Originally published in the August 4 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s official gazette of July 20 published Legislative Decree 436, marking congressional approval of the 1969 Vienna Convention on the Law of Treaties.
For the convention to become effective, President Luiz Inácio Lula da Silva must issue a presidential decree incorporating it into Brazilian domestic law. This is expected to occur within the next few weeks.
Almost 40 years after its signature, the Vienna Convention on the Law of Treaties will soon enter into force in Brazil. Although the convention generally regulates the way international treaties must be concluded between states, professionals believe the introduction of the convention into Brazil’s legal system will contribute to a more favorable approach toward tax treaties vis-à-vis local tax laws.
Brazilian courts have not consistently interpreted international tax laws to prevail over local tax rules when a potential conflict exists. The Supreme Court (STF) in 1997 1 ruled that international treaties and conventions executed by Brazil have the same power as ordinary laws approved by Congress and are subject to the Brazilian Federal Constitution.
The case dealt with a potential constitutional conflict between Brazil’s Constitution and the International Labour Organization’s Termination of Employment Convention (Convention 158). The STF ruled that international treaties or conventions that, formally or materially, violate the Brazilian Constitution are not legally valid in Brazil even after being introduced into Brazil’s legal system.
The Vienna Convention establishes some rules that may change the way Brazil’s executive and judicial branches view and apply international conventions and treaties. Historically, the Federal Revenue Department has been reluctant to accept tax treaty provisions that reduce Brazil’s ability to impose a tax or prevent the application of a more burdensome Brazilian tax rule.
Provisions like article 27 of the Vienna Convention, which establishes that a state may not invoke the provisions of its internal law as justification for its failure to perform a treaty provision, may become instrumental in forcing Brazilian tax authorities to accept the authority and effectiveness of a tax treaty provision over a local tax rule.
Another important provision of the Vienna Convention that may assist taxpayers in enforcing a treaty provision over local tax rules is article 18, which provides that a state must refrain from acts that would defeat the object and purpose of a treaty. That article may be especially important when challenging tax regulations or rulings from the Federal Revenue Department that try to avoid the application of a tax treaty provision.
Likewise, article 32 of the convention may be useful in tax litigation involving a conflict between a tax treaty and domestic tax rules because it allows one to examine the treaty’s preparatory work and the circumstances of its conclusion to confirm Brazil’s intention in executing the treaty.
Professionals believe the entry into force of the Vienna Convention may change — in a way more favorable to taxpayers — how Brazilian courts interpret and apply tax treaty provisions. For example, the convention could give the taxpayer additional arguments should the government appeal a taxpayer-favorable decision from the Regional Federal Court of Appeals for the Fourth Region. The court ruled that service payments remitted to Canada, and before 2006 to Germany, are not subject to Brazilian withholding tax because the payments qualify as business profits under Brazil’s income tax treaties with those countries.2
FOOTNOTES
1 Unconstitutionality Direct Action no. 1,480.
2 Case 2002.71.00.006530-5, originally filed by Cia Petroquimica do Sul (COPESUL).
END OF FOOTNOTES
David Roberto R. Soares da Silva