Presentation on theme: "TAX SPARING A reconsideration of the reconsideration"— Presentation transcript:
1TAX SPARING A reconsideration of the reconsideration Prof. Dr. Luís Eduardo Schoueri
2International Tax Regime Territoriality x Worldwide taxationA never-ending debate
3Capital Export Neutrality (CEN) The final taxation is determined by the Residence StateNeutrality to the investorinterestsA CorpB CorpC CorploanState AState B10% WHTTax rate on WW income: 30%10% credit from WHT (State B)
4Capital Export Neutrality (CEN) CEN is NOT definitiveNeutrality?If Source’s rate is higher, there is no reimbursement for the over- taxationUnder the same level of taxation, investors prefer to invest in a developing country’s infrastructural environmentTaxation at sourceCapital import neutrality (CIN)
5Capital Import Neutrality (CIN) The State of the investment determine the final taxation of income sourced in its territoryNeutrality under Source State perspective$$10% WHTB CorpC CorpA CorpState AK10% CITState BState C
6Territoriality x WW Taxation CEN: foreign tax credit systemCIN: exemption
7CIN x CEN CIN Exemption method Source State decides whether or not to taxCENCredit methodNeutralizes any taxation decision of the Source StateThe MORE the Source taxes, the LESS will be tax due at Residence;The LESS the Source taxes, the MORE will be the tax due at Residence.
8Tax sparingTax sparing aim at (i) assuring that treaty benefits will be maintained or (ii) at maintaining unilateral tax exemptions25%15%Internal tax rateTreaty tax rateTax credit(i) Matching credit25%15%10%Internal tax rate (general)Treaty tax rateTax creditInternal tax rate (tax incentive)(ii) Tax sparing s.s.
9Brazilian tax treaty policy 1960 Decade:Brazilian perspective: territorialityThe Source State must have the exclusive right to taxTaxation at source: 25%Double taxation: illegitimate intrusion of the Residence State
10Brazilian tax treaty policy 1960: first Brazilian treatiesMilitary government, foreign investments and developmentTreaties as tools of economic policyThe decrease of the taxation at source must be in favor of the investorMatching credit and tax sparing provisions
11Matching Credit and/or Tax Sparing Available on the Double Tax Treaties concluded between Brazil and the following European countries:AustriaBelgium (expired)DenmarkSpainFinlandFranceNetherlandsHungaryItalyLuxembourgNorwayThe Czech and Slovak RepublicsSwedenGermany (revoked)
13The OECD Report Report “Tax Sparing: a Reconsideration”, 1998 Main concernsthe potential for abuse offered by tax sparingthe effectiveness of tax sparing as an instrument of foreign aid to promote economic development of the source countrygeneral concerns with the way in which tax sparing may encourage States to use tax incentives“(…) tax sparing should be considered only in regard to States the economic level of which is considerably below that of OECD member States.”
15Reconsidering the OECD Report OECD Report: tax sparing would be in disuseReconsidering…Thuronyi: tax sparing clauses may be found in 1/3 of tax treaties signed from 2000 to 2003Half of them involving OECD Members
16Reconsidering the OECD Report OECD Report: there is no evidence that tax sparing would affect the level of FDIReconsidering…What is the effect of DTTs on FDI at all?Inconclusive researchesBrazil-Germany tax treatyPost-revocation: increase on German investments
17Reconsidering the OECD Report OECD Report: lower taxation at source as a condition for granting tax sparing (“high price”)Reconsidering…OECD itself advocates lower taxation at sourceOne should not generalize the idea that treaty negotiators would not be capable of deciding what to concede
18Reconsidering the OECD Report OECD Report: increase in the standards of living in developing countriesReconsidering…The OECD Report does not rely on any specific data on this issueUN’s 2000 Millennium Development Goals Report“Ever-increasing inequality between countries”
19Reconsidering the OECD Report OECD Report: the potential for abuse derived from tax sparing clausesReconsidering…If potential for abuse was to be considered, sooner or later no single article would surviveMore consistent approach: treaty shopping and anti- abuse clauses (e.g. LOB)
20Reconsidering the OECD Report OECD Report: tax sparing would encourage an excessive repatriation of profitsReconsidering…Only valid for time conditioned clausesProvided benefits are the same, investors’ decisions to repatriate profits should not be dependent on tax sparing provisions
21Reconsidering the OECD Report OECD Report: tax sparing as a subsidy to developing countriesReconsidering…Tax sparing is a mechanism for the recognition of the limits of States’ tax jurisdictionTax sparing confirms that Residence has no taxing right on an item of income granted to the Source State
22Reconsidering the OECD Report State AState BTax treaty
23Exemption by the Residence What about if Residence State exempts an item of income which would be taxable in Source State?No limit should be applicable to the taxation of the Source State, since there would be no risk of double taxation“Residual” tax power of the Source State
24Tax sparing reconsideration It is time to reconsider tax sparing…… but NOT in the sense of OECD’s reconsideration!