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International Taxation, the BRICS, and the Brazilian Experience: Tracing Patterns and Drawing Comparisons on Taxation of Business Profits

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International Taxation, the BRICS, and the Brazilian Experience: Tracing Patterns and Drawing Comparisons on Taxation of Business Profits University of London International Taxation, the BRICS, and the Brazilian Experience: Tracing Patterns and Drawing Comparisons on Taxation of Business Profits Marcelo Pedroso Ilarraz A thesis submitted to the Institute of Advanced Legal Studies (IALS), School of Advanced Study, University of London for the degree of Doctor of Philosophy London, September 2018 Declaration I, Marcelo Pedroso Ilarraz, confirm that the work presented in this thesis is my own. Where information has been derived from other sources, I confirm that this has been indicated in the thesis. ii Abstract The specialized literature identifies a number of factors that influence economic growth, usually centring its attention either on geography, on the integration between rich and poor countries when it comes to international trade, or on institutions. The institutional factor assumes a particular relevance when developing and developed countries face the challenges of taxing income from international transactions. In this context, the question about which jurisdiction would have the taxing right on such an income is the main friction point; then the question on the mechanisms to allocate profits to different taxpayers in different jurisdictions comes into play. In light of this, the thesis addresses the following research question: to what extent can the experience of the BRICS countries in the taxation of business profits provide a different framework for developing countries? It does so by applying a comparative methodology through a functional analysis of the legal systems of Brazil, India, and South Africa. Three research objectives, or sub-questions, guide this research endeavour: (i) to investigate the level of influence of the OECD MC on the compared countries’ tax treaty networks with regards to taxation of business profits (and, as a result, the level of deviation from the OECD MC towards the UN MC); (ii) to analyse whether and to what extent the adoption by developing countries of a transfer pricing regulation that does not entirely mirror the OECD’s one would be convenient for those jurisdictions; and (iii) to consider the building up of an alternative transfer pricing framework derived from the thesis’s findings. The thesis is divided into five substantive chapters. It evolves from a general assessment of the income tax legislation and the tax treaty networks of the compared countries (Chapter 2) to a critical analysis of the provisions dealing with business taxation (Chapters 3 to 5) to, finally, presenting a transfer pricing proposal that could be more beneficial for developing countries (Chapter 6). The chapters dedicated to the analysis of the domestic law and of specific treaty articles (Articles 5 on the permanent establishment concept, Article 7 on attribution of profits to permanent establishments, and Article 9 on taxation of associated enterprises) are structured in a similar way, so that they offer a consistent and coherent comparative framework for the thesis purposes. The research findings show that, while those countries do not adopt a coordinated treaty policy, they deviate from the OECD MC in respect to various provisions, to different degrees. In many cases, conventions were signed with OECD member countries that provided for a treatment far more beneficial to the source country on taxation of business profits than iii the one adopted by the OECD MC. Tax treaties that were patterned after either the UN MC and the OECD MC were signed between relevant FDI origin jurisdictions and the compared countries. Such findings then provide the answer to the question on whether the alignment with the OECD MC (mainly with respect to the attraction of FDI) is mandatory. The answer seems to be negative. Finally, drawing on the domestic regulation and tax treaty networks analysis, the thesis puts forward a proposal of a regulatory-based, pre-fixed profit margins transfer pricing framework aiming at providing developing countries with a regulatory system that is focused on the legal certainty needed for FDI attraction. It privileges transparency and the due scrutiny by the governments of the fiscal and regulatory outcomes as intended by developing countries when they enact the transfer pricing legislation. iv Acknowledgments This research is funded by CAPES Foundation, Ministry of Education of Brazil, through the awarding of a full doctoral research grant. I am extremely thankful to the Brazilian Government for the opportunity and trust. I am also grateful to the Institute of Advanced Legal Studies, University of London for allowing me to carry out this research during the last years. The academic environment of the IALS offered me a unique opportunity to meet up outstanding researchers and scholars, to whom I owe a great deal. Most specially, I would like to express my gratitude to my brilliant supervisor, Philip Baker QC, who offered invaluable guidance and inspiration during the PhD. I will be forever indebted to him. Finally, I would like to thank my family for their understanding, patience and support since the beginning of this journey: my dad Gilberto, my mom Marilde and my sister Márcia. Larissa was the person that shared all the anxieties and burdens. We decided to come to London and to go through the PhD research together, facing unexpected challenges miles away from our beloved ones. To my other two families, the Verri Boratti (Ivo, Rejane and Juliana) and Ilarraz Law Firm, my gratitude for the support received. v List of Tables and Figures Table 1.1 Chapter-by-chapter thesis structure Table 2.1 Population, GDP, and per capita income Table 2.2 Countries’ annual average growth rate (%GDP) Table 2.3 Tax-to-GDP ratios and Income Tax (%) Table 2.4 Each industry’s share of GDP Table 2.5 Income Tax Features Table 2.6 Percentage of FDI stock - final and the intermediate investor - 2013 Table 3.1 Article 5 (3) (a) – Construction PE – UN MC v. OECD MC Table 3.2 Article 5 (b) and (c) – Service PE – UN MC v. OECD MC Table 3.3 Article 5 (4) (a) and (b) – Exclusionary list - UN MC v. OECD MC Table 3.4 Article 5 (5) (b) – Agency PE – UN MC v. OECD MC Table 3.5 Article 5(6) – Insurance PE – UN MC v. OECD MC Table 3.6 Article 5 (7) – Independent Agent PE – UN MC v. OECD MC Table 4.1 Article 7 (1) – Limited Force of Attraction - OECD MC v. UN MC Table 4.2 Article 7 (3) – Deduction of expenses – OECD MC v. UN MC Table 4.3 Article 7 (4) – Formulary apportionment provision – OECD MC v. UN MC Table 4.4 Article 7 (5) – Purchase of goods – OECD MC v. UN MC Table 5.1 Evolution of Article 9 Table 5.2 OECD and UN influence on the treaty networks (treaties in force) Table 5.3 Brazil’s TP domestic legislation for imports Table 5.4 Brazil’s TP domestic legislation for exports Table 5.5 TP rules for inbound and outbound loans Table 5.6 Domestic legislation features Figure 3.1 Article 5 – Influence of the UN MC on India’s tax treaty network Figure 3.2 Article 5 – Influence of the UN MC on South Africa’s tax treaty network Figure 3.3 Article 5 – Influence of the UN MC on Brazil’s tax treaty network Figure 4.1 Article 7 – Influence of the UN MC throughout Brazil’s tax treaty network Figure 4.2 Article 7 – Influence of the UN MC throughout South Africa’s tax treaty network vi Figure 4.3 Article 7 - Influence of the UN MC throughout India’s tax treaty network Figure 5.1 FDI inflow into the Brazilian economy: 1990–2000 Figure 5.2 FDI inflow into the Indian economy: 1994–2003 Figure 5.3 FDI inflow into the South African economy: 1992–2001 Figure 6.1 Post-Legislative Scrutiny Instrument vii List of Acronyms BEPS OECD/G20 Base Erosion and Profit Shifting Project BRICS Brazil, Russia, India, and South Africa CARF Administrative Tax Appeal Tribunal CIT Commissioner of Income Tax G20 Group of Twenty GDP Gross Domestic Product IBFD International Bureau of Fiscal Documentation IMF International Monetary Fund ITAT Income Tax Appellate Tribunal LN League of Nations OECD Organisation for Economic Co-operation and Development PPP Purchasing Power Parity RFB Brazilian Federal Revenue Service SARS South African Revenue Service STF Federal Supreme Court STJ Superior Court of Justice TP Transfer Pricing TPO Transfer Pricing Officer TRF Federal Court of Appeal UN United Nations UNCTAD United Nations Conference on Trade and Development WB World Bank WEO World Economic Outlook viii List of Cases Brazil Telesat – Serviços de Telecomunicações S/A e Outro(a) v Fazenda Nacional, Federal Tribunal – First Circuit (TRF1), Appeal n. 2000.38.00.044412-7/MG, Judgment date: 26.11.2013 PCI do Brasil Ltda. v Fazenda Nacional (Federal Tax Revenue), Federal Tribunal – Second Circuit, Appeal n. 2002.51.01.002701-0, Judgment date: 16.03.2010 Copesul Companhia Petroquímica do Sul v National Treasury, Superior Court of Justice, Special Appeal n. 1.161.467-RS, Judgement date: 17.5.2012 Decision n. 101-96.665, Conselho Administrativo de Recursos Fiscais, 1a Câmara, Official Gazzete 17 April 2008 Decision n. 103-22.016, Conselho Administrativo de Recursos Fiscais (CARF), 3a Câmara, Official Gazette 5 July 2008 Decision n. 107-08.725, Conselho Administrativo de Recursos Fiscais (CARF), 7a Câmara, Official Gazette 25 September 2008 Decision n. 101-94.888, Conselho Administrativo de Recursos Fiscais (CARF), 1a Câmara, Official Gazette 1 June 2005 Decision n. 108-09.551, Conselho Administrativo de Recursos Fiscais (CARF), 8a Câmara, Official Gazette 3 June 2008 Decision n. 105-17.103, Conselho Administrativo de Recursos Fiscais (CARF), 5a Câmara, Official Gazette 10 December 2008 India Morgan Stanley & Co Inc v DIT (International Taxation), Supreme Court of India, Civil Appeal ns 2914 and 2915 of 2007, Judgment Date: 9 July 2007 Convergys Customer Management Group Inc.
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