Originally published at the March 6 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
After rejecting an earlier ruling on Brazil’s taxation of profits and dividends distributed by special Spanish holding companies, the Brazilian Taxpayers’ Council now may change its view and adopt a new approach, the Federal Revenue Attorney’s Office has said.
After rejecting an earlier ruling on Brazil’s taxation of profits and dividends distributed by special Spanish holding companies (entidadde tenenciade valores extranjeros, or ETVEs), the Brazilian Taxpayers’ Council now may change its view and adopt a new approach, the Federal Revenue Attorney’s Office has said.
On reviewing appeal No. 148,709 on October 19, 2006, the First Chamber of the Taxpayers’ Council rejected the application of Interpretative Declaratory Act 6/2002, which provided that profits and dividends received by a Brazilian taxpayer from a Spanish ETVE were taxable in Brazil. The taxpayer, Eagle Distribuidorade Bebidas S.A., a Brazilian beverage company, prevailed in the case.
Another case against Eagle (appeal No. 148,710) now is under review before the same First Chamber of the Taxpayers’ Council, but instead of following its previous ruling, the chamber may adopt an entirely different approach with different consequences.
The chamber on December 6, 2006, requested additional information about whether Eagle’s Spanish subsidiary has paid taxes in Spain. According to the Federal Revenue Attorney’s Office, if there have been no Spanish tax payments by Eagle’s Spanish subsidiary, the First Chamber might decide to add the subsidiary’s profits into Eagle’s taxable income; if Spanish taxes were paid but the Spanish taxation was less than Brazilian taxation on the foreign-source income, the chamber could decide to tax the balance. In that case, it would be adopting a third method of taxation, disregarding both the 1976 Brazil-Spain tax treaty and Interpretative Declaratory Act 6/2002. Taxpayers argue that no taxation should exist under the tax treaty, while tax authorities maintain that Brazil should be entitled to tax the entire profits generated by ETVEs.
According to the Federal Revenue Attorney’s Office, however, the request for information from Spanish tax authorities shows that the First Chamber may no longer accept its own previous ruling. Some observers say that if the Taxpayers’ Council endorses a new, third approach to taxation, it might be challenged in court because the treaty does not allow Brazil to tax profits that, according to the treaty, should be taxed only in Spain. If Spain waives taxation, that should not authorize Brazil to impose a tax, they say. Many believe that only termination of the Brazil-Spain tax treaty would allow for such an approach and, even then, only as provided by Brazilian tax law.
There is precedent in Brazil for terminating a tax treaty because of loopholes. A loophole in the treaty with Portugal allowed for tax avoidance through the use of Madeira, a tax haven, which was included within the jurisdiction of Portugal for treaty purposes. Because of that loophole, Brazil terminated the treaty, although it eventually signed a new treaty that excluded the Madeira option.
David Roberto R. Soares da Silva