Recent developments in the negotiation of an ncome tax treaty between Brazil and the United States... are vital for enhancing the commercial relationship between the countries, and therefore for Brazilian and American businesses and economies.

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Despite the many advantages of a tax treaty, there are some difficulties in reaching an agreement between Brazil and the United States. Among these, the most important are:

• Brazil's insistence on a tax sparing clause;
• The U.S. position on a provision for the complete exchange of information;
• Brazil's unique transfer pricing legislation'
• Brazilian insistence on imposing withholding tax on payments for services rendered in the country of residence of the payer; and
• The U.S. position favoring a complete elimination of withholding taxes.

Brazil's Insistence on a Tax Sparing Clause. A tax sparing clause... found in some tax treaties, usually between developed and developing countries... requires that a foreign tax credit be granted in the developed country for a deemed income tax in the developing country. In other words, the payment of tax is deemed to have occurred even if it has not.

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U.S. rejection of the tax sparing clause has meant that, for many years, it was impossible for the United States to conclude treaties with many developing countries, including Brazil.

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[However, a Brazilian] policy of sacrificing a treaty relationship for want of a tax sparing clause does not seem productive, considering all the advantages of a tax treaty relationship. Brazil has evolved from having a peripheral role in international economic activity to become an important player in the global economic scene -- from investment target to investor, home of multinational companies, and from weak negotiator in international trade forums to leader of emerging countries in the World Trade Organization.

Complete Exchange of Information. Although Brazil has recently concluded a tax information exchange agreement with the United States (March 20, 2007), despite the past view that information exchange was a major obstacle for a tax treaty, North American authorities still seem to insist on a "more complete" agreement.

Although Brazil has recently concluded a tax information exchange agreement/11/ with the United States (March 20, 2007), despite the past view that information exchange was a major obstacle for a tax treaty,/12/ North American authorities still seem to insist on a "more complete" agreement...

Brazil's Unique Transfer Pricing Legislation. Brazil has a unique position on transfer pricing... [that] has three negarive effects:

• it may impose an additional burden on taxpayers, who are presumed to use an unacceptable price when another price may in fact be fair;
• it may actually permit an artificial price if the criteria accepted by tax authorities do not fit the facts; and
• it makes it very difficult to achieve understanding between Brazilian and foreign authorities in the negotiation of income tax treaties, particularly in situations when there is disagreement between countries on the appropriate pricing rules to apply.

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An established democracy among emerging countries, Brazil shares with India a chronic problem of unequal wealth distribution, which is a major obstacle to development. The good news is that the country finally seems to have an awareness of the problem and the hindrance it presents to greater development; Brazilians know that participation in international commerce, together with investment in education, are the most efficient weapons with which to fight poverty and inequality. These objectives will not be achieved, however, unless Brazil manages to abandon positions it originally took when it was not an emerging power and was quite peripheral in the international context.

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