Brazilian President's October Visit: The Right Time for a Brazil-U.S. Tax Treaty?
July 31, 2013
While Brazilian president Dilma Rousseff’s state visit may be just under three months away, and given the normal sluggishness of the U.S. government’s interagency process in preparations, now is the time to start thinking about what the Obama administration wants to achieve. Brazil has been the focus of considerable attention lately, with mass protests, the Papal visit, and build-up for both the 2014 World Cup and the 2016 Olympics garnering countless headlines. Given the South American country’s potential in world affairs, it should come as no surprise that the United States is continuing efforts to increase ties with Brazil.
Over the last two years, the Obama and Rousseff administrations have made efforts to increase high level engagement. In May, Vice President Joe Biden traveled to Brasilia, where he extended a state visit invitation to Rousseff and shared his vision of making 2013 the “start of a new era of Brazil-U.S. relations.” Now, the White House looks to greet President Rousseff for an official state dinner on October 23.
Rousseff’s trip will mark the first official state visit by a Brazilian president since Fernando Henrique Cardoso journeyed to the White House in 1995, and the first state visit of Obama’s second term. The trip could provide a unique opportunity for Brazil and the United States to develop substantive, long-lasting initiatives that advance both countries’ economic goals to achieve mutual prosperity.
Despite growing trade, investment, and economic ties between the two countries, until recently there appeared to be little appetite in Brazil for implementing a bilateral free trade agreement (FTA) or a bilateral investment treaty any time soon.
But a combination of factors, including a marked drop in President Rousseff’s popularity as a result of weeks of sustained protests and the United States’ and other regional partners’ moving forward on an assortment of trade deals, including the Trans-Pacific Partnership (TPP), the Pacific Alliance, and the Transatlantic Trade and Investment Partnership (T-TIP) with the European Union, have left Brazil, as one politician mentioned, "outside of the party, and dancing alone at home."
This situation creates an opportunity for Brazil to reconsider deeper commercial cooperation with the United States, and the timing of the October visit could not be better.
The conclusion of a bilateral tax treaty is still a very ambitious proposal, but more realistic in this context. The start of serious negotiations on a tax treaty should be a priority, and the outcome, of October’s visit.
But why is a bilateral tax treaty a good first step in institutionalizing growing bilateral economic cooperation between the United States and Brazil?
Q1: What would the bilateral tax treaty do, and why is it beneficial?
A1: A tax treaty provides exemptions from taxes or reduced tax rates that eliminate double taxation of income, which is currently a major disincentive for U.S. corporations interested in operating or investing in Brazil. In addition, a tax treaty, following the Organization for Economic Cooperation and Development (OECD)’s Model Tax Convention, would address transfer pricing, withholding rates, tax dispute resolution, and tax sparing, facilitating commerce between Brazil and the United States.
By demonstrating a commitment to reducing taxation, a tax treaty will promote cross-border investment. This incentivizes corporations, both small and large, to invest abroad, ultimately making the companies more competitive in each other’s markets. The U.S. Investment Climate Statement of 2012 considered Brazil a friendly environment for foreign investment, but acknowledges that “burdensome tax and regulatory requirements exist.” The United States and Brazil have both emphasized the importance of deepening cooperation in trade and commerce, and a bilateral tax treaty seems the logical first substantive step in increasing economic output and strengthening investment relations.
Q2: Why is a bilateral treaty not yet in place?
A2: The United States and Brazil have a history of trade disputes and disagreements over tax policies. After signing the bilateral Tax Information Exchange Agreement (TIEA) in 2007, the countries released a joint statement explaining that their divergence “on a number of important areas of tax treaty policy [makes] the conclusion of a mutually accepted treaty difficult.” Past disputes have also revolved around the enforcement of intellectual property rights in Brazil, agricultural trade, customs, and legal procedures. This has made negotiations between the countries difficult, and even now an FTA or an investment treaty remains unlikely.
Before Obama’s visit to Brasilia in 2011, the potential for a bilateral tax treaty was raised within the U.S. Congress. Then-Senator Richard Lugar submitted a resolution urging President Obama to push for the negotiation of the treaty during his visit. Although some support existed within the U.S. Congress, the fierce debate within the Brazilian Congress over the much simpler Tax Information Exchange Agreement (TIEA) demonstrated that, at the time, Brazil was not prepared for a formal tax treaty with the United States.
Nevertheless, the Brazilian Congress has begun voicing interest in reaching more formal, comprehensive economic agreements with the United States. Brazilian senators originally rejected the TIEA citing its alleged violation of Brazilian constitutional principles—but have since overcome these reservations.
Q3: How can Obama and Rousseff push a tax treaty now?
A3: This March, the U.S.-Brazil TTIEA came into effect. After stalling in the Brazilian Senate for six years, the TIEA now allows the countries to share information on tax collection, helping prevent tax evasion.
The ratification of the TIEA represents an important first step toward a full tax treaty, its approval demonstrating the favorable tax environment developing between the countries. In the current political environment, both the United States and Brazil are in a position to push for more comprehensive tax policies that encourage investment and facilitate trade. This year’s implementation of the TIEA shows attitudes are changing, albeit slowly.
Considering this major advancement, Rousseff’s visit comes at a perfect and critical time. Currently, the United States has tax treaties with over 60 countries in every region of the world; for its part, Brazil has tax treaties with 24 countries.
Brazil is the seventh largest economy in the world, but remains the only one of the top ten economies with which the United States does not yet have a tax treaty in place. The state visit allows the presidents to take advantage of the window of opportunity and momentum granted by the TIEA’s approval to move forward on this issue.
Conclusion: The economic relationship between the United States and Brazil is growing in importance, but ample opportunities exist to strengthen it. Today, Brazil is the United States’ ninth largest trade partner, and the state visit highlights U.S. interest and willingness to increase cooperation.
The visit may well provide an opportunity to give a much needed legal framework to the countries’ relationship, serving as an excellent channel to push important and timely issues.
The White House should take advantage of momentum within the Brazilian Congress on the TIEA and place the bilateral tax treaty—a tangible deliverable—at the center of the state visit’s agenda.
Should the United States provide enough momentum of its own, Obama and Rousseff may reach a mutually beneficial agreement to push the treaty forward in both congresses.
Though working through the U.S. Congress presents serious challenges, an agreement to promote the tax treaty is a symbol of cooperation which signals an opportunity for the countries to achieve mutual prosperity and increase their global competitiveness—let’s not waste it
Carl Meacham is the director of the Americas Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Michelle Sinclair, intern scholar with the CSIS Americas Program, provided research assistance.
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