16 January 1990 Income Tax Severed Letter HBW4125B F - Canada-Brazil Income Tax Convention - Interest Income

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

January 16, 1990

Dear 19(1)

Re:  Canada-Brazil Income Tax Convention Tax-Sparing Provisions

Further to your letters of June 3, 1988 and March 25, 1987, we have re-examines our position and are still of the view that paragraph 3 of Article 22 of the Canada-Brazil Income Tax Convention does not apply to interest income arising from a loan booked through a permanent establishment in a third state.  We apologize for the delay in replying.

In an article "Tax-Sparing" (Feb. 1980) The Canadian Banker and ICB Review 50, A.B. McKie sets out the principles involved in tax-sparing as follows:

     Tax-sparing is the name given to the procedure under which a country gives up its right to impose its normal tax on a recipient of income flowing from another country.  The income enjoying this tax concession has also benefitted from tax incentive legislation in the source country.  Indeed that is the rationale for tax sparing.

. . .

     Long ago it was realized that if a tax concession was given by a developing country to a foreign-owned entity but the non-resident owners were taxed on the exempt income by their own country, the main beneficiary of the tax concession was that country's treasury.

By deeming Brazilian tax to have been paid at a rate of 20 percent, and by limiting the rate of tax actually imposed on a company, the Canada-Brazil Income Tax Convention deliberately creates a discrepancy between the two figures.  This difference constitutes the tax saving to the taxpayer.  In the case of tax payable on interest earned, the interplay of Paragraph 2 of Article II and Paragraph 3 of Article 22 thus allows the taxpayer a saving of either 5 or 10 percent.

In the context of the Canada-Brazil treaty is our view that paragraph 3 of Article 22 was intended to provide tax sparing only for certain items of income the rate of taxation of which are limited by the provisions of paragraph 5(b) of Article 10, paragraph 2 of Article 11 and paragraph 2(b) of Article 12.

To adopt the view that you suggest would mean, for example, that an individual who paid a withholding tax of 25% to Brazil in respect of interest would be deemed to have paid tax of only 20%. Clearly this is not a result that was contemplated or intended to result from the application of a tax-sparing provision.

While we agree that the wording of paragraph 3 of Article 22 could be clearer, we believe that, in the context of the provisions of the treaty and the intent of that paragraph, interest which is not subject to the limitations of paragraph 2 of Article 11, is not deemed by paragraph 3 of Article 22 to have been paid at the rate of 20%.

As you know the principles that govern the interpretation of international tax treaties are codified in the Vienna Convention, Article 31 of which supports our approach that has regard to the object and purpose of Treaty provisions.  It states:

     A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose...(emphasis added)

We trust that the above satisfactorily explains our position.

Yours sincerely,

C. SavageA/DirectorProvincial and International Relations Division

b.c.c.      Jacques Sasseville Department of Finance

     Michele TrottierFinancial Industries Division

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