VZCZCXRO3056
RR RUEHRG
DE RUEHSO #0240/01 1341144
ZNR UUUUU ZZH
R 131144Z MAY 08 ZDK
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8215
INFO RUEHBR/AMEMBASSY BRASILIA 9343
RUEHRI/AMCONSUL RIO DE JANEIRO 8706
RUEHRG/AMCONSUL RECIFE 4094
RUEHAC/AMEMBASSY ASUNCION 3384
RUEHBU/AMEMBASSY BUENOS AIRES 3136
RUEHCV/AMEMBASSY CARACAS 0728
RUEHMN/AMEMBASSY MONTEVIDEO 2688
RUEHLP/AMEMBASSY LA PAZ 3795
RUEHSG/AMEMBASSY SANTIAGO 2384
RUCPDOC/USDOC WASHDC 3078
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/USDOC WASHDC 3079

UNCLAS SECTION 01 OF 02 SAO PAULO 000240 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/EPSC, WHA/BSC, EEB/OIA 
STATE PASS USTR FOR KATE SUCKWORTH 
TREASURY FOR JHOEK 
USDOC FOR 4332/ITA/MAC/WH/OLAC 
USDOC ALSO FOR 3134/USFCS/OIO 
 
E.O. 12958: N/A 
TAGS: ECIN EINV ECON EFIN BTIO BR
SUBJECT: U.S. ACCOUNTING FIRMS WEIGH-IN ON BRAZIL-U.S. ECONOMIC 
PARTNERSHIP 
 
REF: A) BRASILIA 551; B) RIO DE JANEIRO 089; C) 4/11 
Erath/DOS-DOC-Treas-NSC e-mail congress lunch; D) 07 SAO PAULO 119 
 
¶1. (SBU) SUMMARY:  On April 23, 2008 Ambassador Sobel, Treasury 
Attache, Senior Commercial Officer (SCO) and EconOffs met with the 
Brazilian-arms of the American accounting firms Pricewaterhouse 
Coopers, Ernst & Young, and KPMG.  The themes of the U.S.-Brazil CEO 
Forum dominated the discussion, including bilateral tax (BTT) and 
investment (BIT) treaties, infrastructure, education, and 
competitiveness.  The firms were hopeful but not optimistic about 
the potential to make significant progress in any of these areas in 
the near-term.  END SUMMARY 
 
--------------------- 
Bilateral Tax Treaty 
--------------------- 
 
¶2. (SBU) In recent Mission discussions with Brazilian authorities on 
a BTT, the overwhelming concern that GOB authorities have voiced has 
been related to information exchange and bank secrecy laws (Refs A, 
B, C).  Discussion with the firms, however, concentrated on 
tax-sparing, tax assignment and transfer pricing as the major 
hurdles ahead.  On transfer pricing (the method chosen to price 
inter-company transactions) Pricewaterhouse Coopers (PwC) 
highlighted that Brazilian transfer pricing rules - which impose 
arbitrary presumed profit margins - do not correspond to actual 
market practices and OECD (and U.S.) transfer-pricing principles. 
(Note:  Germany suspended its BTT with Brazil in part due to 
Brazil's transfer pricing practices.  End note.) 
¶3. (SBU) With regards to tax-sparing (provision whereby a 
contracting state agrees to provide a credit in the home country 
against foreign income that has not actually been collected), PwC 
was of the opinion that the GOB should not get hung-up over this 
issue, as the internal withholding tax rates in Brazil are generally 
the same as the rates approved in most all treaties signed by Brazil 
(and U.S. treaties allow for some flexibility in terms of 
withholding rates).  PwC also downplayed the GOB's concerns 
regarding state tax disparities between the North/Northeast and the 
rest of the country.  Currently, the foreign tax credits available 
to the subsidiaries of U.S. companies in those regions are at a rate 
lower than the nominal tax rate in the U.S.  In PwC's analysis, the 
treaty would not change in any respect the existing tax results in 
either country. 
 
¶4. (SBU) In a recent study PwC did on the BTT for the Brazilian side 
of the CEO Forum (and shared with the GOB), they concluded that the 
BTT would benefit Brazilian investors "assuming that the treaty 
would limit withholding income tax to a maximum of 15 percent" 
(compared to the standard 30 percent levied under U.S. domestic law 
for payments of non-U.S. persons of dividends and royalties).  They 
also predicted "no significant reduction for Brazilian tax 
collection," highlighting that mid-sized U.S. companies would feel 
more legal security investing in Brazil.  Their analysis underscores 
the potential for expanded employment opportunities derived from 
increased U.S. investment. 
 
--------------------------- 
Bilateral Investment Treaty 
--------------------------- 
 
¶5. (SBU) On prospects for a BIT, the Ambassador noted that 
divergences on arbitration have been the biggest impediment in 
moving forward.  PwC was of the opinion that in the short-term it 
would be difficult to make progress on this issue, as it is one that 
has to do with mindset and political sensitivities.  At the same 
time, the firms noted that this approach is bound to change over 
time as Brazilian companies invest abroad with greater intensity. 
Increasingly, the GOB will see international arbitration as being in 
its best interest.  For instance, PwC recalled that Petrobras was 
considering international arbitration during the 2006 
nationalization crisis with Bolivia. 
 
 
SAO PAULO 00000240  002 OF 002 
 
 
-------------- 
Infrastructure 
-------------- 
 
¶6. (SBU) PwC was of the opinion that the GOB and state governments 
need to look beyond Public-Private Partnerships (PPP's) to "more 
sophisticated investment models" for attracting private investment. 
(NOTE: PwC did not offer specific examples of what these more 
sophisticated models are. END NOTE)  PwC also raised the point that 
privatization of infrastructure projects (roads, ports, airports) 
carries the additional factor of falling under national security 
considerations.  Other factors weighing on investor calculations 
include the lack of transparency of regulations and licensing 
requirements, and a legal framework that makes corporate managers 
personally liable for certain environmental and workplace 
violations.  Moreover, the performance bonds associated with 
Brazilian infrastructure projects are sometimes backed by banks that 
are not held in high repute by international investors.  (COMMENT: 
This assessment of the GOB's rocky start with PPP's is consistent 
with what the Commercial Service is hearing from U.S. companies 
concerning their experiences to date with infrastructure projects. 
END COMMENT.) 
 
------------------------------ 
Competitiveness and Tax Reform 
------------------------------ 
 
¶7. (SBU) There was extended discussion on Brazil's domestic tax 
regime and competitiveness.  Brazil's standing among the most 
burdensome tax systems in the world has real consequences for 
Brazil's competitiveness globally.  All highlighted the ICMS tax 
(rough VAT-equivalent collected at the state level) as being 
particularly frustrating.  ICMS rates and tax benefits vary from 
state to state, and have a history of sparking tax disputes between 
states and hindering the operations of foreign companies (Ref D). 
All the firms were of the opinion that the tax reform proposal that 
the Lula government submitted to Congress in early March is a good 
one, but that it is unlikely to be approved due to lack of political 
ownership and the fact it will create revenue loss among some state 
governments who will oppose the measures.  As the decision to change 
ICMS rules would also require a constitutional change, the chances 
of this happening are slim.  Nevertheless, the firms voiced support 
for the GOB proposal to standardize the ICMS/VAT and compensate the 
states for the lost revenue by transferring other taxes back to the 
states.  (Note:  This will be the second tax reform proposed during 
Lula's presidency and aims to simplify the current tax code rather 
than reduce the tax burden. The 2003 proposal failed to make 
meaningful reforms due to similar opposition from state governments. 
 End Note.) 
 
------------------------------- 
October 2008 CEO Forum Planning 
------------------------------- 
 
¶8. (SBU) The firms had several suggestions for themes to be included 
on the October 2008 CEO Forum agenda: 1) education, highlighting 
that education is at the heart of competiveness; 2) environmental 
issues including carbon credits and climate change; 3) biofuels and 
energy policy; and 4) financial market trends, including Brazil's 
growing rate insurance market (insurance against changes in exchange 
rates, performance bonds, interest rates, etc.).  In addition, the 
Ambassador agreed to consider whether to recommend to the members of 
the CEO Forum that they include a meeting with the Big 4 accounting 
firms on their agenda as well. 
 
¶9. (U) This cable has been cleared by Ambassador Sobel and 
coordinated with the US Treasury Financial Attache in Sao Paulo.