VZCZCXRO1336
RR RUEHRG
DE RUEHBR #0828/01 1801129
ZNR UUUUU ZZH
R 291129Z JUN 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 4598
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 7937
RUEHSO/AMCONSUL SAO PAULO 4276
RUEHRG/AMCONSUL RECIFE 9708
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 000828 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC, EEB/OMA MERRIN, EEB/ODF SIEMER 
TREASURY FOR LUYEN TRAN MICHAEL MUNDACA 
COMMERCE FOR ANNE DRISCOLL 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV BR
SUBJECT: BRAZIL'S TAX COLLECTION AGENCY NOT A CONSTRUCTIVE PARTNER 
ON BTT 
 
REFS: A) Brasilia 809 
 
¶1.  (SBU) Summary: A June 24 Brazilian-industry sponsored conference 
highlighted that Brazil's recent record of concluding bilateral tax 
treaties (BTT) lags far behind that of other Latin American and BRIC 
countries, and the Brazilian revenue collection agency responsible 
for tax treaty negotiations, Receita Federal (Receita), appears less 
than enthusiastic to make any substantive progress in the area.  In 
contrast, Brazil's private sector, including foreign enterprises 
operating in Brazil, continued to argue for passage of tax treaties, 
especially with the United States, and concluded that the government 
of Brazil's unwillingness to address the country's complicated set 
of tax regulations and negotiate reasonable international terms 
remains the greatest obstacle to any future tax agreements.  These 
private sector tax treaty proponents along with legal experts 
implicated Receita Federal (Brazil's IRS-equivalent agency) as a 
reluctant partner to tax treaty development, and believed 
negotiations on the Brazilian side should reside with the Ministry 
of Finance.  End Summary. 
 
¶2.  (U) On June 24, the Brazilian National Confederation of Industry 
(CNI) hosted international tax experts, private sector leaders and 
representatives from Receita Federal to discuss tax treaty 
development in Brazil and its importance in attracting increased 
foreign direct investment (FDI) to the country (conference title: 
"CNI: Tax Treaties in the Brazilian Tax System:  How to Enable 
Environment for FDI").  Panels included international tax attorney 
Peter Byrne, American Chamber of Commerce board member and attorney 
Roberto Pasqualin, Receita's general coordinator for international 
affairs and chief negotiator Marcos Valadao, and tax and finance 
representatives from Camargo Correa, JBS Friboi, Marcopolo, Shell, 
Delphi, Volkswagen and PricewaterhouseCoopers. 
 
POOR RECORD OF ACHIEVEMENT WITH TAX TREATIES 
------------------------------------------- 
 
¶3.  (SBU) Byrne, who said he participated in U.S.-Brazil tax treaty 
negotiations twenty years ago as an attorney with the International 
Tax Counsel's Office at Treasury, detailed developments over the 
past 15 years showing comparable Brazilian peer countries making 
significant progress signing tax treaties: China (80), India (40), 
Mexico (40), Venezuela (15, mostly pre-Chaves) and Chile (15).  In 
contrast, he continued, Brazil's tax treaty highlights over the past 
several years include a narrow agreement with the U.K. covering 
certain aspects of air and maritime freight and Germany's 
cancellation of their tax treaty with Brazil in 2005 (NOTE: due to 
GOB unwillingness to renegotiate the treaty to meet OECD standards 
and to lower tax rates.  END NOTE). 
 
¶4.  (SBU) To further demonstrate Brazil's lack of progress in tax 
treaty development, Nelio Weiss of PricewaterhouseCoopers pointed 
out that of the three countries in the world with the most signed 
tax treaties - the United States, U.K. and Netherlands - two of the 
three have not concluded an agreement with Brazil.  (NOTE: according 
to the Brazilian Investment Association, SOBEET, Brazil has signed 
just 12 tax treaties putting them in a similar treaty profile with 
countries like Swaziland and Burundi.  END NOTE.). 
 
LACK OF CLEAR TAX CODE AND BTTs FRUSTRATE PRIVATE SECTOR 
--------------------------------------------- ----- 
 
¶5.  (SBU) Private sector panelists from Brazilian and foreign-HQ'ed 
multinationals shared stories of operational difficulties, lost 
revenue and forgone business expansion plans as a result of Brazil's 
burdensome tax regimen and lack of BTTs.  Delphi's (the automobile 
parts supplier) international tax counsel Robert Sparks explained 
that Brazilian law applies a statutorily pre-determined gross profit 
margin of 60 percent on Delphi products sold in Brazil that include 
components obtained from the United States (Sparks says his profit 
margin on such products should be about 20 percent).  Sparks 
complained that he is essentially assessed phantom profits on which 
he must pay taxes.  Sparks called for alignment with OECD norms, 
including guidelines for transfer pricing, and an immediate 
re-examination of the pre-determined profit margin metric which he 
says is significantly crippling Delphi's Brazilian operations. 
 
¶6.  (SBU) Volkswagen Brazil's executive Michael Lehman complained 
that his company must staff an accounting team that is many times 
the size of Volkswagen operations in other countries in order to 
contend with Brazil's complex tax environment.  Lehman said 
Volkswagen pays R$ 4.6 billion (US$ 2.3 billion) in annual Brazilian 
taxes, yet is never entirely clear which tax rules to follow and is 
constantly playing catch-up to stay current with tax variations 
 
BRASILIA 00000828  002 OF 003 
 
 
across Brazil's 5,000 municipalities.  Lehman said that his company 
is currently engaged in 2,000 tax related lawsuits, many of which 
have been ongoing for decades.  He describes his discussions 
attempting to explain Brazil's tax environment to Volkswagen's 
leadership in Germany as impossible.  Lehman also said that 
Volkswagen would like to invest in a regional design and R&D center 
in Brazil, but executives in Germany will continue to direct their 
highest profile investments to countries with reasonable tax codes 
and signed BTTs. 
 
¶7.  (SBU) Legal director for Brazilian-based international meat 
exporter JBS Friboi, Francisco de Assis, described a growing 
discomfort among the domestic Brazilian business community wanting 
to expand overseas with the Brazilian government's lack of BTTs. 
This, de Assis postulated, should create another major incentive for 
Brazil to sign bilateral tax treaties.  De Assis also said that he 
thought Receita and Valadao's posture toward BTT progress appeared 
pessimistic and insufficiently open-minded.  He called on Brazil to 
alter their way of thinking to create a more simplified system that 
incorporated a sound domestic tax code and embraced BTTs. 
 
¶8.  (SBU) Tax manager for Shell in Brazil, Elizabeth Ramos, 
reiterated concerns about Brazil's complicated tax structure 
emphasizing her company's frustration with the lack clarity of 
Brazil's tax code and the overall high tax burden.  Ramos contended 
that Shell would actually prefer to have a more non-beneficial tax 
collection system that was clearly defined than the current opaque 
system. 
 
RECEITA ON A ROAD TO NOWHERE 
--------------------------- 
 
¶9.  (SBU) The private sector and legal tax experts agreed that 
discussions on tax policy and international treaties belonged within 
the Brazilian Ministry of Finance who could better envision a 
comprehensive economic policy that the short-term, tax 
revenue-focused Receita.  Byrne was the first to make the 
suggestion.  Receita personnel seated in the audience did not 
visibly react to Byrne's remark.  Receita's Valadao, however, did 
attempt to address the point in the panel he led ("Brazilian 
Government Perspectives") when JBS Friboi's Francisco de Assis 
stated that having Receita negotiate tax policy was like having 
JBS's head accountant direct sales strategy.  Valadao countered that 
while he never worked in the private sector he was sure there was a 
role for accountants to play in the overall strategy of a business. 
 
 
¶10.  (SBU) Valadao's formal presentation provided little assurance 
to conference attendees that Receita is committed to signing a BTT 
with the United States.  He called the current environment for 
negotiation challenging within the context of the financial crisis, 
and commented that global economic developments will keep Brazil's 
tax treaty agenda in a state of constant change.  In the current 
environment of falling government receipts, Valadao insisted that 
tax treaties reduce revenues, posing a problem that Receita cannot 
ignore.  He blamed much of the slow progress on Brazil's particular 
tax structure, which he described as good but not perfect.  He 
commented that Brazil's system, which he asserts takes into account, 
but manipulates, OECD norms, was to Brazil's benefit and may even 
provide a model for other countries' tax policies, a comment that 
drew an intake of breath followed by a collective chuckle from the 
audience. 
 
RECEITA'S SPECIFIC POINTS 
------------------------- 
 
¶11.  (SBU) Valadao made the following specific U.S.-Brazil BTT 
points during his panel presentation: 
 
Information Exchange: Valadao contended that information exchange 
was an important component to BTT negotiation, not only for treaty 
compliance but for customs rules and law enforcement.  He cited the 
U.S.-Brazil Tax Information Exchange Agreement currently pending 
ratification in the Brazilian congress as a productive step and 
potential precursor to information exchange clauses within a 
U.S.-Brazil tax treaty. 
 
Double Taxation: Brazil's source taxation versus the United State's 
taxation at the recipient will hinder BTT negotiation, according to 
Valadao.  While discussing double taxation, Valadao spoke at length 
on common versus civil law environments, treaty interpretation in 
each country, and Brazil's probable need to amend their constitution 
in the case of a U.S.-Brazil treaty.  (NOTE: Tax expert Byrne 
 
BRASILIA 00000828  003 OF 003 
 
 
commented to econoff that Valadao explored these general legal 
environment issues to simply consume time off the clock.  END 
NOTE.). 
 
Tax Sparing: In his defense of tax sparing, Valadao called Brazil a 
poor and developing country requiring unequal treatment of tax 
policy across regions.  Valadao indicated he understood the United 
State's objection to tax sparing, but contended the issue is still 
very relevant for Brazil. 
 
Dispute Resolution: Valadao again invoked an image of Brazil as a 
poor country unwilling to give up revenue to developed northern 
countries in his contention that dispute resolution would continue 
to be a point of friction.  He paralleled Germany's complaints over 
service sector tax dispute resolution to a north-south contest, and 
a major factor in Germany's decision to pull out of their BTT with 
Brazil. 
 
Transfer Pricing: On the subject of transfer pricing, Valadao 
claimed that Brazil does follow OECD principles yet in an altered 
format to make them compatible with a Brazilian tax code that he 
admits is complex.  Valadao explained that compliance to OECD norms, 
including an expanded set of profit margins, would require an 
endless approval process through the Brazilian government, and 
claimed there was no reason for Brazil to comply to OECD norms 
anyway since Brazil is not an OECD member.  He acknowledged the 
current Brazilian model could be improved and additional 
industry-specific profit margins introduced, yet insisted such 
changes should not alter Brazil's current system, which he described 
as good. 
 
LACK OF WILL 
----------- 
 
¶12.  (SBU) Even after Valadao publicly told conference attendees 
that Receita is engaged in ongoing negotiations with the United 
States, he appears unenthusiastic to make himself available for a 
digital video conference (DVC) with Washington tax negotiators, as 
Casa Civil head Dilma Rousseff and Finance Deputy Minister Nelson 
Machado committed (reftel).  He told econoff at the conference, in a 
very unenthusiastic tone, that he will be unable to meet in the next 
two weeks, but to call his office to secure a date/time the week of 
July 6th for the DVC. Repeated calls to his office since have 
yielded a "tentative" commitment to a July 10 (Friday) 4 pm DVC. 
 
COMMENT 
------- 
 
¶13.  (SBU) Comment: Receita Federal, including chief negotiator 
Valadao, does not appear to have sufficient interest to move forward 
on substantive BTT negotiations absent a heavy handed directive from 
Brazil's top leadership.  Post believes the only reason Valadao will 
eventually commit to the Washington tax negotiation DVC is that the 
offices of both President Lula's Casa Civil chief of Staff Dilma 
Rousseff and Finance Deputy Secretary Nelson Machado have told him 
he must.  The private sector (and separately, other GOB 
interlocutors) has opined that the BTT negotiations will only make 
progress if the Finance Ministry engages at the political level.  In 
his meeting with the U.S. Deputy National Security Advisor for 
International Economic Affairs (reftel), Finance Deputy Nelson 
Machado did not close the door to further discussion, but 
demonstrated ambivalence toward a BTT.  Meanwhile, Brazil and 
foreign-headquartered multinationals continue to feel the effects of 
a burdensome Brazilian tax code and a lack of a signed BTT.  The 
Brazilian-based and foreign multinational company representatives 
present at the CNI conference were unified in their criticism of 
Brazil as the impediment to a BTT; the conference was absent of any 
such criticism towards the United States.  While it is encouraging 
that the Brazilian National Confederation of Industry, CNI, (as well 
as its constituent association, FIESP, in Sao Paulo) is prioritizing 
conclusion of BTTs as important to FDI growth and is engaging GOB on 
the issue, as long as Receita Federal is negative and the Finance 
Ministry remains ambivalent, substantive progress will be difficult. 
 End Comment. 
 
SOBEL