The Brazilian tax authorities interpret non-defined terms within a tax treaty

On June 30 2020, the Federal Brazilian Tax Authorities (RFB) published Solução de Consulta - Cosit 49/2020 (dated June 22 2020) providing that the double tax treaty (DTT) concluded between Brazil and France is not applicable to the territory of French Polynesia, given that ‘overseas collectivities’ are not included within the tax treaty definition of a resident of a contracting state (being France).

The interested party is an airline company responsible for transporting passengers and cargo, headquartered in the city of Papeete in French Polynesia and based on the Faa'a International Airport (Tahiti International Airport) seeking to clarify the tax treatment of the remittance of profits / income resulting from the sale of international airline tickets in the national territory through a branch, functioning as an offline point of sale (POS). More specifically, the possibility of applying Article 8 of the DTT concluded between Brazil and France, which allows taxation of profits relating to shipping and air transport only in the country where effective management of the enterprise is situated.  

By the background, Brazil is not a member of the OECD, although the tax treaties generally do follow the OECD Model Convention framework (as amended from time-to-time), with some differences. Broadly speaking, Article 1 of the DTT between Brazil-France states that the convention shall apply to persons who are residents of one or both of the contracting states. Pursuant to the general definitions section in Article 3, the contracting states are defined to be France and Brazil. Brazil being defined as the Federal Republic of Brazil and France being defined as the European and overseas departments (Guadeloupe, French Guiana, Martinique and Réunion) of the French Republic and the areas adjacent to the territorial waters of France over which, in accordance with international law, France may exercise its rights relating to the seabed, the seabed and its natural resources. 

In the present case, the RFB considered that having regard to the definition of the term ‘Overseas Department’, the commentary to the OECD Model Convention provides, as a general interpretive rule, that where there is no express definition in the convention, it is necessary to consider the domestic legislation in effect when the tax is required. The RFB considered that the context is, therefore, determined by the intention of the contracting states when signing the convention, as well as by the meaning attributed to the term in the legislation of the contracting state to which it refers.

The RFB went on to conclude that based on the French legislation, there is a significant difference between the definition of ‘oversea territory’ (which includes French Polynesia)* and ‘overseas department’ with respect to competence to tax, with the former enjoying autonomy to define the taxation of its residents. In this regard, the French Republic has concluded a DTT with French Polynesia. As such, French Polynesia should not fall within the definition of a resident of France for the purposes of applying the DTT. 

The RFB did not go on to address the second question regarding the form of taxation of the profits/income. This was on the basis that not all of the necessary elements were presented to conclude on this question, highlighting a difference in treatment between remittances of income and profits under the Brazilian legislation, depending on whether a branch is established (which is considered equivalent to a company for Brazilian tax purposes). Further, remittances can be subject to different rates of tax depending on the nature and jurisdiction of the recipient of the remittance. 

While a Solução de Consulta does not represent law or legal precedent, it does provide further support and guidance for Brazilian entities in relation to how the RFB is treating arrangements under consideration. While the specific fact scenario is unlikely to be applicable to many other taxpayers, in our view, the ruling provides interesting insight in relation to the RFB’s position on dealing with situations where terms are not expressly defined in the treaty and it is necessary to revert to the domestic legislation.   

In this regard, the Commentary to the OECD Model Convention acknowledges the question regarding whether the domestic legislation referred to in order to determine the meaning of terms not defined in the tax treaty, being the legislation in force at the time of signing or at the time of the treaty being applied (tax imposed). 

In an international context, this was addressed by the Committee on Fiscal Affairs, taking the position that the time of application of the tax treaty should be used. The text of the OECD Model Convention was updated to reflect this position in 1995. However, as noted in the Commentary, the updated language still includes ‘unless the context otherwise requires’ which provides tax authorities with some leeway on interpretation. The DTT between Brazil and France was from 1972 and had not adopted this updated language, although based on the reasoning of the RFB, this does appear to be the approach adopted by the RFB.

* It was highlighted that in 2003, following reforms to the French Constitution, overseas territories became referred to as overseas collectives.

Mark ConomyT: +55 11 3674 2002E: conomy.mark@pwc.com