VZCZCXRO9486
RR RUEHRG
DE RUEHBR #0890/01 1971938
ZNR UUUUU ZZH
R 161938Z JUL 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 4694
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 7994
RUEHSO/AMCONSUL SAO PAULO 4312
RUEHRG/AMCONSUL RECIFE 9743
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 000890 
 
SENSITIVE 
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 CONTINUED RESISTANCE TO OECD GUIDELINES STALLS BTT 
NEGOTIATIONS 
 
REFS: A) BRASILIA 809 B) BRASILIA 828 
 
¶1.  (SBU) Summary: Tax treaty negotiators from the U.S. Treasury and 
Brazil's revenue collection agency, Receita Federal (Receita), met 
via DVC on July 10 to assess the potential for renewed progress on a 
bilateral tax treaty (BTT), and to develop a consensus message to 
present to the CEO Forum in anticipation of the Forum's July 20-21 
meeting.  Brazilian negotiators concluded that tax treaty 
negotiations would be difficult until the Brazilian Congress has 
taken action on the Tax Information Exchange Agreement (TIEA), a 
necessary internal political step for Brazil to advance in the 
treaty process, but as was reminded by Ambassador Sobel, not a 
requirement from the U.S. side.  Furthermore, Brazil's resistance to 
acceptable positions on taxation of services, transfer pricing, 
dispute resolution and arbitration, and tax sparing continue to pose 
significant challenges in the near-term.  Coincidentally, the head 
of Receita, Lina Vieira, was fired on July 10.  Her dismissal, which 
according to the press was due to internal struggles within an 
environment of falling tax revenues, will likely not impact BTT 
negotiations in the near-term.  End Summary. 
 
BACKGROUND 
---------- 
 
¶2.  (SBU) The DVC occurred as a result of Casa Civil Minister Dilma 
Rousseff and Finance Deputy Minister Nelson Machado's agreement - 
during Deputy National Security Advisor Froman's June visit to 
Brasilia - that tax treaty negotiators would meet before the CEO 
Forum, to assess what progress is possible and the viability of 
continued negotiations in the near term (reftel A).  Acting 
Assistant Secretary for Tax Policy Michael Mundaca led the U.S. 
Treasury negotiation team and Coordinator General for International 
Coordination Marcos Valadao led the team from Receita. 
 
RECEITA FEARS REDUCED TAX COLLECTIONS 
------------------------------------- 
 
¶3.  (SBU) Valadao emphasized that Brazil's primary concern with a 
BTT is the potential drop in tax collections that could result upon 
treaty implementation, a point he has vocalized in the past (reftel 
B).  In order to help project the potential impact on Receita's 
collections, Valadao requested U.S. Treasury data on flows of income 
between the United States and Brazil.  (Note:On July 13, U.S. 
Treasury provided Receita with this data.) 
 
BRAZIL POSSIBLY WILLING TO DISCUSS SOME TREATY REDUCTIONS IN 
WITHHOLDING RATES 
-------------------------------------------- 
 
¶4.  (SBU) Mundaca summarized United States preferred treaty policy 
regarding withholding taxes on cross-border payments of interest, 
royalties, and dividends.  Receita did not directly voice objection 
to the preferred rates but did point out that rate reductions would 
be difficult given Brazil's current fiscal environment.  Receita 
also pointed out that the United States and Brazil differ 
substantially on the treatment of income from services.  Valadao 
noted that Brazil, unlike the United States, does not require the 
existence of a permanent establishment when levying taxes on income 
from services performed.  Moreover, the tax imposed by Brazil on 
service providers is a gross basis tax that is withheld by the 
payor.  Ambassador Sobel noted that Brazil's taxation of income from 
services is out of step with the OECD approach.  Valadao said that 
it would be difficult for Brazil to move away from a payor rule but 
that there might be flexibility on reducing the income tax rate 
itself. 
 
SIGNIFICANT HURDLES REMAIN 
------------------------- 
 
¶5.  (SBU) Negotiators determined that the following issues would 
continue to prevent BTT progress in the near-term: 
 
Information Exchange: Unlike the United States where TIEAs are 
executive agreements, Brazil's compliance to information exchange is 
dependent on congressional approval.  Valadao commented on the 
current TIEA legislation before the Brazilian Congress, saying its 
passage was a critical requirement for the resumption of active BTT 
negotiations.  Ambassador Sobel clarified that a signed TIEA is not 
needed for the United States to move forward with BTT negotiations. 
 
Tax Sparing: Brazil maintained its position of requiring tax sparing 
as part of a BTT.  Valadao volunteered that Brazil could be flexible 
if the United States showed flexibility on the issue.  When Mundaca 
 
BRASILIA 00000890  002 OF 003 
 
 
explained the U.S. Senate's firm opposition to tax sparing and 
investment credit clauses, Valadao asked for the consideration of a 
creative solution on the issue.  When prompted, Valadao did not 
propose a specific suggestion, but said he would give it more 
thought.  Ambassador Sobel added that he knew a number of Brazilian 
senators who - in the case that all other BTT items reached 
consensus - would not allow the tax sparing issue to become a deal 
breaker. 
 
Dispute Resolution and Arbitration: Mundaca summarized that previous 
negotiations had revealed that Brazil does not have sufficient 
flexibility within its legal system to carryout dispute resolutions, 
adding that a robust dispute resolution framework would be required 
in a BTT for anticipated cases of double taxation and transfer 
pricing issues.  Valadao suggested that Brazil could possibly create 
a work-around mechanism to allow for treaty-related dispute 
resolution to trump local tax law, but that this would require a 
change in Brazil's tax laws.  Prospects for such a change, however, 
are unlikely.  Valadao added that due to domestic law constraints, 
there would be no way to include arbitration provisions in a BTT, 
and that disputes over transfer pricing would be especially 
difficult to resolve. 
 
Transfer Pricing: Receita indicated it would not consider a 
departure from statutory profit margin requirements with respect to 
transfer pricing because Receita has no authority under domestic law 
to deviate from these statutory requirements.  The United States 
continues to seek a strong arm's-length standard for transfer 
pricing along the lines of the policies developed by the OECD. 
 
BRAZIL'S BLACKLIST TAX HAVEN LEGISLATION 
--------------------------------------- 
 
¶6.  (SBU) In response to a U.S. Treasury question on Brazilian 
legislation, passed January 1, 2009, broadening Brazil's definition 
of tax havens to possibly include certain U.S. states, Valadao 
explained that the legislation remains ineffective due to the 
absence of a normative instruction attached to the law.  He did not 
offer any additional guidance as to when or if such normative 
instruction would be introduced to make the legislation enforceable. 
 
 
CONSENSUS MESSAGE TO THE CEO FORUM 
---------------------------------- 
 
¶7.  (SBU) U.S. Treasury and Receita discussed a consensus message to 
deliver to the July 20-21 CEO Forum regarding future BTT negotiation 
progress.  Negotiators are currently trading draft statements that 
will address the importance to Brazil of the Brazilian Congress's 
passage of the TIEA.  The message will also indicate that progress 
on issues such as taxation of income from services, transfer 
pricing, dispute resolution and arbitration, and tax sparing would 
not be possible in the short term. 
 
RECEITA'S TOP OFFICIAL FIRED 
--------------------------- 
 
¶8.  (SBU) Coincidentally, the head of Receita, Lina Vieira, was 
fired on July 10.  According to the press, her dismissal was due to 
internal struggles within an environment of falling tax revenues. 
Press reports have also named Finance Deputy Minister Nelson Machado 
as a possible replacement.  A contact from within the Ministry of 
External Relation's (MRE) financial and tax cooperation group told 
econoff that domestic tax collection issues would most likely be the 
focus of the new leadership, and external issues like the BTT would 
probably not receive different attention under a new management. 
That said, Valadao was named the lead tax treaty negotiator when 
Vieira assumed her duties approximately one year ago, and the MRE 
contact admitted that a larger leadership shuffle was possible. 
 
COMMENT 
------- 
 
¶9.  (SBU) Comment: The Brazilian negotiators suggested tying the 
future of BTT discussions to the Brazilian Congress passage of the 
TIEA.  However, an issue by issue analysis of the core BTT points 
indicates that Brazil's continued inability to accept fair and OECD 
compliant positions leaves the negotiation process essentially 
unchanged from when talks resumed three years ago.    If Receita 
requires passage of the TIEA before negotiations resume, the CEO 
Forum, the broader U.S.-Brazilian business community and other BTT 
proponents will have to lobby the Brazilian Congress for passage of 
the TIEA, a process that could take an indefinite amount of time. 
 
BRASILIA 00000890  003 OF 003 
 
 
It should be kept in mind that the linking of the TIEA to the BTT is 
being made by Receita Federal, not by the United States.  Were 
progress on the substantive BTT issues possible, the U.S. Treasury 
would be willing to resume discussions before approval of the TIEA. 
Unfortunately, however, the July 10 DVC revealed that until Brazil 
adopts positions more in conformity with OECD guidelines on core BTT 
issues such as taxation of services, transfer pricing, dispute 
resolution and arbitration, and tax sparing, progress remains 
difficult if not impossible.  End Comment. 
 
¶10. (U) This cable was cleared by U.S. Treasury Acting Assistant 
Secretary for Tax Policy Michael Mundaca's office. 
 
SOBEL