TAX SPARING A reconsideration of the reconsideration Prof. Dr. Luís Eduardo Schoueri.
Prof. Dr. Luís Eduardo Schoueri Challenges for the celebration of a tax treaty between Brazil and...
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Transcript of Prof. Dr. Luís Eduardo Schoueri Challenges for the celebration of a tax treaty between Brazil and...
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!