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?

Thank you!

schoueri@lacazmartins.com.br