VZCZCXRO3248
RR RUEHRG
DE RUEHBR #1271/01 3020953
ZNR UUUUU ZZH
R 290953Z OCT 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 5296
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 8324
RUEHSO/AMCONSUL SAO PAULO 0014
RUEHRG/AMCONSUL RECIFE 0056
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 001271 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC, EEB/OMA SAUNDERS 
TREASURY FOR LUYEN TRAN MICHAEL MUNDACA 
COMMERCE FOR ANNE DRISCOLL LORRIE FUSSELL 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV BR
SUBJECT: BRAZIL: SMALL VICTORY IN THE 40 YEAR STRUGGLE FOR A BTT 
 
REFS: A) BRASILIA 828 B) BRASILIA 890 
 
¶1.  (SBU) Summary: On October 28, the Brazilian Chamber of Deputies' 
Constitutional Committee (CCJ) approved the Tax Information and 
Exchange Act (TIEA) with the United States.  The TIEA, which the 
Government of Brazil (GOB) considers an important pre-element of 
progress toward a Bilateral Tax Treaty (BTT), is now cleared to 
advance to deliberation and a vote in the full Chamber.  On October 
27, panelists in a United States-Brazil BTT conference hosted at the 
Chamber of Deputies predicted the positive CCJ result, yet did not 
seriously address the key issues, such as tax sparing, dispute 
resolution, and transfer pricing, that remain fundamental to 
achievement of a United States-Brazil BTT.  End Summary. 
 
BTT CONFERENCE 
-------------- 
 
¶2.  (SBU) The Chamber of Deputies, AMCHAM, the Brazil-U.S. Business 
Council and CNI (National Confederation of Industry) co-hosted a 
United States-Brazil Bilateral Tax Treaty conference on October 27. 
Panelists, including U.S. business representatives, Brazilian 
business representatives, Members of Congress and the Brazilian 
executive branch, were supportive of renewed progress on a United 
States-Brazil BTT.  The level and tone of support ranged from a 
reserved theoretical "in favor" stance from Receita Federal 
(Brazil's IRS-equivalent agency), to more adamant calls for 
immediate action from AMCHAM which openly questioned GOB resolve to 
move the issue forward. 
 
¶3.  (SBU) Marcos Valadao, Receita's lead international tax 
negotiator, delivered prepared remarks highlighting the standard 
benefits of a BTT. In order to solve the 40 plus year impasse, 
Valadao recommended pursuing a United Nations model treaty, versus 
the United States preferred OECD model (NOTE: Valadao presumably 
believes the U.N. model would be more favorable to Receita's tax 
collections, given the model's consideration of special 
circumstances of developing countries.  The U.N. model also promotes 
tax sparing, which Valadao should realize is a non-starter with the 
U.S. Congress (reftel B).  END NOTE).  Valadao argued that tax 
sparing continues to be a major impediment to a treaty.  He also 
contended that there is no empirical evidence to indicate a 
relationship between investment flows and the existence of a BTT. 
 
¶4.  (SBU) Robert Pasqualin, AMCHAM's legal counsel and president of 
the AMCHAM Tax Taskforce, confronted Valadao's 
less-than-enthusiastic acknowledgement of the importance of a BTT, 
with a strong criticism of Brazil's tax system.  Speaking directly 
after Valadao, he said, "Brazil's tax system is already too complex 
and seriously flawed.  The absence of a solid BTT with the United 
States just makes it worse."  He then cited a study showing 
Brazilian companies pay more in taxes than on employee's salaries 
and wages.  Pasqualin suggested the GOB may not have the resolve to 
move forward on a BTT with the United States, asking, "Don't we know 
how to produce a BTT, or do we not want to?"  He encouraged the GOB 
to strive for specific progress, and volunteered AMCHAM's full 
cooperation with Receita to assist, adding that he has personally 
offered support to Valadao in the past. 
 
¶5.  (SBU) In addition to Valadao and Pasqualin's presentations, a 
series of panelists spoke in favor of a BTT.  Luis Balduino, the 
Ministry of Exterior Relations head of international financial 
policy, cited political and diplomatic resolve on the part of the 
GOB to move forward with a BTT.  Brazilian member of congress, 
Mendes Thame (PSDB-SP) also spoke in favor and predicted the October 
28 CCJ approval of the TIEA.  EMBRAER's Director of Institutional 
Relations, Horacio Mello, compared Brazil's lack of a BTT with the 
United States to an American trying to rent a car without a credit 
card, "The U.S. financial system looks upon such a transaction with 
suspicion; the Americans view the absence of a BTT in the same 
light." 
 
¶6.  (SBU) Brazilian member of congress, Mauricio Rands (PT-PE), 
co-chair of the Brazil-U.S. Parliamentary group, announced that 
several members of congress will be presenting in the coming days a 
petition in the Foreign Affairs Committee that will request 
acceleration on the BTT from Casa Civil.  He asserted that there was 
a strong awareness among the Brazilian congress of the importance of 
signing a BTT with the United States. 
 
TIEA ADVANCES 
------------- 
 
¶7.  (SBU) As panelists had predicted, on October 28, the Brazilian 
Chamber of Deputies' Constitutional Committee (CCJ) approved the 
 
BRASILIA 00001271  002 OF 002 
 
 
TIEA with the United States.  The TIEA, which the GOB considers an 
important pre-element of progress toward a BTT, is now cleared to be 
sent next week to the full Chamber for deliberation under a special 
"urgency" procedure.  This should help the TIEA's prospects for 
passage.  While the Chamber's vote is uncertain, there is a good 
basis for believing it will approve the TIEA given the CCJ's October 
28 recommendation.  If the Chamber approves, the TIEA goes to the 
Senate, where prospects become more difficult to predict.  While the 
Senate is likely to receive the TIEA in late November or December, 
there is no sense at this stage either when the Senate may vote or 
what the outcome of its vote will be. 
 
¶8.  (SBU) Comment: The Chamber BTT conference, similar to the 
CNI-sponsored event in June (reftel A), highlighted broad support 
for progress on a United States-Brazil BTT.  This particular event 
was significant in that it included Brazilian members of congress 
and GOB officials voicing support for a BTT.  While no party voiced 
objection to progress on a BTT, Valadao did little to convince the 
conference attendees that Receita is a motivated negotiator.  The 
U.S.-Brazil CEO Forum commissioned study on the effects of a BTT for 
Brazil is now finished, and will be formally presented to the GOB 
within the next three weeks.  The October 28 CCJ committee approval 
of the TIEA is a step in the right direction, yet significant 
hurdles remain (reftel B) including: tax sparing, dispute 
resolution, and transfer pricing; hurdles that were barely, it at 
all mentioned, during the BTT conference.  End Comment. 
 
KUBISKE