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34 Intertax 195 (2006)
Is Brazil Developed - Termination of the Brazil-Germany Tax Treaty

handle is hein.kluwer/intrtax0034 and id is 195 raw text is: I On 7 April 2005 Germany filed a termination notice with Brazil's Ministry of Foreign Relations regarding the tax treaty to avoid double taxation (DTT) between both countries. The initiative to review came from the German side, which found that the Treaty no longer offered a balanced tax solution between the two countries nor did it offer juridical protection for German interests against double taxation.' Because of repeatedly unsuccessful efforts to review the Treaty's clauses Germany terminated the agreement unilaterally. This article intends to consider the main implications of such. Furthermore, since a treaty termination constitutes a rare2 and somehow drastic diplomatic measure in the interna- tional tax environment, the landscape of this situa- tion and the scope of Brazilian DTTs will also be commented upon. 1. Context In the past, when the DTT was created, taxpayers' worries surmounted in regard to the exchange of information clause, which was then formulated as a 'reduced information exchange clause'.3 The Treaty came into force in 1975 and followed the provisions of the OECD Model Treaty. It included, however, several provisions referring to the UN Treaty Model for treaties between developed and developing countries, which expressed a major German interest to conclude the agreement, even if admitting generous clauses that may not be found in many other treaties with developing countries.4 Unlike 30 years ago, in the beginning of 2005 taxpayers - mostly representing the German private economy - vehemently expressed their interest to keep the Treaty. The main question refers to tax sparing and tax matching clauses to attract German investment to Brazil that are found in regards to income from immovable property, business profit, payments of dividends, interests and royalties. Basi- cally Germany allowed several material benefits to German investors in Brazil in the form of fictive tax credits, which were quoted over the real rate taxed in Brazil. Such renouncement of tax substrate shows the interest to stimulate investment in the favoured region and may be found in some other German treaties (Argentina, Bangladesh, Bolivia, China, Ecuador, India, Indonesia, Mongolia, Philippines, Portugal, Uruguay and Vietnam5). In the interest to improve the development, the other side of the coin shows an interest to improve the competitiveness of German investors abroad, which in a way may form a counterpart to the one-sided development argument. This poses the question: is Brazil still seen by German authorities as a developing country that needs tax incentives?6 This must be followed by the question: how important are invest- ments in Brazil to be considered for their strategic focus in Germany?7 Among the above-mentioned countries there are economies comparable to and some competitors of Brazil that remain with tax sparing rules, even though conditions may differ. From the cooperation point of view, Brazilian authorities reacted in a much more friendly manner when Spain, for example, successfully discussed the Brazilian interpretation of their DTT (after participat- ing in the Brazilian privatization programme in the 1990s Spain became the second biggest investor in Brazil, a place occupied by Germany in the past).9 The WWHm See official publication from the German Federal Finance Ministry: BMF, wiww.bundesfinaizmiiisterium.de, Aktuelles, 14 April 2005. 'Kiindigung des deutsch-brasilianischen Doppelbesteuerungsabkommens', in 2 Germany had just one DTT terminated (in 1973 Argentina terminated it unilaterally). It is supposed that no more than 15 treaties have been terminated in the last 20 years. For an international overview see Cannon and da Camara, 'Will Brazil Derail Madeira Investment Route?' Tax Notes International 1999, WTD, 157-3. See Krabbe, 'Brasilien', in Debatin and Wassermeyer, 'DBA-Kommentar', Band II, EL 81, May 2000, Art. 27, note 1. Regarding 'kleiner vs. grofer Informationsaustausch' see Baranowski and Grotherr, 'Einfuihrung OECD-MA', in Becker et al., 'DBA-Kommentar', IWB-Textsannilung, 9, Erg. Lfg. 2004, 10. See Krabbe, ibid., 2000, Art. 1, note 3. The German-Vietnam DTT fixed a 10-year limit to the tax matching clause (Art. 23, para. 2 of the DTT). This argument was exposed in Weggennann, 'Auswirkung der Kuindigung des DBA-Brasilien und Handlungsempfehlungen', RIW 2005, no. 7, p. 519. The debate on this question was formulated by Prof. Gerd Rothmann and Prof. Fernando Zilveri, in 'Ata da Mesa de Debates de I1/08/2005', Instituto Brasileiro de Direito Tributirio (IBDT), under www.ibdt.com.br last visited 20 December 2005. See BMF-Schreiben, 'Nachweis des Vorliegens der Voraussetzungen fiir die Anrechnung fiktiver Quellensteuern bei auslandischen Zinseinkiinften nach DBA', 5 December 1998, IV C 6 - S 1301 - 18/98, DStR 27/1998 1012. See Rothmann, in 'Ata da Mesa de Debates de 11/08/2005', IBDT. Germany is the sixth major investor in Brazil, after respectively US, Spain, the Netherlands, France and Portugal (considered the period January 1996-September 2002), IBGE/Fiesp 2003. INTERTAX, Volume 34, Issue 4 @ Kluwer Law International 2006 Is Brazil 'Developed'? Termination of the Brazil-Germany Tax Treaty Napoledo Dagnese, Lawyer within the European transfer pricing team of Deloitte, Dusseldorf 195

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