BRAZIL'S TAX COLLECTION AGENCY NOT A CONSTRUCTIVE PARTNER

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