Brazil moves closer to standard practice on tax treaties

24/07/2009 em Imprensa

Fonte: Latin Lawyer

Matéria citando o Dr. Luiz Girotto, Sócio V&G.

A Brazilian court has ordered the country’s tax authority to follow the OECD’s model in its interpretation of tax treaties.

After analysing  Brazil’s tax treaties with Canada and Germany, the Federal Court of the fourth region ruled last month that the country may not impose taxes on companies from those countries rendering non-technical services outside Brazil.

The ruling stems from a case brought against Brazil’s tax authorities by domestic petrochemical company Copesul, after the authority attempted to impose withholding taxes on a deal in which Canada’s Surface Engineering supplied steel tubes to Copesul’s German subsidiary.

The tax authority based its decision on a move by Brazil’s government in 2000 to reclassify fees earned from Brazilian companies by non-resident businesses as ‘other income’ rather than ‘profit’ – Brazil being allowed to tax other income under the terms of most of its existing treaties.

This tax would be levied in the form of a withholding tax – a portion of a fee paid by a company in one jurisdiction to a service provider in another.

But the Federal Court found that Brazil should adhere to article seven of the OECD’s model treaty, according to which a company’s profits may only be taxed in jurisdictions outside its home state if those profits are made in the course of an enterprise that is permanently based in the other jurisdiction.

While the court’s decision is viewed as a positive step that exposes cracks in the government’s present position, Richard Winston, a partner of US firm K&L Gates LLP, thinks many Brazilian tax practitioners might be scpetical about just how much impact the case will have.

“For now, we do not expect the new ruling to affect the reporting positions of Brazilian companies that are presently withholding Brazilian taxes on payments made to service providers located in tax treaty jurisdictions,” he says.

He also expects Brazil’s tax authority to appeal the ruling, though he says that it could be three years or longer before a decision is reached.

But there are other, strong signs that Brazil could be a step closer to adopting recognised principles of international treaty law. Last week the country’s Congress approved the text of the Vienna Convention on the Law of Treaties, which now awaits the ratification of the President.

Winston says, “The recent actions of the government favouring the adoption of the Vienna Convention suggest that Brazil is moving towards the full recognition of well-established principles of international treaty law.”

“There is great hope that Brazil will one day adopt the OECD model with respect to its future interpretation of article seven in its existing tax treaties,” he adds.

Counsel to Copesul

Velloza, Girotto e Lindenbojm Advogados

Partner Luiz Eduardo de Castilho Girotto

Counsel to the Brazilian Tax Authority

Chief lawyer of the Ministry of Finance – José Cyrillo Diogo da Silva

Velloza Advogados |


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