VZCZCXRO0372
PP RUEHRG
DE RUEHBR #0824/01 1681359
ZNR UUUUU ZZH
P 161359Z JUN 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 1888
INFO RUEHBR/AMEMBASSY BRASILIA
RUEHRI/AMCONSUL RIO DE JANEIRO 6272
RUEHSO/AMCONSUL SAO PAULO 2242
RUEHRG/AMCONSUL RECIFE 8147
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 BRASILIA 000824 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR DUCKWORTH 
TREASURY FOR OASIA HOEK AND TRAN 
USDOC FOR 4332/ITA/MAC/WH/OLAC/ADRISCOLL 
 
E.0. 12958: N/A 
TAGS: EFIN ECON EINV BR
SUBJECT: Brazil: Tax Treaty Roundtable with Receita Federal 
 
Refs: a) 4/11/08 e-mail Erath/NSC/Treas/DOS/DOC re April 10 tax and 
investment lunch 
 
(U)1. SUMMARY:  Treasury DAS Brian O'Neill's roundtable, hosted by 
the Ambassador, with the head of Receita Federal Jorge Rachid, 
Senator Tasso Jereissati, Deputy Antonio Palocci, CEO Forum chair 
Josue Gomes da Silva, Finance Ministry Chief of Staff Luis Malin, 
Casa Civil International Affairs advisor Carlos Teixeira, and 
Receita Federal's head of international tax affairs Marcus Pontes 
made progress in revitalizing Brazilian government interest and 
willingness to negotiate substantively on a bilateral tax treaty. 
Congressional participants urged both sides to look for creative 
solutions and possible language to bridge differences.  The CEO 
Forum chair strongly underlined the interest of the Brazilian 
business community in concluding a BTT that would decrease the tax 
burden and increase the incentive to invest in the United States. 
Rachid and congressional representatives agreed that the key 
political issues that must be resolved are tax sparing, information 
exchange and limitation on benefits.  Tax sparing, participants 
indicated, is likely to pose the greatest political challenge to 
resolve. Rachid agreed that the negotiating team would engage 
substantively during the June 10-12 session in Washington to try to 
find ways to address creatively both sides' needs. END SUMMARY 
 
TAX SPARING 
 
(U) 2. While the technical economic impact of inclusion or 
non-inclusion of a tax sparing provision may be insignificant in the 
present day, Rachid emphasized that GOB believes that if Brazil has 
to give up tax revenue as a consequence of tax incentives, the 
United States must also forgo this revenue to be fair.  DAS O'Neill 
noted that the US Senate has historically and currently objected 
categorically to providing in essence a subsidy for US investment 
abroad that is tied to incentives a foreign country may choose to 
offer.  Jereissati and Palocci agreed that a treaty that explicitly 
excludes tax sparing would be extremely difficult to ratify in the 
Brazilian Congress.  In a separate O'Neill meeting with Senator 
Francisco Dornelles, the acknowledged authority within the Brazilian 
Congress on tax issues who enjoys strong political influence in tax 
matters, the Senator underlined that a tax sparing provision is 
critical to his acceptance of any BTT.  Both Rachid and Dornelles 
emphasized the strong desire to avoid re-negotiating existing tax 
sparing provisions in tax treaties with European countries, Japan 
and Canada.  These treaties contain MFN obligations and these 
countries have already indicated strong interest in eliminating 
their tax sparing provisions, according to Rachid and Dornelles (the 
latter corroborated by post conversations with these embassies in 
Brazil).  Jereissati, Palocci and Gomes urged negotiators to explore 
creative drafting solutions and Rachid indicated willingness to 
explore further in the bilateral tax negotiations in Washington June 
10-12.   All participants acknowledged that tax sparing may 
ultimately prove the most politically challenging issue to resolve. 
 
 
INFORMATION EXCHANGE 
 
(U) 3. Jereissati and Palocci strongly reiterated the consensus of 
the April 10 congressional lunch (ref A).  They and other 
legislators could conceivably accept creative solutions to exchange 
of information where no domestic tax interest exists, although a 
treaty that explicitly stated such a requirement would have great 
difficulty achieving ratification in Congress.  However, the 
Brazilian Congress would oppose any agreement that would permit 
Receita Federal to access and exchange any specific types of 
information the agency does not currently have the right to access. 
Receita Federal and the Finance Chief of Staff indicated vigorous 
agreement with this position, being well aware of the political 
sensitivities surrounding privacy concerns.   On the TIEA, Rachid 
underlined the importance GOB attaches to ratification of agreement 
by the Brazilian Congress.  The Ambassador agreed that, while the 
TIEA is not the same as a full BTT, it is an important step and USG 
hopes the agreement will be ratified soon.  (NOTE:  The TIEA is 
still in the House under Committee consideration.  On 5/29, the Tax 
and Finance Committee raporteur issued a favorable recommendation to 
the Committee, which must now vote to move the legislation to the 
plenary for a vote.  END NOTE).  In the separate one-on-one meeting 
with Senator Dornelles, he indicated that he did not believe that 
Rachid had the authority to sign the TIEA on behalf of the Brazilian 
government and has requested a legal opinion from MRE.  Dornelles 
also noted that various lawyers and lobbyists for the financial 
sector have raised objections with him regarding the substantive 
provisions of the TIEA.  He planned to study the merits of those 
 
BRASILIA 00000824  002 OF 002 
 
 
objections, and had asked for constitutional lawyers' opinions, 
before taking a position. 
 
LIMITATION ON BENEFITS 
 
(U) 4. Rachid indicated that a provision on limitation on benefits 
will need to be carefully drafted.  While Brazil wants to explore 
text development that will address the problems of treaty 
shopping/free-riders, there is some concern that a provision that is 
too broadly drafted could unwittingly capture Brazilian companies 
that should legitimately benefit from the tax treaty. 
 
OTHER ISSUES 
 
(U) 5. The roundtable did not substantively address other issues 
such as services, transfer pricing, taxing rights or arbitration. 
Receita Federal confirmed Rachid had sent a letter June 2 to the 
Ambassador responding to his May 12 request for Brazilian feedback 
on GOB priorities and redlines for a BTT (response forwarded 
electronically to Treasury June 5). In DAS O'Neill's meeting with 
Dornelles, in addition to issues discussed above, transfer pricing 
was discussed.  Transfer pricing was the one area where Dornelles 
expressed enthusiasm, saying the US was the recognized expert in 
this area.  He encouraged the US to provide technical assistance to 
Receita Federal to help the agency move toward OECD standards.  "I 
give my full support for any kind of technical assistance or 
administrative help; that would be extremely useful for Brazil.  You 
have my full support on transfer pricing - my problem is tax 
sparing."  Dornelles indicated he planned to ask his friend and CEO 
Forum member Jorge Gerdau to provide a list of ten points explaining 
why the Brazilian business community wants a BTT and asked Treasury 
to facilitate obtaining a similar document from the US side of the 
Forum (finatt is following up on this request). 
 
(SBU) 6. On the margins of the meeting, Finance quietly indicated 
that garnering internal agreement for Rachid's participation in the 
roundtable had been extremely challenging.  After the March 
negotiating session in Brasilia, Finance had decided at the highest 
level to suspend engagement on tax treaty negotiations with the 
United States and had intended the Washington discussions in June to 
be pro forma and final.  After much internal high-level discussion, 
Rachid was given permission to attend the roundtable provided 
Finance accompanied.  The concrete, substantive discussion at the 
roundtable, including the obvious congressional interest and the 
impassioned support vocalized by the CEO Forum Chair, had clearly 
revitalized GOB interest in engaging substantively with the US, per 
Finance.  Finance informed the Ambassador that President Lula has 
received on-going updates regarding the BTT and is fully aware of 
the issues. 
 
COMMENT 
 
(SBU) 7. The roundtable's influential participants provided an 
opportunity to underline congressional and business interest in 
moving forward with substantive BTT negotiations.  Rachid engaged 
concretely on the issues discussed, highlighting both political 
challenges and his own willingness to engage.  He signaled that if 
the United States was prepared to demonstrate some flexibility on 
the politically challenging areas, an agreement could be possible. 
He indicated that the Brazilian delegation will be prepared to 
engage substantively in technical discussions in Washington June 
10-12.  Post believes this roundtable was key in stimulating GOB 
substantive engagement and interest in concluding a bilateral tax 
treaty with the United States.  Intensified pressure from the 
Brazilian business community and high-level political engagement 
will continue to be required to ensure these negotiations move 
forward productively.  END COMMENT 
 
SOBEL