1. TAX SPARING A reconsideration of the reconsideration
Prof. Dr. Luís Eduardo Schoueri

2. International Tax Regime
Territoriality x Worldwide taxation
A never-ending debate

3. Capital Export Neutrality (CEN)
The final taxation is determined by the Residence State
Neutrality to the investor
interests
A Corp
B Corp
C Corp
loan
State A
State B
10% WHT
Tax rate on WW income: 30%
10% credit from WHT (State B)

4. Capital Export Neutrality (CEN)
CEN is NOT definitive
Neutrality?
If Source’s rate is higher, there is no reimbursement for the over- taxation
Under the same level of taxation, investors prefer to invest in a developing country’s infrastructural environment
Taxation at source
Capital import neutrality (CIN)

5. Capital Import Neutrality (CIN)
The State of the investment determine the final taxation of income sourced in its territory
Neutrality under Source State perspective $$
10% WHT
B Corp
C Corp
A Corp
State A K
10% CIT
State B
State C

6. Territoriality x WW Taxation
CEN: foreign tax credit system
CIN: exemption

7. CIN x CEN CIN Exemption method
Source State decides whether or not to tax
CEN
Credit method
Neutralizes any taxation decision of the Source State
The MORE the Source taxes, the LESS will be tax due at Residence;
The LESS the Source taxes, the MORE will be the tax due at Residence.

8. Tax sparing
Tax sparing aim at (i) assuring that treaty benefits will be maintained or (ii) at maintaining unilateral tax exemptions
25%
15%
Internal tax rate
Treaty tax rate
Tax credit
(i) Matching credit
25%
15%
10%
Internal tax rate (general)
Treaty tax rate
Tax credit
Internal tax rate (tax incentive)
(ii) Tax sparing s.s.

9. Brazilian tax treaty policy
1960 Decade:
Brazilian perspective: territoriality
The Source State must have the exclusive right to tax
Taxation at source: 25%
Double taxation: illegitimate intrusion of the Residence State

10. Brazilian tax treaty policy
1960: first Brazilian treaties
Military government, foreign investments and development
Treaties as tools of economic policy
The decrease of the taxation at source must be in favor of the investor
Matching credit and tax sparing provisions

11. Matching Credit and/or Tax Sparing
Available on the Double Tax Treaties concluded between Brazil and the following European countries:
Austria
Belgium (expired)
Denmark
Spain
Finland
France
Netherlands
Hungary
Italy
Luxembourg
Norway
The Czech and Slovak Republics
Sweden
Germany (revoked)

12. THE 1998 OECD REPORT

13. The OECD Report Report “Tax Sparing: a Reconsideration”, 1998
Main concerns
the potential for abuse offered by tax sparing
the effectiveness of tax sparing as an instrument of foreign aid to promote economic development of the source country
general concerns with the way in which tax sparing may encourage States to use tax incentives
“(…) tax sparing should be considered only in regard to States the economic level of which is considerably below that of OECD member States.”

14. RECONSIDERING OECD’s RECONSIDERATION

15. Reconsidering the OECD Report
OECD Report: tax sparing would be in disuse
Reconsidering…
Thuronyi: tax sparing clauses may be found in 1/3 of tax treaties signed from 2000 to 2003
Half of them involving OECD Members

16. Reconsidering the OECD Report
OECD Report: there is no evidence that tax sparing would affect the level of FDI
Reconsidering…
What is the effect of DTTs on FDI at all?
Inconclusive researches
Brazil-Germany tax treaty
Post-revocation: increase on German investments

17. Reconsidering the OECD Report
OECD Report: lower taxation at source as a condition for granting tax sparing (“high price”)
Reconsidering…
OECD itself advocates lower taxation at source
One should not generalize the idea that treaty negotiators would not be capable of deciding what to concede

18. Reconsidering the OECD Report
OECD Report: increase in the standards of living in developing countries
Reconsidering…
The OECD Report does not rely on any specific data on this issue
UN’s 2000 Millennium Development Goals Report
“Ever-increasing inequality between countries”

19. Reconsidering the OECD Report
OECD Report: the potential for abuse derived from tax sparing clauses
Reconsidering…
If potential for abuse was to be considered, sooner or later no single article would survive
More consistent approach: treaty shopping and anti- abuse clauses (e.g. LOB)

20. Reconsidering the OECD Report
OECD Report: tax sparing would encourage an excessive repatriation of profits
Reconsidering…
Only valid for time conditioned clauses
Provided benefits are the same, investors’ decisions to repatriate profits should not be dependent on tax sparing provisions

21. Reconsidering the OECD Report
OECD Report: tax sparing as a subsidy to developing countries
Reconsidering…
Tax sparing is a mechanism for the recognition of the limits of States’ tax jurisdiction
Tax sparing confirms that Residence has no taxing right on an item of income granted to the Source State

22. Reconsidering the OECD Report
State A
State B
Tax treaty

23. Exemption by the Residence
What about if Residence State exempts an item of income which would be taxable in Source State?
No limit should be applicable to the taxation of the Source State, since there would be no risk of double taxation
“Residual” tax power of the Source State

24. Tax sparing reconsideration
It is time to reconsider tax sparing…
… but NOT in the sense of OECD’s reconsideration!

25. THANK YOU!