Managing the Crisis:
Brazilian and US Cross-Border Tax Considerations
March 25, 2009
Julio A. de Castro
Dewey & LeBoeuf LLP
Luiz Felipe Ferraz
Demarest & Almeida
Advogados
Lavinia Junqueira
Unibanco
1
Topics to be Covered




Overview of cross-border tax issues faced by Brazilian
and US companies as a result of the financial crisis
Tax challenges and opportunities

Recognition and acceleration of losses

Acquisitions of loss companies

Debt workouts, acquisition by funds of distressed debt

Cash repatriations to provide liquidity in home
jurisdictions

Transfer pricing issues
Brazil-US tax treaty
Q&As
2
Certain Types of Losses From Economic Downturn

Actual disposition of stock or debt at a loss
 Market example

 Sales of mortgage-backed securities (MBS) or loans at steep
discounts
Write-downs and write-offs of stock and debt assets
 Market example

 Banks’ write-downs of MBS
Trading (“hedging”) losses
 Market example
 Foreign exchange derivative losses
3
Reactions by Tax Authorities to Crisis

Brazil

Deferral of payment deadline for certain federal taxes

New installment tax payment program for delinquent companies

IPI tax exemption/reduction in acquisition of new vehicles

Creation of intermediary income tax rates for individuals (7.5% and 22.5%)

Six-month suspension of requirement to present good standing certificates
(CND/FGTS) in loans granted by public banks

Postponement to Dec 2010 of the application of PIS/COFINS cumulative
system for the real estate sector

Suspension of IPI, PIS/COFINS levy in the acquisition or importation of
goods for manufacturing of goods that will be exported

Creation of subvention (interest rate equalization and compliance bonus on
interest) in financing transactions

IOF tax reduction in transactions with individuals and nonresident investors

IRPJ/CSLL offsetting restrictions
4
Reactions by Tax Authorities to Crisis

United States: Fairly active response
 Rev. Proc. 2008-51 (AHYDO relief)
 Notice 2008-78 (capital contribution to loss corporation)
 Notice 2008-83 (built-in losses of acquired banks)
 Rev. Proc. 2008-63 (securities borrower default)
 Notice 2008-91 (certain short-term cash repatriations from
CFCs)
 2009 Stimulus Bill
 Election to defer cancellation of debt income (CODI)
 Suspension of applicable high-yield debt (AHYDO) rules
 Extension of carryback period for small businesses
5
Claim and Acceleration of Offshore Tax Losses
Scenario 1: Losses from Sale of Loss Subsidiary Shares
1A
1B
USCo
≥80%
$ < tax
basis
Shares
Brazilian Co
Assets
Brazilian Co
$ < tax
basis
Shares
Buyer
Buyer
≥80%
USCo
Assets
6
Claim and Acceleration of Offshore Tax Losses


Scenario 1: Losses from Sale of Loss Subsidiary Shares
US Tax Treatment of Scenario 1A:

Capital loss allowable in the US cannot offset ordinary income of
the corporation

Loss generally from US sources for foreign tax credit purposes

What if Brazilian Co had elected disregarded entity or partnership
status?
Brazilian Tax Treatment of Scenario 1B:

Loss in the sale of a foreign subsidiary is not tax deductible. The
alternative is to concentrate outbound investments in one sole
foreign holding company and have the holding dispose of assets
and investments
7
Claim and Acceleration of Offshore Tax Losses
Scenario 2: Losses on Sale of Loss Subsidiary Assets
2A
2B
USCo
Brazilian Co
≥80%
≥80%
$ < tax
basis
Brazilian Co
Buyer
Assets
Assets
$ < tax
basis
USCo
Buyer
Assets
Assets
8
Claim and Acceleration of Offshore Tax Losses
Scenario 2: Losses from Sale of Loss Subsidiary Assets

US Tax Treatment of Scenario 2A:

Loss derived by Brazilian Co not allowed as a deduction in the
United States
 If sale at gain, in some circumstances gain could be taxable
currently in the US under subpart F/CFC regime (e.g., shares of
subsidiaries). Disconnect between treatment of gain and loss
 Loss would decrease earnings and profits of Brazilian Co,
potentially decreasing future US tax on profits of foreign
subsidiary under the subpart F/CFC regime

Alternative planning: electing to treat Brazilian Co as disregarded
immediately prior to sale of assets. In that case, loss from sale of
asset could be claimed in the US
 Hurdles: inbound liquidation basis adjustment rules and “dual
consolidated regime”
9
Claim and Acceleration of Offshore Tax Losses
Scenario 2: Losses from Sale of Loss Subsidiary Assets

Brazilian Tax Treatment of Scenario 2B:
 Loss derived by US Co not allowed as a deduction in the
United States
 If US company has an accounting loss in the current year,
this loss may be carried forward to offset future accounting
income of US company
 If sale at a gain, profit would be taxable currently in Brazil
under the Brazilian CFC rules
10
Claim and Acceleration of Offshore Tax Losses
Scenario 3: Impairment (Financial Accounting) Losses
3A
3B
USCo
Brazilian Co
≥80%
Brazilian Co
Assets
Financial Accounting
Mark-down, Brazilian
Co not insolvent
Financial Accounting
Mark-down
≥80%
USCo
Assets
11
Claim and Acceleration of Offshore Tax Losses

Scenario 3: Impairment Losses
US Tax Treatment of Scenario 3A:
 No loss allowed for US tax purposes

 Planning technique: accelerate tax loss for impaired stock
through a so-called Granite Trust structure, under which
Brazilian Co is disaffiliated from US group and liquidated into
US Co and a related foreign affiliate
Brazilian Tax Treatment of Scenario 3B:
 Impairment loss not deductible in Brazil
 Planning technique: interposing a foreign holding company
so that the markdown becomes an accounting loss of the
foreign holding company, thereby offsetting other
accounting income of such company in the computation of
worldwide income taxable basis
12
Claim and Acceleration of Offshore Tax Losses
Scenario 4: Trading Losses
4A
4B
USCo
Brazilian Co
Position (e.g., BRL)
with significant loss
Financial Markets
Position (e.g., USD)
with significant loss
Financial Markets
13
Claim and Acceleration of Offshore Tax Losses
Scenario 4: Trading Losses

US Tax Treatment of Scenario 4A:
 Loss can be generally claimed upon termination of the
position or earlier if mark-to-market regime applies
 Subject to certain rules dealing with “straddles” (where there is
another inverse position outstanding)
 Consider reportable transaction rules
 Mark-to-market complicated by valuation issues in the current
market
 Character of non-mark-to-market loss generally capital
14
Claim and Acceleration of Offshore Tax Losses
Scenario 4: Trading Losses

Brazilian Tax Treatment of Scenario 4B:
 Losses incurred directly by Brazilian companies in financial
investments overseas are generally not tax deductible
unless:
 in the case of a hedging derivative entered in a foreign futures
exchange market
 the loss is incurred in a variable income transaction (shares,
gold, futures, forward, options, swap) and is offset with a
variable income gain obtained in the same country/market and
within the same year
 Planning Technique: invest in foreign markets through a
foreign subsidiary or a Brazilian proprietary investment fund
that invests in offshore funds (among other investments in
Brazil)
15
Claim and Acceleration of Offshore Tax Losses
Scenario 5: Worthless Investments
5A
5B
USCo
Brazilian Co
≥80%
≥80%
Brazilian Co
Worthless
Security/Stock
USCo
Worthless
Security/Stock
Worthless
Stock
Brazilian S
Worthless
Security/Stock
16
Worthless Securities – Brazilian Tax Considerations

Brazilian Tax Treatment of Scenario 5B
 Accounting losses may be offset with income of the US
company, in the case of investments made by this company
 Generally, losses in investments held directly by the
Brazilian company are not tax deductible
17
Worthless Securities – US Tax Considerations






Section 165(g)(3) permits ordinary loss for stock of active affiliates

Affiliates need to be in an operating business per legislative history
Subsidiary is “affiliated” with the taxpayer if three tests are satisfied:

Ownership test: direct ownership of at least 80% of the total voting power
and value of the subsidiary

Gross receipts test: more than 90% of the aggregate gross receipts of the
subsidiary for all years must be from sources other than passive (royalties,
rents, dividends, interest, etc.)

Taxpayer must be a domestic corporation
Anti-abuse Rule: stock of the subsidiary cannot be acquired “solely” for purpose of
obtaining loss
Source: loss is sourced for foreign tax credit purposes based on the residence of
the parent entity. So loss is generally US source
Parent allowed worthless security deduction when election made to change the tax
classification of subsidiary from corporation to disregarded entity and fair market
value of the subsidiary’s assets does not exceed liabilities
Problem with gross receipt test for tiered structures. Worthless holding subsidiaries
may not qualify
18
Claim and Acceleration of Offshore Tax Losses
Incurred by US and Brazilian Companies – Scenarios
Scenario 6: Investments in Brazil by US Disregarded entities
Cayman
Fund
Delaware LLC
Portfolio
Security/Stock
Brazilian Co
19
New Brazilian Tax Haven Rules – US a Tax Haven?

“Privileged tax regime” is a tax system that:

Does not tax income or taxes income at rates lower than 20%

Does not tax income earned abroad or taxes such income at rates lower than
20%

Grants tax benefits to nonresident parties:





With no requirement of substantial economic activity in the tested jurisdiction

Bound to the non-performance of substantial economic activity therein
Does not allow access to information re: corporate interest, ownership of
goods or rights, or to the economic transactions performed
New rule specifically applies for transfer pricing purposes. Presumption
that payor and payee are commonly controlled. Remittances other than
for importation, exportation or payment of interest should not be
included
Risk that US LLCs could be treated as formed in privileged tax regime
because (unless elected otherwise), they are not subject to tax on a
stand-alone basis
In principle, not applicable to investments in financial markets
20
Acquisition of Companies with Net Operating
or Built-in Losses

Brazilian Rules:
 Income tax code allows the use of NOLs by companies
after the corporate interest is changed
 Exception: cumulative change of corporate interest and
corporate purpose, case in which NOLs should be
written off
 Mergers: merged companies must write off NOLs
21
Acquisition of Companies with Net Operating or Builtin Losses – US Rules





Section 382 limits use of net operating losses (NOLs), built-in
losses and built-in deductions following an “ownership change”
Ownership change: more than 50% increase in shareholder
ownership of loss corporation during three-year “testing” period
If loss corporation has net unrealized built-in loss that exceeds a
threshold amount, built-in losses and built-in deductions
generally will be subject to limitation
NOLs, built-in losses and built-in deductions may offset taxable
income in amount equal to the fair market value of the loss
corporation’s stock multiplied by the long-term tax-exempt
interest rate
What is fair market value these days?
22
Acquisition Losses/“Net Unrealized Built-in Losses” –
US Rules


Notice 2008-83: any deduction allowed after an
ownership change (as defined in Section 382(g)) to a
bank with respect to losses on loans or bad debts shall
not be treated as built-in loss or deduction attributable
to periods before the change date
Stimulus Bill repealed Notice 2008-83 prospectively for
any ownership change occurring after January 16, 2009
 Notice 2008-83 still applicable with respect to ownership
change after January 16, 2009, if change is pursuant to
written binding contract or publicly disclosed agreement
entered into on or before such date
23
Acquisition Losses/“Net Unrealized Built-in Losses”
US Rules

Notice 2009-14: acquisitions pursuant to various
programs established under the Emergency
Economic Stabilization Act of 2008
 Instruments denominated debt will be treated as debt
and preferred stock will not be taken into account in
determining if an ownership change has occurred.
Generally determination of debt vs. equity based on
specific facts
 Warrants bought by Treasury will be treated as options
(and not stock). Not deemed exercised
24
Acquisition Losses/Capital Contributions to an Old
Loss Corporation

Section 382(l)(1):
 For purposes of determining value of stock of loss
corporation for purposes of computing limitations,
capital contributions are part of a plan a principal
purpose of which is to avoid or increase any limitation
not taken into account
 Any capital contribution made during the two-year
period ending on the change date shall, except as
provided in regulations, be treated as part of a tax
avoidance plan
 No regulations dealing with these matters have been
issued to date
25
Acquisition Losses/Capital Contributions to an Old
Loss Corporation


Notice 2008-78 (September 26, 2008): regulations under Section
382(l)(1) will be issued as described in the notice. The notice also
provides that, pending the issuance of further guidance, taxpayers may
rely on the rules set forth in the notice.
Notice 2008-78 sets forth the following:

capital contributions not presumed to be part of tax avoidance plan solely as
a result of having been made during the two-year period ending on the
change date

capital contributions received by an old loss corporation shall be taken into
account (and will not reduce the value of the old loss corporation) unless the
contribution is part of a tax avoidance plan

whether a capital contribution is part of a tax avoidance plan is determined
based on facts and circumstances, unless (i) the contribution is described in
one of the four safe harbors or (ii) Section 382(l)(1) does not apply to the
contribution pursuant to Treas. Reg. § 1.382-9(k)
26
Debt Workouts/CODI

Renegotiations of debt instruments
 Stock-for-debt exchange
 Property-for-debt exchange


 Debt-for-debt exchange
Repurchases by issuers or affiliated companies at
discount
Consequences to issuers and holders
27
Debt Workouts – Brazilian Tax Considerations


Consequences to the issuer:
 If the issuer pays or purchases its own debt at a discount,
the discount becomes a taxable gain (income tax and social
contribution)
Alternatives:
 To postpone taxation: punctuality discount (uncertain ex
nunc condition clause); negotiation of a present value
discount without formally reducing the amount of nominal
accrued interest and principal
 Shareholder purchases and capitalizes debt
 In case of securities or debt that may have a secondary
market either now or in the future, use of a financial
structure facility to intermediate purchase and holding of the
security
28
Debt Workouts – Brazilian Tax Considerations

Consequences to Holder: loss on sale of securities or renegotiation of
debt at a discount is deductible if:

loss is incurred in Brazil and debt was originally issued and acquired
in Brazil (losses in outbound investments are generally not tax
deductible)

loss is classified as an ordinary and operational expense, necessary
in holder’s due course of business. In general: if the debt is
sold/renegotiated at its fair or market value, to prevent further
losses of the holder; if the debt/security is linked to the holders
operational activity; if the transaction is a true sale

Tax authorities regularly assess these types of losses. Alternatives
that allow to postpone issuers gain and holders loss may reduce
holders exposure

If renegotiation triggers indeed a current accounting/tax loss, it is
advisable to homologate the renegotiation agreement in the due
course of a judicial execution procedure or judicial debt
restructuring arrangement (for Law 9,430-96 purposes)
29
Debt Workouts – Brazilian Tax Considerations


General rule for the deduction of losses in defaulted credits (rather than
losses in renegotiation or sale of credits), according to Law 9,430/96

For secured credits of any amount: after two years of default, as long as
judicial action has been initiated and maintained for the recovery of the loan
and arrest of the guarantees

For unsecured credits: Deduction as expenses is allowed for credits: [a]
after six months of default, for credit amount up to R$ 5,000; [b] after one
year of default, for credit amounts higher than R$ 5,000 lower than R$
30,000, provided there is evidence of collection procedures; and [c] after two
years of default, amounts higher than R$ 30,000, as long as judicial collection
or execution procedures have been initiated
Alternative: Securitization or sale of credits (private sale, SPE, FIDC).
Renegotiations may also fall aside of this rule (assessment risk)
30
Debt Workouts/CODI – US Tax Considerations
Deemed debt-for-debt exchanges

Reg. 1001-3: Significant modifications include:
 Change in yield (greater than 5% or 25 basis points)
 Change in timing or amount of payment (material
deferral of payment, subject to safe harbor)
 Change in obligor or collateral (subject to certain
exceptions for reorganizations)
 Change from non-recourse to recourse (and vice versa)
31
Debt Workouts/CODI – US Tax Considerations

Issuer recognizes CODI upon repurchase of a debt instrument
for an amount less than its adjusted issue price
 Exception for taxpayers that have filed for bankruptcy or are
insolvent

 These taxpayers are required to reduce certain tax
attributes, including NOLs, by the amount of the CODI
(or a portion thereof, as applicable, in the case of
insolvency)
If debtor issues a debt instrument in satisfaction of
indebtedness, the debtor is treated as having satisfied the
indebtedness with an amount of money equal to the issue price
of the debt instrument
 Potential for unanticipated cancellation of debt income
 Debt vs. Equity concerns
32
Debt Workouts/CODI – US Tax Considerations





OID: difference between issue price of a debt instrument and its
stated redemption price at maturity
Issue price is important to determine the amount of OID, CODI
(if an outstanding debt is satisfied with a new debt), and gain or
loss if property is exchanged for a debt instrument
In the case of public offering, issue price generally is the initial
offering price to the public
In the case of a private placement for cash, the issue price is the
price paid by the first buyer
In the case of a debt instrument issued for property and which is
either traded on an established securities market, or issued for
property traded on an established securities market, the issue
price is the fair market value of the property
33
Debt Workouts/CODI – US Tax Considerations


Excess of the issue price and unpaid stated interest of the
debt instrument over its purchase price generally treated
as CODI for the issuer
 but also creates OID, deductible over the remaining term of
the instrument (timing mismatch)
Interest deduction can be deferred until paid or even
permanently disallowed in part if debt instrument is an
AHYDO, i.e., provides for:
 a maturity date in excess of five years,
 a yield to maturity equal to or in excess of the sum of the
AFR + 5%, and
 “significant OID”
34
US Tax Considerations – Relief in US Stimulus Bill



CODI resulting from certain debt repurchase after December 31, 2008,
and before January 1, 2011, can be deferred. CODI can be included
rateably over the following five taxable years:

For debt-for-debt exchanges (or deemed exchanges), any OID
deduction with respect to the newly issued debt instrument not in
excess of the deferred CODI also deferred

If new debt instrument is issued and proceeds used by the issuer to
repurchase pre-existing debt instrument, new debt instrument
treated as issued in satisfaction of the repurchased debt instrument

OID deductions deferred under same rules

General exception for insolvent or bankrupt debtors does not apply
if taxpayer elects to defer tax due on CODI
AHYDO rules are suspended for debt instrument issued between
September 1, 2008, and December 31, 2009, in exchange (or deemed
exchange) for a pre-existing obligation which is not itself an AHYDO
However, suspension does not apply to certain contingent debt
obligations and to any obligation issued to a related person
35
US Tax Considerations – Administrative Relief

Rev. Proc. 2008-51: IRS will not treat the following debt
instruments as AHYDOs:
 Debt instrument issued for money pursuant to financing
commitment if it would not be an AHYDO if issue price
were net cash proceeds actually received by issuer
 Debt instrument exchanged/indirectly exchanged for debt
instrument issued pursuant to a financing commitment if:
 debt instrument issued within 15 months of issuance of old
debt instrument,
 debt instrument would not be an AHYDO if issue price were
net cash proceeds actually received by issuer,
 If debt instrument issued on or after August 8, 2008:
– maturity date not more than one year later than the maturity
date of the old maturity date
– stated redemption price not greater than the stated redemption
price of the old instrument
36
Case Study 1



Issuer defaults on a $1 billion note and wants to cure the
default
Lenders agree to waive the relevant covenant subject to
an increase in interest rate
Note is worth $700 million
 Issuer treated as satisfying the old note with a new note
with an issue price of $700 million
 Debtor realizes $300 million of CODI
 Lenders realize $300 million of loss
 New note has $300 million of OID and could be an AHYDO
37
Foreign Funds Investing in Distressed Debt
ManCo
•
ManCo investment advisor for Hedge Fund
only
•
ManCo can bind HF
•
ManCo operates exclusively in either US or
BR
•
ManCo receives investment advisory fees
•
Hedge Fund (through ManCo) either:
(i)
originates loans in the US/BR;
(ii) buys US/BR debt in secondary
market;
(iii) buys US/BR loans in anticipation of
renegotiating them, or
(iv) Forecloses on underlying collateral
(e.g., real estate).
Investors
Hedge Fund
Tax Haven
Jurisdiction
Distressed
Loans
US
Delaware LLC
Distressed
Loans BR
38
Foreign Funds Investing in Distressed Debt – Brazilian Tax
Considerations

If an investment fund acquires distressed debt of a Brazilian
company, the following issues should be addressed:
 Fair sale/purchase value (evaluation of credit portfolio x
fund MTM)
 True sale verification
 Due diligence of credit portfolio: credit exists and is
definable
 Succession of credit rights: silent or formal assignment?
Replacement of creditor in judicial suits (x moral or financial
hazard demands linked to collection procedures)?
 For purchaser: holding structure for the portfolio x WHT
levy (FIDC is advisable)
 For seller: sale will trigger a net operating loss carryforward? (should be avoided)
39
Foreign Funds Investing in Distressed Debt – US Tax Considerations


Non-resident individual or corporation engaged in business in
the US is taxable on income effectively connected with that
trade or business
Foreign person considered engaged in a US business if it:
 Makes personal, mortgage or other loans to the public



 Buys, sells for the public notes, drafts, checks etc.
Loan origination: how many does it take to create trade or
business?
Secondary purchases: level of involvement in connection
with original loan?
Renegotiations?
40
Foreign Funds Investing in Distressed Debt – US Tax Considerations



IRS Office of Chief Counsel studying issues surrounding foreign
funds investing in US distressed debt
If fund buying distressed debt engages in purchase of debt with
a view towards restructuring the issuer and selling quickly, it will
likely be viewed as engaging in a trade or business in the United
States
 Consequence: net basis taxation in the US
If hedge fund makes passive investments, buying distressed
debt and helping manage the company with a view toward
making a capital gain on the sale of stock, it may not be viewed
as engaging in a trade or business in the United States
 No net basis taxation
41
Cash Repatriations – Sample Scenario
Parent company needs liquidity
Income of Brazilian Co not subpart F
USCo
IOF tax (0.38%
flat + up to
1.5% for the first
year)
≥80%
Loan
Foreign Co
Assets
Alternative: investment in offshore financial markets
and extension of loan within financial markets.
Interest is tax
deductible (34%)
and taxable at
source (15%
WHT).
Brazilian Co
≥80%
Loan
USCo
Assets
42
Cash Repatriations – Brazilian Tax Considerations

No capital gain tax up to capital amount invested in foreign
currency
 Accumulated losses



 Tax incentive reserves
Dividends: exempt of withholding tax
Payment of Interest on Equity: 15% of income withholding
income tax. Deductible up to 50% of the profit reserves or
50% of the year profit (the highest)
Interest: subject to 15% withholding tax (or 25% if to a low
tax jurisdiction)
 Thin capitalization rules
 Transfer pricing limitation
43
Services/Royalties – Brazilian Tax Considerations

Payment of:
 Services (import): High taxation - 15% of withholding
income tax, 9.25% of PIS/COFINS social contributions,
5% of ISS (tax on services); 10% of CIDE
 Royalties: 15% of withholding income tax, 10% of
CIDE in certain cases. Deduction of the expenses.
Conditions: certificate approval from the Central Bank
of Brazil and the National Institute of Industrial
Property
44
Cash Repatriations – US Tax Considerations


Undistributed income and losses of Brazilian Co not included in USCo’s taxable
income subject to (i) entity classification considerations, and (ii) US antideferral regimes generally applicable to “passive” income under subpart F
Operation of Subpart F



Subpart F rules require “US Shareholders” of a controlled foreign corporation (or
CFC) to include their pro rata share of the CFC’s Subpart F income in their own
taxable income, whether or not the CFC has made actual distributions
Controlled Foreign Corporation

A CFC is a foreign corporation that is more than 50 percent (measured by vote or
value) owned by US Shareholders

Foreign Co is a CFC
US Shareholder

A US Shareholder is a US person who owns 10 percent or more of the total
combined voting power of all classes of stock of the CFC.

Ownership may be direct or indirect, or by attribution from certain related parties

USCo is a US Shareholder
45
Cash Repatriations – US Tax Considerations



If a CFC invests its earnings and profits in certain “US
property,” the US Shareholders of the CFC may be taxable
on the amount of such investment
Earnings and profits of a CFC that have been previously
taxed as Subpart F income that are invested in US
property are generally not subject to this tax
A loan made by a CFC to a US Shareholder or certain
related parties is generally treated as an investment in US
property
46
Cash Repatriations – US Tax Considerations

Notice 2008-91: parent companies of CFCs can receive
certain 60-day term loans without these loans being
treated as “obligations” of US persons
 Previously, Notice 88-108 permitted 30-day term loans

 The purpose of the Notice, the IRS stated, was “[t]o
facilitate liquidity in the near term”
Notice 2008-91 only covers loans made during the 2008
and 2009 tax years
 Limit on the aggregate time a corporation can have an
outstanding loan: 180 days/year

 Therefore, USCo can take as many 60-day loans from
Foreign Co over nearly half a year
No restrictions on how the loans may be used
47
Cash Repatriations – US Tax Considerations

On May 27, 2008, Treasury and IRS published Rev. Proc. 200826:
 IRS won't question whether security is “readily marketable
security” which is one exception to definition of “US
property”, as long as security is of type that was readily
marketable at any time within 3 years before 5/12/2008

 Safe harbor was considered necessary due to “current
market conditions and liquidity constraints” which have
created uncertainty as to marketability of previously
marketable securities
Notice 2009-10 extends the application of Rev. Proc. 2008-26 to
any day during calendar year 2009, for which it is relevant
whether securities are readily marketable for purposes of section
956(c)(2)(J)
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Cash Repatriations – Brazilian Tax Considerations




Brazilian CFC regime – controlled and associated
companies
 Supreme Court yet to decide on associated companies
Taxation of profits on availability (accrual)
Compensation of losses in the same country
Foreign tax credit is allowable
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Brazilian Securitization Vehicles

Brazilian company holds credit portfolio directly:
- Non deductibility of credit provisions. Postponement of
credit loss deductibility (6 months to 2 years). Possible to
empower control of deductibility (rather than in the case
of sale and renegotiations)
- Losses and recoveries accounted for in different tax
periods may not be off settable (taxation of recoveries at
a gain x freezing of losses, etc.)
- Financial revenues not taxable by PIS/COFINS (nonfinancial companies, non-cumulative PIS/COFINS tax
regime)
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Brazilian Securitization Vehicles

Brazilian company holds credit portfolio through FIDC:
-
Credit provisions comprised within MTM of fund´s portfolio.
Net MTM income/loss on fund is taxable/tax deductible on a
current basis (matching of accounting and tax losses, not
possible to empower control of deductibility, but gains and losses
are computed on a net current basis)
Income on investment in fund is not taxable by PIS/COFINS,
but is subject to WHT of 22.5% to 15%, creditable against
corporate income tax payable
Other Brazilian securitization vehicles only recommended for
mortgage/real state credits (possible future issuance of exempt
securities for private banking financing portfolios) Rather than
that, the only benefits used to be CPMF and PIS/COFINS, which
do no longer prevail
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Transfer Pricing Issues



Overview of Brazilian and US transfer pricing rules
Challenges in matching US and Brazilian transfer pricing
goals
Do tax treaties give transfer pricing protection/shelter?
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Overview of US Transfer Pricing Rules



Section 482 allows IRS to make adjustments or
reallocations when necessary to prevent evasion of taxes
or clearly reflect income in transactions between related
parties
The true taxable income of a controlled taxpayer is
determined using an arm’s-length standard, which is
satisfied if “the results of the controlled transaction are
consistent with the results that would have been realized
if uncontrolled taxpayers had engaged in the same
transaction under the same circumstances”
The Regulations identify several pricing methods for
determining whether the arm’s-length standard is satisfied
and, if not, the arm's-length result
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Challenges in Matching US and Brazilian Transfer
Pricing Goals

Brazilian rules – adaptation of OECD standards to Brazilian
peculiarities
 Use of traditional methods (imports and exports)
 Use of fixed gross margins
 No APAs
 Allowance of hidden comparables

 Related parties – corporate or business relationship, tax haven
jurisdictions and transactions under “privileged tax regime”
Difficulties in the Brazilian scenario
 Qualification of professionals
 Reliable and detailed database
 Brazilian transfer pricing reform pending of approval since
2001
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Do Tax Treaties Give Transfer Pricing
Protection/Shelter?


OECD provides avoidance of double taxation in Article IX of
Convenion Model
Article IX of Brazil treaties only consider first paragraph of
Convention Model
 Paragraph 1 – if related parties exist and transact in
conditions that may not be considered arm’s length, then
any profits that would, but for those conditions, have
accrued to one of the enterprises may be included in the
profits of that enterprise and taxed accordingly
 Paragraph 2 – if avoidance of double taxation
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US Brazil Tax Treaty
Will It Happen? Friction Points


March 2007: US and Brazil signed a Tax Information Exchange Agreement (TIEA)

Purpose: facilitating administration of both countries’ tax systems

Both governments have expressed hope that signing of the TIEA would be first
step to deeper bilateral tax relationship

However, declaration states that two countries still “diverge” on several
important areas
Both countries previously attempted to reach an agreement on tax treaty


US Treasury Department and Brazilian Receita Federal initiated informal
discussions in 2006 to exchange views on several tax policy issues, including:

transfer pricing;

permanent establishment;

taxation of income from services;

mutual agreement procedures;

Most favored nation clauses in other treaties
On March 11, 2009 US Sen. Dick Lugar introduced a United States Senate Resolution
calling for the strengthening of US-Brazil economic relations through a double tax
treaty
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Will It Happen? Friction Points

Major Political Obstacles:
 Will Brazilian companies benefit as much as US companies?
 Loss of tax revenues in Brazil
 Tax sparing

 No uniform pressure from Brazilian companies and their
representatives
Major Legal Obstacles in Brazil
 Need for Constitutional Amendment
 Competent Authority: Tax dispute settlement
 Need for change in ordinary law
 Reduction in interest, dividend and royalty rates
 Transfer pricing adjustments
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What Is It Expected To Say?



July 2008: National Foreign Trade Council (NFTC) comments to Treasury in support
of tax treaty between the United States and Brazil

Tax provisions in tax treaties recently ratified by Brazil not helpful to US
companies

Following the US treaty precedents would enhance free flow of capital
between countries
The NFTC recommended the following provisions:

Reduction of parent-subsidiary dividend withholding rate to zero

Reduction of interest withholding rate from 15% to zero, including for loans
by banks, financial institutions and non-bank finance companies

Reduction of royalty and services withholding rate from 25% to 0%

Arms-length standard for transfer pricing and APA programs

Mutual agreement/competent authority provision

Permanent establishment and business profits provisions reflecting US and
OECD models
Treasury agreed and stated that it remained committed to negotiating a tax treaty
that satisfies goal of eliminating tax-related barriers to trade and investment
between US and Brazil
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Exchange of Tax Information Between US and
Brazilian Tax Authorities






TIEA Status: pending ratification by Brazilian Congress. Unlikely
to happen
Questions arose regarding constitutionality of the agreement and
the impact on Brazilian companies
Fear that the IRS may use (or abuse) Brazilian tax information
as a basis to audit Brazilian businesses and transactions in the
United States with adverse consequences
Brazilian industry believes that Receita not interested in treaty –
only wanted TIEA to increase reach of its audits
List of covered taxes is longer in Brazil
On July 8, 2008, lawmaker Regis de Oliveira delivered an opinion
to the House Commission (CCJ) to reject the agreement based
on its unconstitutionality, illegality, and poor wording
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Questions?
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Thank you!
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