Prof. Dr. Luís Eduardo Schoueri

1. Challenges for the celebration of a tax treaty between Brazil and the USA Prof. Dr. Luís Eduardo Schoueri

2. 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

3. Why to celebrate 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 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.

4. Tax Sparing vs Matching Credit 25% Internal rate (general) 15% Treaty rate 10% Incentive internal rate 15% Credit Matching Credit 25% Internal rate 15% Treaty rate 25% Credit Tax Sparing

5. 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. 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.

6. Treaty Override BRAZIL: Art. 98 CTN: treaties prevail over the internal law; Override practiced by administrative authorities, but controlled by CARF/Judiciary. 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.

7. Royalties BRAZIL: Taxation at Source Presence of the Market Deductibility of royalties Inclusion of Technical Services and Technical Assistance USA: Taxation at Residence • Where the technology was developed • Deductibility of R&D

8. Services 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. USA: Taxation under Art. 7 (Business Profits); Art. 21: Taxation at Residence.

9. Concept of Permanent Establishment 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) USA: Article 5 of the US-Model • Similar to OECD Model • Construction site PE: 12 months period

10. Transfer Pricing BRAZIL: Rigidity in methods Pre-determined margins Arm´s Length Prohibition of the “basket approach” Royalties are excluded No corresponding adjustments No APA USA: PluralityofMethods • Preference to profit-basedmethods • Best MethodRule Formulary Approach • ConflictwithArm´s length Correspondingadjusments APAs

11. Major investors in Brazil (US$ millions) Source: BACEN Is a treaty really needed?

12. Thank you! schoueri@lacazmartins.com.br