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 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 provisions

Matching Credit 25% 15% 25% Internal rate Treaty rate Credit 25% 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!