Tax Treaty Case Law around the Globe 2020

S. 235Chapter 19 Brazil: Royalties – Mixed Issues

Luís Eduardo Schoueri and Guilherme Galdino

19.1. Introduction

The Yamaha case, decided by the Administrative Council for Tax Appeals (Conselho Administrativo de Recursos Fiscais, or CARF), presented two concrete problems: (i) the applicable tax rate for technical services, which required an analysis of the proper allocative rule; and (ii) the moment of the taxable event, which involved an analysis of both domestic law and the Brazil-Japan Income Tax Treaty (1967).

A central argument in the case was the fact that the tax authorities applied the original (1967) version of the treaty, in spite of its later modification via a protocol. Although the CARF deemed this to be relevant, the authors show that, even in the original version of the treaty, tax would not be due. Moreover, even if the distributive rule would not be applicable, this would never imply the application of the “other income” article (according to which taxation at source would be allowed with no limitation), but rather the “business income” rule (which would imply no taxation at source).

The case also involved an interesting question concerning the moment at which the tax would b...