Financial strategies for minimizing corporate income taxes under Brazil's new global tax system

ADMINISTRAÇÃO CONTÁBIL E FINANCEIRA

Financial strategies for minimizing corporate income taxes under Brazil's new global tax system

Stephen T. Limberg^I; John R. Robison^II; Michael S. Schadewald^III

^IVisiting; Professor, Fundação Getúlio Vargas. Professor, The University of Texas, Austin. E-mail: Iimberg@mai/.utexas.edu

^IIProfessor, The University of Texas, Austin

^IIIAssociate Professor, University of Wisconsin, Milwaukee

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 article, 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.

Key words: financiaI strategies, foreign tax credit, international tex, tax minimization, worldwide income taxes system.

RESUMO

Em 1996, o Brasil adotou um sistema internacional de impostos de renda para empresas. Este sistema representa uma mudança fundamental em como o governo brasileiro trata as transações internacionais e as estratégias para minimizar os impostos para as empresas. Neste artigo, descrevemos as bases conccituais para um sistema internacional de impostos e o problema causado pela criação de uma dupla taxação. As reações do governo e da iniciativa privada à dupla taxação são consideradas. Também são analisados os mecanismos imper­fcitos desenvolvidos no Brasil e em outros países para atenuação da taxação dupla. Finalmente, abordamos as estratégias utilizadas pelas empresas para não apenas evitar a dupla taxação como também ter as vantagens dos paraísos fiscais.

Palavras-chave: estratégias financeiras, taxas de crédito estrangeiras, taxas internacionais, redução de impostos, sistema internacional de impostos de renda.

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Stephen Limberg

Gratefully acknowledges the support of Phílips do Brasil Ltda. without which this research would not have been possible. The authors also wish to express their appreciation for the valuable insights of Mr. Raimundo L.M. Christians from Price Waterhouse in São Paulo, Brazil

1. Law 9.249/95. Article 25. December 26, 1995 effective January 1, 1996.

2. Instrução Normativa 38. Article 2, Section 1. June 28, 1996.

3. $40 = $60 foreign source income - $20 foreign taxes paid

4. The limited, as well as unlimited, FTC systems typically provide a credit only for foreign direct taxes, namely income taxes. Because they provide no relief for foreign indirect taxes, for example value added taxes, they are blas against foreign investments in countries with large indirect taxes.

5. This assumplian simplifies the analysis but may be invalid in many instances since there are often numerous differences between how two countries define and saurce taxable income.

6. $46 = $25 Brazilian tax paid + $21 F tax paid.

7.46% = $46 worldwide taxes paid / $100 warldwide income.

B. 60% = 35% F tax rate + 25% Brazilian tax rate.

9. $15 = 25% Brazilian tax rate x $60 F source income.

10. $31 = $10 Brazilain tax paid + $21 F tax paid.

11.31% = $31 worldwide tax paid / $100 warldwide incorne.

12. $25 = $16 Brazilian tax paid + $9 L tax paid.

13.25% = $25 worldwide tax paid / $100 worldwide income.

14. $15=$60 Lsource income x 25% Brazilian tax rate.

15. $6 = $15 Brazilian tax paid . $9 FTC.

16. $25 = $10 Brazilian tax paid + $10.5 F tax paid + $4.5 L tax paid.

17. 25% = $25 worldwide tax paid / $100 worldwide income.

18. $15 = $10.5 F tax paid + $4.5 L tax paid.

19. $15 = $60 foreign (F + L) source income + 25% Brazilian tax rate.

20.25% = ($10.5 F tax paid + $4.5 L tax paid) / $60 foreign (F + L) source income.

21. OECD COMMITTEE ON FISCAL AFFAIRS. Model tax convention on income and capital. Article 9(1). OECD publication service, March 1994.

22. More specilically, the OECO treaty indicates that a permanent establishment includes a place of management, a branch, an oflice, a lactory, a workshop, and natural resource extraction lacilities. A permanent establishment does not include a loreign enterprise's use of a lacility solely lor the purpose of storage, display, or delivery of goods; maintenance of a stock solely lor storage display, delivery or processing; maintenance of a lixed place of business solely lor purchasing goods collecting inlormation, preparatory or auxiliary activities or a combination of ali these items 50 long as the activity is of a preparatory or auxiliary character. OECO COMMITTEE ON FISCAL AFFAIRS. Model tax convention on income and capital. , Article 5(2),(3) and (4). OECO publication service, March 1994.

23. For a more detailed discussion of selected concepts in this section see OGLEY, A. The Principies of International Tax: A Multinational Perspective. Interlisc Publishing, 1995.

24. See, for example, L1MBERG, S.T., ROBINSON J.R. and CHRISTIANS, R.L.M. International Trasnsfer Pricing Strategies for Minimizing Global Income Taxes. Working paper, Fundação Getúlio Vargas, São Paulo, Brazil. Novernber 1996; and L1MBERG, S.T., ROBINSON J.R. and CHRISTIANS, R.L.M. International Transfer Pricing Restrictions: Impact on Corporate FinanciaI Policy. Working paper, Fundação Getúlio Vargas, São Paulo, Brazil. November 1996.

25. OECD COMMITTEE ON FISCAL AFFAIRS. Model fax convenlion on income and capital. Artieles 10(4),11(4), and 12(3). OECO publication service, March 1994.

26. Under agreement between the Netherlands and Nelherlands Antilles, the withholding rate may be between 5 and 7.5 percent.

27. 20% = 25% alternative 1 wilhholding tax rate - 5% alternative 2 withholding lax rate.

28. Tax treaty Article 7.

29. Law 9.249/95. Article 25. December 26, 1995 effective January 1,1996.

30. Instrução Normativa 38. Article 2, Section 1. June 28, 1996.

31. AI this writing, Brazil has tax trealies with Argentina, Austria, Belgium, Canada, the People's Republic of China, Czechoslovakia, Denmark, Ecuador, Roland, F rance, Germany, Hungary, In dia, Italy, Japan, Korea, Luxembourg, the Netherlands, Norway, the Philippines, Portugal,Slovakia,Spain, and Sweden. Brazil is currently negotlaling tax treaties with Chile, Romania, Switzerland, the United Kingdom, the United States, and Venezuela.

Publication Dates

• Publication in this collection
  20 Oct 2011
• Date of issue
  Mar 1997