Any Member may draw the attention of another Member to administrative or other practices which may contravene this principle and which might result in significant saving of direct taxes on export transactions. In such circumstances the Members shall normally attempt to resolve their differences using the facilities of existing bilat-eral tax treaties or other specific international mechanisms, without any losses to the rights and obligations of Members under GATT 1994, including the right of consultation created in the preceding sentence.

We propose, by these considerations, a hermeneutic twirl to reason that exemptions or credits granted by a Contracting State in favor of the persons taxed by other Contracting State, in the en-forcement of Bilateral Tax Convention, do not constitute, anytime, a tax benefit which can be thought of as a subsidy8. They are, actually,

8 About the application of the ASMC rules to the Bilateral Tax Conventions, see: MCDANIEL, Paul R. The U.S. tax treatment of foreign source income earned in developing countries: a policy analysis. The George Washington International Law Review, v. 35, p. 265-295, 2003. MELOT, Nicolas. Territorial and worldwide tax systems: should France adopt the U.S. system? Tax Management International Journal, Washington, v. 33, n. 2, p. 84-102, 2003. STATHIS, Dionisios. Compat-ibility of anti-treaty shopping policies with basic international trade imperatives: relevance of fiscal equity and neutrality in the international trade regime and lessons for international tax lawyers. Manchester International Economy Jour-nal, v. 1, n. 2, 2004. Heinonline. Visited on: <http://heinonline.org/>. POZEN, David. Tax expenditures as foreign aid. The Yale Law Journal, v. 116, p. 869-880, 2004. ROSENBLUM, Janet. The GATT qualifier: its validity as a tax standard and its effect on DISC and DISC alternatives. Cornell International Law Journal, v. 16, n. 2, p. 469-501, 1983. SHEPPARD, Hale. Rethinking tax-based incentives: converting repeated defeats before the WTO into positive tax policy. University of Texas International Law Journal. v. 39, n. 1, p. 111-142, 2003. FELLER, Peter Buck. Mutiny Against the bounty: an examination of subsidies, border tax ad-justments, and the resurgence of the countervailing duty law. Law and Policy in International Business. v. 1, p. 17-76, 1969. ENGEL, Keith. Tax neutrality to the left, international competitiveness to the right, stuck in the middle with subpart F. Texas Law Review, v 79, n. 6, p. 1525-1607, 2001. LANG, Michael et al. WTO

18

mechanisms used to avoid double taxation, privileging one of the tax regimes, of the Country source of the income or the Country of residence of the party that accrues it.

Therefore, the fictitious tax credit, matching credit and tax spar-ing clauses, are tax instruments used to approximate the taxation of the regime adopted by the Country source of the income, irrespective of whether its regime contemplates exemption or reduced taxation.

In fact, the fictitious tax credit clauses only defer the effects of the exemption granted by the Country source of the income9 when the taxation occurs by residence, favoring those who, coming from other countries, take wealth and jobs into the frontiers of develop-ing countries.

Hence, with the maintenance of the fictitious tax credit clauses in Tax Conventions, it is possible for the developing countries to face the discussions regarding fiscal policy and commercial relations involving the international community.

Who knows this way, once this new perspective for dealing with the matter is open, it will be possible for us to contribute to resolving litigation between developed and developing countries, so that debates like the ones described in the Doha Round come to a positive outcome in the multilateral negotiations.

and direct taxation. The Hague: Kluwer Law International, 2005. BRAUNER, Yariv. International trade and tax agreements may be coordinated, but not rec-onciled. Virginia Tax Review, v. 25, n. 1, p. 251-311, 2005. FISCHER-ZERNIN, Justus. Gatt versus tax treaties? the basic conflicts between international taxation methods and the rules of GATT. Journal of World Trade Law, Haia, v. 21, n. 3. p. 39-62, 1987.

9 Brazil, for example, does not impose taxes on dividends of legal entities, what-ever they are. This system does not constitute, by the provisions of the ASCM, subsidies of direct taxation, by lacking the specifity contained in its article 2. Where a tax sparing clause attributes a tax credit to the exporting company subject to taxation by the residence principle, we do not see how to deem this situation as a tax benefit, or argue that such regime would be a subsidiy.

FROM THE POINT OF VIEW OF AN UNDERDEVELOPED COUNTRY

ALEXANDRE ALKMIM TEIXEIRA

ALEX

AN

DR

E A

LK

MIM

TEIX

EIR

Ata

x s

pa

rin

g

editora 2588647885849

ISBN 9788584258864

ISBN 978-85-8425-886-4

The coexistence of the principle of non-discrimination due to Tax Treaties and of the specific regime of Bilateral Tax Treaties on Income and Capital has caused intense discus-sions among specialists.This is because, by permitting the sustenance of a bilateral tax regime, the grounds for non-discrimination arising from the Commercial Treaties are, sometimes, called into question.This conflicting relationship is aggravated when the deve-loped countries oppose to the fictitious tax credit clauses (matching credit and tax sparing) in the Bilateral Tax Con-ventions, despite the system of subsidies control created by means of the Commercial Treaties.Therefore, developed countries often impose restrictions to matching credit and tax sparing clauses, framing these provisions as if they were subsidies, against which this work is diametrically opposing.

This book is the result of my PhD thesis defended on may, 2009 at the University of São Paulo - USP School of Law, published in portuguese with the name “Tributação Interna-cional e Incentivos Fiscais”. We propose a hermeneutic twirl to reason that exemptions or credits granted by a Contract-ing State in favor of the per-sons taxed by other Contract-ing State, in the enforcement of Bilateral Tax Convention, do not constitute, anytime, a tax benefit which can be thought of as a subsidy. They are, actu-ally, mechanisms used to avoid double taxation, privileging one of the tax regimes, of the Country source of the income or the Country of residence of the party that accrues it.

PhD in Tax Law by the USP School of Law (University of São Paulo), Master in Tax Law by UFMG School of Law (Federal University of Minas Gerais). Professor of the graduation and post-gradu-ation courses of Faculdades Milton Campos; and of the post-graduation course of Tax Law of PUC-Minas. Di-rector of the Brazilian Asso-ciation of Tax Law – ABRADT. Member of The International Association of Tax Judges – IATJ, International Fiscal As-sociation – IFA and Instituto Latinoamericano de Derecho Tributario – ILADT. Former Ad-ministrative Tax Judge at the Brazilian Council of Tax Ap-peals (CARF). Attorney-in-law.

ALEXANDRE ALKMIM TEIXEIRA