FINANCIAL STRATEGIES FOR MINIMIZING CORPORATE INCOME TAXES UNDER BRAZIL/S NEW GLOBAL TAX SYSTEM

estratégias minimizar bases conceituais sistema impostos e problema causado pela criação de dupla taxação. As reações governo e iniciativa privada dupla taxação consideradas. analisados os mecanismos imper-feitos desenvolvidos no Brasil e em outros países para atenuação da taxação dupla. Finalmente, abordamos as estratégias utilizadas pelas empresas não apenas evitar dupla taxação como também ter as vantagens dos paraísos fiscais. ABSTRACT: In 1996, Brazil adopted a worldwide income tax system for corporations. This system represents a fundamental change in how the Brazílian government treats multinational transactions and the tax minimizing strategies relevant to businesses. In this enicte, we describe the conceptual basis for worldwide tax systems and the problem of double taxation that they create. Responses to double taxation by both the governments and the priva te sector are considered. Namely, the imperfect mechanisms developed by Brazil and other countries for mitigating double taxation are analyzed. We ultimately focus on the strategies that companies utilize in order not only to avoid double texetion, but also to take advantage of tax havens.

Brazilian trade policies and trends continue to indicate ongoing intemationalization of its commercial markets. One such sign of Brazil' s globalization is its recent adoption of a worldwide (or global) income tax system for corporations. Such a system is consistent with longstanding policies of most developed countries. The corporate strategic impact of this new system will become increasingly significant as Brazilian companies continue to look abroad. The purpose of this artic1e is to describe the nature and challenges associated with a worldwide income tax system, and identify corporate strategies frequently undertaken to minimize an enterprise's global taxo The first section develops the rationale underlying the global income tax system in Brazil, as well as other countries. Such a system often leads to the possibility that one dollar of earnings will be taxed by two or more jurisdictions, or so-called double taxed. The second section describes govemment responses to double taxation, inc1uding Brazil's response and that of other countries. Double taxation is of concem to govemments because it might put their intemational businesses at a disadvantage in world markets. In the third section, we address the private sector's response to double taxation. By strategically managing global structures and finances, multinationals may not only mitigate double taxation, but also use tax havens to their advantage.

JURISDICTION TO TAX
At present, there is no global authority that establishes intemational tax rules. That is, there is no intemational tax law per se, only national tax laws. Therefore, each country has discretion over deciding who and what to taxo In this 42 section, we discuss the type of connection used by countries to establish the right to taxo What gives a country tax authority? The jurisdictional scheme that a country adopts specifies the types of relationships with taxpayers that lawmakers believe are sufficient to justify taxation. Typically, taxation in a country arises when a business entity is connected to the country in one of two waysnamely, through a personal relationship or an economic relationship.

Personal relationship
A personal relationship with a country frequently leads to taxation. For individuals, such a personal relationship may be established by virtue of being a citizen or resident of a country. Corporations, the subject of this artic1e, can also have a personal relationship with a country through citizenship or residency. A corporation is often considered a citizen of the country in which it is chartered.
In some countries, mere incorporation is enough to establish tax authority, regardless of the company's activity Ievel in the country of incorporation. Under the laws of other countries, incorporation does not, by itself, create tax authority. In those countries, some minimum level of activity is required before a govemment establishes its right to taxo Vntually in all countries, corporate residency results in taxation. Residency typically depends on where a company is managed and controlled. Not surprisingly, the interpretation of terms such as "management" and "control" can take on different meanings in different jurisdictions. For example, one interpretation might be based on the location ofboard meetings whereas another interpretation might look to the location where day-to-day operations take place or the principal place where the business is located. Because definitions of residency vary with country, it is possible for a taxpayer to be a resident of two jurisdictions. To avoid this redundancy many tax treaties between countries have so-called tie breaker rules that determine a single residency location.
whenever they derive income from business activities or invest:ment assets located within a country. Business activities usually create an economic relationship if a nontri via] part of the value added process occurs in a country, such as manufacturing, marketing, or distribution functions.
Strict importing and nominal activities usually do not create an economic presence in a country, The set of entities deriving income from sources within a country includes not only citizens and residents (those persons who already have a personal relationship with the country), but also foreigners.

Brazil's worldwide tax system
Before 1996, Brazil taxed the income of corporations under the territorial system of taxation.
Under this system, only those corporations having an econornic relationship with Brazil were taxed. That is, Brazilian corporate citizens and residents were allowed to exclude foreign sources ' income from domestic taxation.
Under the territorial systern, Brazil (the home country) asserted primary jurisdiction over domestic income whether the recipient of that income was a citizen, resident, ar foreigner. Primary jurisdiction is the right to tax income irrespective of the jurisdictional c1aims of other countries. No jurisdiction was asserted RAE • v.37 • n. 1 • Jan./Mar. 1997 over income derived from abroad.
Beginning in 1996, Brazil began taxing the income of Brazilian corporations under a worldwide tax system. In general, countries under this system impose tax based on both an economic and a personal relationship. Therefore, a foreign branch still has a personal relationship with the home country because ir is merely a unit of the home company. Accordingly, a foreign branch's income will be taxed by the home country on the accrual basis, even if the income is not repatriated to the home office. On the other hand, a foreign subsidiary is a separate legal entity, hence it has no personal relationship withits parent's home country. Moreover, if it only earns income abroad, it has no economic relationship with its parent's home country. Accordingly, the income of a foreign subsidiary general1y is not taxed at home until ir is repatriated to the parent as, for example, dividends. The type of tax systems used by a sample of countries is shown in Exbibit I. As suggested by Exhibit 1, the worldwide tax system dominates among the world's largest trading countries. By adopting this systern, Brazil joins the ranks of tbese countries, However, Brazil added a unique variation in its original enactment of a worldwide system, It not only accrues income from foreign branches, but it also accrues income from foreign subsidiaries. I About six months after the enactrnent of this law another Brazilian tax pronouncement took a different position.

Exhibit I Sample of Countries with Corporate Territorial versus Worldwide (WW) Tax Systems
It allowed taxation of a foreign

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subsidiary's income based on the more traditional non-accrual approach, namely only when the income is repatriated." However, arguably this pronouncement does not carry the weight of law. Accordingly, as of this writing, it might be possible for taxpayers to operate under the law or the pronouncement creating an anomaly that is discussed later under the title "tax havens", Under the worldwide tax system multinational corporations are likely to face international double taxation. A foreign branch's income is frequently taxed in the foreign country based on an economic relationship and the same income is taxed as accrued in the home country based on a personal relationship.
Likewise, a foreign subsidiary's income is typically taxed abroad based on an economic and personal relationship with the foreign country. The same income is taxed when repatriated to the parent, and under Brazilian law it rnight even be taxed on the parent as accrued.
As a result, a fundamental issue faced by governments using a worldwide tax system is how to rnitigate international double taxation. Both the home and the host countries must decide whether and how to adjust their tax system when there are competingjurisdictional claims.
Commonly, double taxation is mitigated by countries acting alone (unilaterally) and, in some cases, they act together (bilaterally) through tax treaties.

Unilateral mechanisms
Traditionally, it has been up to the home country to solve the double taxation problem of its corporation citizens and residents. There are several ways by which a country may mitigate double taxation. In all cases, the home country is, fully or partially, forfeiting its jurisdictional tax c1aim on the foreign source's income. Brazil's pre-1996 use of a territorial system for corporations is one way of avoiding double taxation.
Alternatively, under a worldwide tax system, corporations may be allowed to deduct the foreign taxes they pay from their tax base at home. However, this provides only partial relief from double taxation. For example, assume a company pays $20 in foreign taxes on $60 of a foreign branch's earnings. When the $60 of foreign earnings is considered as taxable inccime back home, a $20 deduction for foreign taxes paid still results in a home tax base of $40 3 from foreign income. In other words, $40 is still double taxed. For this reason, countries usually do not rely exc1usively on this deduction mechanism.
Another worldwide mechanism by which a home country can mitigate double taxation is to inc1ude all their home and foreign income in the tax base, but allow an unlirnited foreign tax credit (FTC), or domestic tax offset, equal to the foreign income taxes paid. If the FTC is unlirnited, foreign income taxes paid offset the home country income tax, even if the host country tax rate exceeds that of the home country. The home country still asserts primary tax jurisdiction over domestic corporate income, but only secondary jurisdiction over the foreign income. The c1aim is secondary in the sense that the home country forgoes the right to collect taxes to the extent the corporation's foreign income is taxed by the host country. However, because foreign taxes in excess of home taxes (on foreign income) offset taxes on domestic income, this method is not adopted by countries very frequently.
Brazil , like most countries using a worldwide tax system, has adopted a limited FTC. Like the unlimited FTC, the mechanics of a limited FTC can be complicated. However, the following conceptual interpretation is sufficient to capture critical aspects of the lirnited FTC. In essence, if the home tax rate is greater than the foreign tax rate, the FTC equals the foreign taxes paid. This is no different than the unlimited FTC. However, if the home tax rate is less than the foreign rate, the FTC is limited to the domestic tax on the foreign income. Therefore, conceptually this credit is the lesser between (a) the foreign taxes paid or (b) the domestic taxes on the foreign source's income." Application of this concept is illustrated below.
• Base case -no FTC. Assume Taxations in Brazil and F combine for a total tax of $46 6 on Bco's earnings of $100, for an overall tax rate of 46 percent. 7 Bco' s foreign source' s income of $60 is double taxed, resulting in a total tax rate of 60 percent" on this income.
The following subsections illustrate the concept underlying the lirnited FTC mechanism Brazil and many other countries use to rnitigate this double taxo • Excess credit case. By allowing a FTC for foreign taxes that is lirnited to the domestic tax on foreign income, Brazil elirninates Bco's double tax in the base case. Applying the concept above, this credit is the lesser between (a) $21 of F taxes paid or (b) $15 9 of Brazilian pre-FTC tax on F income. As shown below, the resulting $15 FTC leaves Bco with a domestic tax liability of $1O,which represents the Brazilian tax on Bco's $40 in Brazilian income.
Taxation in Brazil and L combine for a total tax of only $25 12 on Bco's earnings of $100 and an overall tax rate of 25 percent. 13 In essence, Brazil allows Bco to reduce its $15 14 domestic tax on L source's income taking into account the $9 already paid to L. The resulting $6 15 difference paid to Brazil is referred to as a short credit because Bco is short of, namely lacks, $6 paid as foreign taxes, that could be used to offset domestic taxes on the foreign source' s income.
• Cross crediting. Excess credits represent a potential tax savings in the home country. Therefore, companies frequently manage their excess credits to derive full benefit from them. An effective strategy for managing excess credits is to combine them with short credits. This may be possible if a company operates in at least two foreign countries, one with an income tax rate above the home country' s rate and the other with a rate below. For example, the following tax results if Bco derives half ($30) its foreign source' s income from country F and the other half ($30) from country L.
5. This assumptian simplifies the analysis but may be invalid in many instances since there are often numerous diflerences between how two countries define and source taxable income.

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Bco's tax is only $25 16 on worldwide eamings of $100. This is less than the $31 worldwide tax when all $60 of Bco's foreign eamings were from F (excess credit case), and equal to the worldwide tax when all of Bco's foreign eamings derived from L (short credit case). In other words, Bco can operate in F and still enjoy an overall tax rate of only 25%17 even though the tax rate in F is 35%.
What enables this outcome? Recall that conceptually the FTC is the lesser between (a) the $15 18 foreign tax paid or (b) the $15 19 domestic tax on the foreign source income. In either case the FTC is $15. By combining the taxes paid in F and L the average foreign tax rate is 25 percent," or equal to the domestic tax rate on foreign income. In essence, cross crediting allows companies to use a weighted average foreign tax rate while computing foreign taxes. In this case, this average rate is equal to the domestic rate. Therefore, the entire domestic tax on foreign income is offset by the FTC.
To prevent this type of cross crediting some countries, such as the United Kingdom, apply a so-cal1ed country-by-country FTC limitation, which prevents the taxes paid in one foreign country to be combined with those of another foreign country. Under this system, cross crediting can still apply within a country if different tax rates apply to different types of income, such as operating income and interest income. Other countries, such as the United States of America, allow taxes paid across countries to be combined, but only for separate classes, or baskets, of income. For example, taxes paid across countries can be combined for operating income, but this basket of taxes must be kept separate from taxes paid on passive income, such as interest and dividend income. At the present time, Brazil has neither a country-by-country or income basket limitation.
The cases above are based on the operation of foreign branches. However, intemational activities are commonly undertaken through foreign subsidiaries. In this case, a foreign source's income typically is only taxed when repatriated, for example through dividends paid to the domestic parent. The principles illustrated above still apply, but with an extra degree of flexibility. Namely, the parent can decide when dividends will be paid, hence when foreign eamings are subject to domestic taxes. Effective cross crediting strategies should balance the timing and amount of foreign dividends to minimize excess taxes, thereby minimizing taxes. For example, assume the foreign entities in the cross crediting example above are foreign subsidiaries ofBco instead offoreign branches. Bco's tax minimizing strategy is to pay equivalent dividends from F and L in the same year leading to the same result illustrated above.

Bilateral mechanisms
Territorial systems, or deductions and/or FTCs under worldwide tax systems represent unilateral solutions to intemational doub1e taxation in the sense that they are created by individual countries (and multilateral solutions in the sense that they apply to outbound transactions involving any foreign country). As another means of preventing intemationa1 double taxation, countries also enter in to bilateral tax treaties only applicable to the two countries that are party to the agreement.
Tax treaties contain provisions that reduce the tax imposed on income derived by corporate (and individual) citizens of one treaty country from sources within the other treaty country. For example, country A may agree to forgo the tax on dividend income derived from within its borders by citizens of country B in exchange for the reciprocal treatment by country B. The effect of such treaty provisions is to give the home country primary tax jurisdiction. This is just the opposite effect of unilateral techniques in which the home country usually relinquishes primary tax jurisdiction. Therefore, under treaties a larger share of the tax on intemational transactions is saved for the home country by subordinating jurisdictional c1aims based on economic relationships to c1aims based on personal relationships. Of course, the increase in the home country's tax revenues comes at the host country' s expense. As a consequence, tax treaty provisions are uniformly reciprocal in nature.
The shifting of primary jurisdiction to the home country also explains why tax treaties frequently do not exist between developed and developing countries. Developing countries often play host to foreign investment. They do not want to relinquish their right to tax these investments by shifting their primary jurisdiction to the (foreign) home country as would occur under conventional treaties. This is especially true because, with limited outbound investment, developing countries gain little by the reciprocal provisions in treaties.
Treaties are crafted to meet the specific objectives of the negotiating countries. One prototype document for starting treaty negotiations is the 1994 model treaty of the Organization for Economic Co-operation and Development (OECD).21 Forerunners of this influential model treaty are the 1992, 1977 and 1963 OECD model treaties, and 1921 studies by the League of Nations, (the OECD antecessor) that culminated in the first model treaty.
In 1980, the United Nations (UN) also developed a model treaty most distinguished for supporting tax authority based on income source, namely economic relationships. The UN treaty is frequently the starting point for negotiations to many Latin American countries inc1uding Brazil. This is because it acknowledges the tax rights of developing countries over income derived from them by richer capital exporting countries.
For example, the UN model treaty increases the likelihood that a business will be considered to have a so-called permanent establishment in another country. In essence, a permanent establishment is the term used to describe the level of economic activity in a host country that justifies taxation by the host country." For example, to create a permanent establishment associated with a building site and consultant services, 12 months of activity are required under the 1994 In theory, the slightest economic relationship with a host country is enough to create the right for that country to impose taxation. By exempting nominal economic activities from host country taxation, permanent establishment provisions facilitate administration and reduce trade inhibiting regulation.

COMPANV RESPONSE TO DOUBLE TAXATION23
Private sector response, at a minimum, attempts to mitigate the impact of double taxation and frequently strives to take tax advantage of so-called tax havens. These efforts are attributable to the tax problems and opportunities created by tax inconsistencies across countries and the rapid acceleration of intemationalized markets that began in the 1980's.

Mitigating double taxation
• Avoid connection. An obvious method companies might use to mitigate double taxation is to avoid a connection altogether with a host country. For example, acting at a level of business below that of a permanent establishment is one approach in order to avoid such a connection. Another, more complex mechanism applies when there is cross-boarder ownership of a multinational enterprise as shown in Exhibit 2.

Exhibit 2 Common Global Organization
Home Country I I Host Country ,'============: Operating Subsidiaries A foreign investor in a host country may have direct ownership in, hence recei ve dividends from, a parent corporation in the home country. At the same time, the parent may be deriving a substantial amount of its profit from an operating subsidiary in the host country. The structure shown in Exhibit 2 can be modified to minimize the number of jurisdictions through which dividends passo Such a modification often strives to accomplish at least two objectives. First, it endeavors to give foreign shareholders direct access to profits generated by subsidiaries located in their countries. Even if subsidiaries and foreign shareholders are in different tax jurisdictions, it may seek to by-pass the parent corporation if it adds an extra tax jurisdiction. Second, these structures attempt to maintain management continuity and ownership control through the parent. In general, those strategies modify Exhibit 2 so it appears as in Exhibit 3.
As shown in Exhibit 3, a structure that 48

Exhibit 3 Restrudured Global Organilation
Home Country I I Host Country ,'=======r esults in some form of direct ownership of a foreign subsidiary by foreign shareholders may keep dividend payments in one jurisdiction. The specific approaches taken to accomplish this outcome involve so-called stapled stocks, income or dividend access schemes, and other related schemes that are broadly labeled as hybrid structures. The tax advantages ofthese strategies must be weighed against their possible disadvantages which inc1ude potential complexity, anti-avoidance measures that govemments may enact, and potential increased risk to shareholders that may result in discounted stock values, A stapled stock structure requires a foreign shareholder to own shares in two companies that are traded together.
The foreign shareholders' dividends are likely to flow from only one of the two companies, preferably the company that is located in the shareholders' jurisdiction ar a jurisdiction that has favorable tax agreements with the shareholders' jurisdiction. The Nestle group depicted in Exhibit 4 reflects a well known example of the stapled stock structure.
Unilac equity issued two types of stock, namely founders' shares and (dividend) bearer shares. Only founders' shares had voting rights and they were owned in trust. NestIe controlled Unilac as a beneficiary of the trust, and through representation on the Unilac board of directors.
This provided control and management continuity for the group. Panamanian shareholders owned Unilac bearer shares which had beneficial rights to dividends

$wilzerland Penemo
•. Bearer shares and distributions in liquidation (no voting rights), but only if they were held and traded concurrently with Nestle voting shares, bearing the same serial number. Through this structure Unilac shareholders were able to receive dividends directly, instead of through Nestle, and at the same time continue to have a vote in Nestle. Shareholders who were neither Swiss or Panamanian could still benefit from holdi..ngbea.rer shares to the extent that profits earned in, and dividends earned from, Panama were more favorably treated than those from Switzerland.
Income and dividend access schemes grant foreign shareholders of the parent corporation rights to recei ve profits directly from a foreign subsidiary. As with stapled stock strategies, preferably the subsidiary is located in the foreign shareholders' jurisdiction. One mechanism for achieving this outcome is to see that income access shares of the foreign subsidiary are issued to the foreign shareholders residing in the subsidiary's jurisdiction. These shares are simply income rights, and may or may not be stapled to shares of the parent. Altematively, a trust may be established to hold income access shares. The foreign shareholders may be named as trust beneficiaries, and they may elect to receive dividends from the foreign subsidiary in lieu of dividends from the parent.
Hybrid structures is a catch-all term capturing all other schemes that attempt to RAE • v. 37 • n. 1 • Jan./Mar. 1997 minimize the number of jurisdictions through which dividends flow. For example, dividend and liquidation rights in foreign subsidiaries might be held by residents of the foreign jurisdiction while voting power is held by the parent directly or indirectly through a holding company.
Alternatively, companies in different jurisdictions might be completely held by local citizens, but bound together by a so-called equalization agreement.
Under this type of ownership, a reciprocal agreement requires that the two companies must pay equal dividends and equal distributions upon liquidation.
• Divert or extract profits. If a company is economically connected to a host country, taxable profits may be diverted away from the hostjurisdiction. More specifically, taxes may be minimized in a host country by minimizing taxable profits through intercompany transfer pricing on goods, services and rights. For example, a company subject to high taxes can charge a low price for goods transferred to a related company in a low tax country. The low price will minimize taxable income, hence taxes, for the selling company. Of course, a multitude of nontax considerations may also dictate transfer prices, such as the impact of the related party' s transfer prices on cash flows, bonus-based compensation, market penetration strategies, duties, anti-dumping rules, and exchange controls, In addition, govemment's have increasingly enacted and enforced regulations that restrict transfer prices between related entities." When profits cannot be diverted through transfer pricing of goods, the focus turns to extractíng profits in other tax deductible ways. For example, a parent may capitalize its highly taxed foreign subsidiary with debt. Accordingly, profit extraction can take the form of tax deductible interest payments to the parent by the subsidiary, thus reducing the subsidiary's taxable income and taxes. However, ex.cessive debt capitalization may be challenged by taxing authorities.
Other forms of tax deductible payments from host country subsidiaries may inc1ude royalties, rents, service fees, and insurance prerniums, to name a few. Proper valuation of these deductible transfers still faIls under the purview of transfer pricing.
Moreover, companies must be aware that payments of items such as interest and royalties (as well as Model tax convention on income and capital. Artieles 10(4),11(4), and 12(3). OECD publication service, March 1994. 50 dividends) may be subjected to so-called withholding taxes by the country of disbursement, Withholding taxes are charged on payments such as those when they leave the host country. Bilateral tax treaties reduce or eliminate withholding taxes between treaty countries, Therefore, an extensive network of bilateral treaties may be a valuable tax planning tool.
• Distributions. lf multi ple jurisdictions cannot be avoided and profits cannot be diverted or extracted then distributions from host jurisdictions rnay be considered when feasible. Tax benefits from distributions arise if taxes are lower in the home country, hence enabling a higher after-tax return on future earnings.
Tax costs associated with distributions include withholding taxes and income taxes in the distributee's country.
Withholding taxes are frequentl y minimized by so-called treaty shopping. That is, if withholding tax rates are high between a parent and foreign subsidiary, the subsidiary may be owned by a holding company in an intermediate country that has low treaty withholding rates. Taxes may be minirnized on distributions to the holding company. A low treaty withholding rate between the interrnediate country and the parent's country may enable the funds to finaUy be distributed to the parent at a favorable withholding tax rate. Altematively, the funds may be parked, or left, in an intermediate country. As will be more discussed in the next section, this has special appeal if the intê §t diate country is a tax haven in which no or low taxes apply to earnings within the country, Of course, a number of nontax factors wiJl also influence distríbution decisions, such as the subsidiary's need forreserves, and political and exchange risks associated with retaining profits in the subsidiary. In addition, countries are increasingly adopting anti-treaty shopping provisions in their bilateral agreements. For exarnple, the OECD model treaty requires that favorable treaty withholding rates will not apply unless the rccipient of dividends, interest and royalties, is also the beneficiary owner, rather than just an intermediary." • Acquisitions andDisposals. Successful implementation of the strategies above will depend on how an international acquisition is structured.
Planning is likely to involve appropriate forrns of capitalization (debt versus· equity), assets acquisition (through stock versus bundled or unbundled asset purchases), consideration surrendered (cash versus stock), and entities chosen (branches versus subsidiaries). After acquiring and operating an international enterprise, its disposal ultimately may be at issue, Disposals are likely to attract tax in at least one jurisdiction inc1uding the home (parent's) country, host (subsidiary's) country, and intermediate countries, if any,

TAX HAVENS
As corporations continue to globalize tax havens become more attractive. Fundamentally, there are two types of tax havens as shown in Exhibit 5. One type of tax haven is characterized by no ar low taxes. Recall that tax treaties usually contain a reciprocal agreement under which a host country surrenders various rights to the tax treaty partner companies. Because this type of tax haven has no OI Iow taxes to surrender, it has littIe to offer a potential treaty parrner. Accordingly, these countries typically have a low or limited network of intemational tax treaties.

Tax Havens Types
However, there are notable exceptions. For example, many countries that have a tax treaty with the Netherlands have extended ir to the Netherlands Antilles, a part of the NetherIands Kingdom.
SimilarIy, treaties with Portugal inc1ude its tenitory of Madeira Island which has no income taxes.
A second type of tax haven has normal taxes, but with significant preferences. For exarnple, manufacturers receive substantial tax preferences if they are located in Ireland. Further, Dutch domestic tax law excludes taxes on dividend income, capital gains, and income from overseas branch . Moreover, there is no ",)J-, withholding tax on royalties or interests, and dividend withholding taxes are low, Because tax haven countries of this type have a normal tax systems, albeit with preferences, they frequent1y have an extensive network of tax treaties.
Desirable nontax attributes of a tax haven include qualified personnel; communications capabilities; a location preferably within a convenient time zone; a legal and regulatory environment in which, for example, property rights are protected and obligations are honored; no exchange control restrictions; political stability; and confidentiality. Exhibit 6 displays a common structure of holding companies (HCs) in the Netherlands and Netherland Antilles (NA) used to minimize withholding (WH) taxes.

Exhibit 6 Tax Havens Characteristics
Exhibit 6 assumes that a parent company (Parent) has an operating subsidiary (Sub) abroad. Under alternative 1, Parent directly owns Sub. Because there is no tax treaty between the Parent's country and the Sub's country, a 25 percent withholding tax applies to direct distributions. Under alternative 2, Parent owns Sub through a Netherlands holding company (Dutch Holding) and a Netherlands Antilles holding company (NA Holding). Distributions from Sub to Dutch Holding are exempt under domestic Dutch law, Distributions from Dutch Holding to NA Holding are subject to low withholding rates by agreement between the Netherlands and Netherlands Antilles." Ifthe Parent's country has a tax treaty with the Netherlands Antilles, distributions from NA Holding to Parent are taxed at low or zero rates as represented by the zero withholding rate shown in Exhibit 6. Tnshorr, alrernative 2 saves Parent withholding taxes of 20 percent" on its distributions.
Mindful that flourishing tax planníng opportunities have accompanied the rapid growth of intemational trade and tax havens, govemments have enforced a variety of anti-RAE • v. 37 • n. 1 • Jan./Mar. 1997 avoidance legislation which may be broadly categorized into the following four goups. First, required administrative consent or exchange controIs have been used to restrict forming entities in, or shifting profits to, a low tax jurisdiction.
Second, mechanisms that prevent tax free or deferred accwnulations of profits in tax havens are often enacted. Third, to the extent profits are being shifted to tax havens by means of transfer pricing, it has already been noted that transfer pricíng has been the subject of significant evaluation by many tax authorities. Fourth, steps have been taken by governments to minimize the use of treaty networks to reduce taxes, for example, through treaty shopping.
Brazil's recently adopted worldwide tax system created the potential for a novel tax savings opportunity for Brazilian companies. The critical tax authorities underlying this opportunity include the following: • Treaty Provisiono Brazil's standard and longstanding tax treaty with Portugal, including its territory of Madeira Island, indicates that Brazil may tax foreign income upon repatriation, but not accrued foreign income" Madeira Island is a tax haven that falls in the no ar low tax category,

• The Law. As already noted, under
Brazil's new worldwide tax system the income of foreign subsidiaries is taxed as accrued, not upon repatriation." • Normative lnstruction (NI). It has also been noted that, about six months after the law was enacted, a tax pronouncement , or so-called NI, provided that authorities act contrary to the law and tax foreign in come upon repatriation, and not accrued foreign income." Although taxpayers may act in accordance with the NI, arguably ir does not supercede the law. Therefore, a case can be made for taxpayers to act at their discretion under either the law or the NL Consider a Brazilian corporation with a Madeira Island subsidiary. Two events are relevant to the analysis, First, income is recognized on Madeira Island through transfer pricing or other mechanisms, Second, this income Is repatriated as a di vidend to the Brazilian parent. Exhibit 7 summarizes the interaction among these events and the authoritíes cited above, Upon the first event, income recognition on Madeira Island the treaty provision 26. Under agreement between the Netherlands and Netherlands Antilles, the withholding rate may be between 5 and 7.5 percent.