The csll and the substantive scope of brazilian tax treaties

Brazil
The Social Contribution on Net Profits and the Substantive Scope of Brazilian
Tax Treaties – Treaty Override or Legislative Interpretation?
João Francisco Bianco[*] and
Ramon Tomazela Santos[**]
Issue: Bulletin for International Taxation, 2016 (Volume 70), No. 9
Published online: 22 August 2016
This article considers aspects of the social contribution on net profits (contribuição social sobre o lucro
liquido, CSLL) in relation to the substantive scope of tax treaties concluded by Brazil and, inter alia, whether
the enactment of a domestic law dealing with the application of the CSLL involves a treaty override or simply a
legislative interpretation.
1. Introduction
An issue of very significant controversy in Brazil with regard to international taxation is the application of tax treaties to certain types
of social contributions imposed by the Brazilian federal government to increase tax revenues. Indeed, as the federal government must
transfer some of the revenues derived from the collection of the income tax to the State Participation Fund (Fundo de Participação dos
Estados, FPE) and the Municipality Participation Fund (Fundo de Participação dos Municípios, FPM), social contributions are often used
by the federal government to raise tax revenues that do not have to be shared with other political subdivisions.
The social contribution on net profits (contribuição social sobre o lucro liquido, CSLL) is a prime example of this issue, as it is considered
to be an addition to the corporate income tax (imposto de renda das pessoas juridicas, IRPJ) that is imposed in Brazil. Apart from a few
exceptions, the tax bases of the CSLL and IRPJ are practically identical, which raises questions regarding the inclusion of the CSLL in
the substantive scope of the tax treaties concluded by Brazil.
Recently, Brazil enacted Law 13,202/2015,[1] which states, for interpretation purposes, that the tax treaties concluded by Brazil include
the CSLL in their substantive scope. This law raises several questions in Brazil in relation to its effects on the tax treaties that are currently
in force.
This article analyses article 2 of the tax treaties that Brazil has concluded, to answer the question of whether Law 13,202/2015 constitutes
a treaty override or is a legislative interpretation. To this end, an overview of the CSLL is first provided (see section 2.). The article then
addresses Brazil’s tax policy regarding article 2 of tax treaties, which deviates in some aspects from the OECD Model[2] (see section 3.).
Subsequently, the case law on this topic is considered, as it may cast some light on the reasons for the enactment of the new law in Brazil
(see section 4.). Next, the article examines the potential effects of Law 13,202/2015 and, in so doing, covers the current debate in Brazil
(see section 5.). The article ends with some conclusions (see section 6.).
2. General Aspects of the CSLL
2.1. Basic principles
The CSLL was introduced by Law 7689/1988[3] as a genuine addition to the IRPJ, from which it only differs in relation to its subjective
scope, the destination of the revenue collected and certain aspects of the tax base. The CSLL does not apply to individuals, which restricts
its subjective scope. In contrast to the individual income tax (imposto de renda da pessoa física, IRPF), the CSLL is only formally levied
on corporations. From a tax policy perspective, it is well known that corporations cannot bear the burden of taxes because of their artificial
nature. That is why corporate taxation can be considered to be a backstop with regard to personal income tax, irrespective of the intention
* Master of Laws and PhD in tax law, University of São Paulo (USP); Director of the Instituto Brasileiro de Direito Tributário (Brazilian Institute of Tax
Law, IBDT); Member of the Board of Directors of the International Association of Tax Judges; former Judge of the Conselho Administrativo de Recursos
Fiscais (Administrative Council of Tax Appeals, CARF); and Visiting Professor in post-graduate courses in Brazil. The author can be contacted at
jfb@marizsiqueira.com.br.
** Master of Laws (LL.M.) in international taxation, Wirtschaftsuniversität Wien (Vienna University of Economics and Business, WU); Master of Laws in tax law,
USP; Member of the IBDT; and Visiting Professor in post-graduate courses in Brazil. The author can be contacted at rts@marizsiqueira.com.br.
1. BR: Law 13,202/2015 of 8 Dec. 2015.
2. OECD Model Tax Convention on Income and on Capital (26 July 2014), Models IBFD.
3. BR: Law 7689/1988 of 15 Dec. 1988.
J.F. Bianco & R. Tomazela Santos, The Social Contribution on Net Profits and the Substantive Scope of Brazilian Tax Treaties – Treaty Override or
Legislative Interpretation?, 70 Bull. Intl. Taxn. 9 (2016), Bulletin for International Taxation IBFD (accessed 22 August 2016 )
1
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Disclaimer: IBFD will not be liable for any damages arising from the use of this information.
Exported / Printed on 19 Sep. 2016 by biblio2@ibdt.org.br.

of a national legislator.[4] From a legal standpoint, the CSLL is levied on the profits derived by corporations. Consequently, the CSLL may
be considered to be additional to the IRPJ levied in Brazil.
2.2. Destination of revenues and management
The CSLL also differs from income tax in the destination of tax revenues collected. The funds collected with the CSLL are intended to
finance social security.[5] For the purpose of this article, it is not necessary to consider whether the control of the use of available resources
is relevant for tax purposes. It is sufficient to emphasize that tax revenues arising from the CSLL have a specific destination, while the
tax revenues derived from the IRPF may be used to finance the general expenses of the federal government, at least in relation to the
part of revenues that need not be transferred to political subdivisions.
In this context, it should be noted that both the IRPJ and the CSLL are managed and levied by the Brazilian Federal Revenue Office, which
is an administrative body of the federal government. As a result, it is also not necessary to discuss whether the tax treaties concluded
by Brazil apply to the taxes imposed on behalf of political subdivisions or local authorities as well. Within the OECD Model, there is no
doubt that article 2(1) encompasses regional and local taxed imposed on behalf of municipalities or states. Nonetheless, deviations from
this provision can be found in some tax treaties, which exclude political subdivisions.[6]
2.3. Tax base
With regard to the tax base, the CSLL, which is payable by companies subject to the real profit system, is computed on the basis of
the accounting profits, adjusted for various inclusions and exclusions as established by law. As Brazil uses financial accounts as the
starting point for calculating the tax bases of the IRPJ and the CSLL, a company subject to taxation based on the real profit system
must keep accounting and tax books in accordance with corporate and tax laws. Such bookkeeping must include all of a taxpayer’s
transactions, including income, earnings and capital gains derived either in Brazil or abroad. The main adjustments determined by tax law,
inter alia, relate to non-deductible expenses, the waiver of debts, fines, accounting provisions, non-mandatory contributions, charitable
donations, accelerated depreciation, results from investments valued in accordance with the equity pickup method, transfer pricing, thin
capitalization, and profits, income or capital gains derived abroad.[7] Given the adoption of International Financial Reporting Standards
(IFRS) in 2007, with effect from 2008, Brazilian tax law also introduced explicitly new rules to neutralize some consequences of new
accounting methods based on the fair value, as well as the true and fair view.[8]
2.4. Rates
The CSLL is charged at a rate of 9%, while the IRPJ is imposed at a basic rate of 15%, plus an additional 10% levy. Consequently, the
worldwide income of companies domiciled in Brazil is subject to corporate taxation at an overall rate of approximately 34%. In September
2015, the CSLL rate was increased from 15% to 20% for banks, private insurers, securities distributors, exchange and securities brokers,
credit, financing and investment companies, real estate credit companies, credit card administrators, leasing companies, and savings
and loan associations. The rate for credit cooperatives is 17% for the period from 1 October 2015 to 31 December 2018, reducing to
15% from 1 January 2019.[9]
2.5. Interim conclusions
Based on this, it is fair to say that the CSLL may be regarded as a corporate income tax within the Brazilian tax system, which is charged
in addition to the IRPJ. This is relevant not only to the analysis of the material scope of Brazilian tax treaties, but also in casting light on
the debate on the recently amended Law 13,202/2015.
3. Article 2 of the Tax Treaties Concluded by Brazil
3.1. The OECD Model and the UN Model
Most of tax treaties concluded by Brazil that are currently in force are based on the OECD Model, subject to certain adaptations to
increase the taxing rights attributed to the source state, as the OECD did not address the problem of unequal income flows between
capital-exporting and capital-importing countries. The changes in the allocation of taxing rights are largely inspired by the UN Model,[10]
which reduces the magnitude of the criterion of residence in the division of taxing rights between the contracting states and is intended
to promote foreign investment in developing countries.
4. P. Harris, Corporate Tax Law: Structure, Policy and Practice p. 8 (Cambridge U. Press 2013).
5. BR: Federal Constitution, art. 195, I, c.
6. R. Imer & A. Blank in Klaus Vogel on Double Taxation Conventions 4th edn., Introduction, p. 155, m.no. 21 (E. Reimer & A. Rust eds., Kluwer L. Intl. 2015).
7. BR: Normative Instruction SRF No. 390 of 30 Jan. 2004, arts. 38 and 39.
8. BR: Law 12,973/2014 of 13 May 2014.
9. BR: Law 13,169/2015 of 6 Oct. 2015, art. 1.
10. UN Model Tax Convention on Income and on Capital (1 Jan. 2011), Models IBFD.
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3.2. Taxes covered
3.2.1 Article 2 of the OECD Model
With regard to the taxes covered, most of the tax treaties concluded by Brazil depart from the OECD Model on the wording of article 2,
in adopting an exhaustive list of taxes on income to which a tax treaty applies. Specifically, article 2(3) of the OECD Model contains an
exemplary list of taxes on income, in which the use of the term “in particular” clarifies that the list illustrates the general definition of taxes
on income to be found in article 2(2). The text of article 2 of the OECD Model reads as follows:
1 This Convention shall apply to taxes on income and on capital imposed on behalf of a Contracting State or of its political
subdivisions or local authorities, irrespective of the manner in which they are levied.
2 There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on elements of
income or of capital, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts
of wages or salaries paid by enterprises, as well as taxes on capital appreciation.
3 The existing taxes to which the Convention shall apply are in particular:
a) (in State A):..........................................
b) (in State B):..........................................
4 The Convention shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of
the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify
each other of any significant changes that have been made in their taxation laws.
(Emphasis added)
The expression “in particular”, apart from making it clear that the list is non-exhaustive, is justified by the fact that treaty negotiations
usually take place in several rounds over a long time. In addition, in many countries, international treaties must be approved by the
congress or the parliament before entering into force, which may also be time consuming. Consequently, the adoption of an open list
avoids misunderstandings between the negotiators and ensures that a tax treaty covers taxes introduced before its signature, as article
2(4) of the OECD Model only applies to new taxes imposed after its conclusion.[11] As a result, with regard to the OECD Model, the material
scope encompasses taxes that exist at the time of the conclusion of a tax treaty, even if they do not appear in the list of article 2(3),
provided that they can be considered to be taxes on income and on capital, as under the definition in article 2(2).[12]
3.2.2. Brazilian deviation from article 2 of the OECD Model
On the other hand, in deviating from the OECD Model, the most common Brazilian approach is to delete the general definition of taxes
on income from article 2(2), as well as the term “in particular” from the wording of article 2(3), thereby adopting a closed and exhaustive
list of the taxes levied at the time a tax treaty was concluded.[13] In practice, the list adopted by Brazil is usually very short, referring only
to the income tax. By way of an example, article 2 of the Brazil-Italy Income Tax Treaty (1978)[14] reads as follows:
1 This Convention shall apply to taxes on income imposed on behalf of each Contracting State or of its political or administrative
sub-divisions or local authorities, irrespective of the manner in which they are levied.
2 The existing taxes to which the Convention shall apply are:
(a) in the case of Brazil:
– the federal income tax, excluding the tax on excess remittances and on activities of minor importance (hereinafter referred
to as “Brazilian tax”).
(b) in the case of Italy:
– the individual income tax (imposta sul reddito delle persone fisiche);
11. A. Kasaizi, Interpretation of Material Scope of Taxes Covered by the OECD MC (Art. 2 OECD MC), in Fundamental Issues and Practical Problems in Tax Treaty
Interpretation p. 362 (M. Schilcher & P. Weninger eds., Linde 2008).
12. T. Dubut, Article 2 from an Historical Perspective: How Old Materials Can Cast New Light on Tax Covered by Double Tax Conventions, in History of Tax Treaties - The
Relevance of the OECD Documents for the Interpretation of Tax Treaties p. 128 (T. Ecker & G. Ressler eds., Linde 2011).
13. M.M.D.F. Rosa, Impostos Visados por Acordos de Bitributação: Interpretação do Artigo 2º das Convenções-Modelo da OCDE e ONU e dos Acordos Brasileiros p. 88
(Master Thesis USP 2016).
14. Convention between the Government of the Federative Republic of Brazil and the Government of the Italian Republic for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with respect to Taxes on Income (3 Oct. 1978), Treaties IBFD.
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– the corporate income tax (imposta sul reddito delle persone giuridiche);
– the local income tax (imposta locale sui redditi), even if they are collected by withholding taxes at the source (hereinafter
referred to as “Italian tax”).
3 The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of
this Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify
to each other any changes which have been made in their respective taxation laws.
(Emphasis added)
As can be seen, Brazil adopts an exhaustive list in relation to the taxes existing at the time at which a tax treaty was concluded.
Despite this deviation from the OECD Model, the tax treaties that Brazil concludes are intended to last for a time. For this reason, in its
tax treaties, Brazil reproduces the wording of article 2(4) of the OECD Model, according to which a tax treaty applies to any identical or
substantially similar taxes that are imposed after the date of the signature of the tax treaty in addition to, or in place of, the existing taxes.
As widely known, article 2(4) of the OECD Model contains an extension clause, which includes taxes introduced after the conclusion of
a tax treaty, when they are identical or substantially similar to the taxes originally covered. This extension clause serves to preserve the
application of the tax treaty over time, as it avoids amendments in domestic laws making the tax treaty inoperative. It also relieves the
contracting states from the obligation of renegotiating the tax treaty on each modification to their domestic laws.
In this respect, the lack of article 2(2) in most of the tax treaties concluded by Brazil, which adopt a synthetic definition of taxes covered,
i.e. “all taxes imposed on total income, on total capital, or on elements of income or of capital”, may also contribute to difficulties of
interpretation, as the identification of “identical or substantially similar taxes”, in the OECD Model is determined by the concept of taxes
covered. In spite of this additional difficulty, it is fair to say that article 2(2) of the OECD Model does not offer an analytical definition of
“taxes on income and capital”, but, rather, a simple enumeration of the categories of taxes concerned. In this respect, article 2(2) of the
OECD Model states that it applies to taxes on total income, as well as to taxes on elements of income, i.e. particular types of income.
As the CSLL is levied on the net profits of companies domiciled in Brazil, there is no doubt that this tax falls within the concept of taxes
on income and capital.
It should be noted that, although article 2 of the tax treaties that Brazil concludes refers to the term “imposto” in the Portuguese-language
version, that word should be understood in the broader sense of “tributo”, which corresponds to the translation of the original English
word “tax”. English is the functional language used by the Brazilian delegation in the negotiation of a tax treaty because it is not always
easy to express a legal concept in another language as exact equivalents are often not to be found in the different languages.[15]
3.2.3. The meaning of the word “tax”
In English, the term “tax” has a broad and generic meaning, which encompasses almost all of the amounts charged by the state based
on its sovereignty, subject to a few exceptions, such as charges related to the administrative policing power, which are referred to as
“fees”. All others forms of taxation, such as duties, excises and social contributions, may be included in the broad concept of tax. More
precisely, the word “tax” is defined as a burden, charge, exaction, imposition or contribution assessed by public authorities of a sovereign
state on a person or property under its jurisdiction.[16] Given this broad definition, it would appear to be rather difficult to explain why, in
the translation of the word “tax” into Portuguese, the term “imposto” has been used. Apparently, it is a simple mistranslation, as a native
Portuguese speaker with knowledge of tax law would probably use the word “tributo” as the natural translation for “tax”.
This interpretation is reinforced by the fact that article 3 of the Brazilian National Tax Code (Código Tributário Nacional, CTN),[17] which
sets out general rules with regard to taxation, provides a broad definition for the term “tributo”, in the following wording:
Taxes are any compulsory pecuniary payment in currency or whose amount therein may be denoted, which does not amount to
sanctioning an illegal act, instituted by law and collected through a fully binding administrative activity.[18]
Consequently, it is reasonable to conclude that Brazil merely translated the English version of the OECD Model into Portuguese, without
restricting its scope through the use of the term “imposto”. Such an interpretation is reinforced by the fact that the tax treaties concluded
by Brazil typically state that English is an authentic language, which prevails in the case of a conflict of interpretation. As a result, even
though “imposto” is only one specific specie of the genus “tributo” within the Brazilian tax system, it must be recognized that, in treaty
practice, the term “tax” usually includes social contributions, such as the CSLL.
15. M. Lang, The Interpretation of Tax Treaties and Authentic Languages, in Essays on Tax Treaties - A Tribute to David A. Ward p. 16 (G. Maisto et al. eds., IBFD/Can.
Tax Fund. 2012).
16. A.S.M. Godoy, Direito Tributário International Contextualizado pp. 28-119 (Quartier Latin 2009).
17. BR: Código Tributário Nacional (National Tax Code, CTN).
18. All English quotations of Brazilian law and regulations and other texts in Portuguese are the authors’ own (unofficial) translations.
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It is true that the Commentary on Article 2 of the OECD Model[19] states that:
social security charges, or any other charges paid where there is a direct connection between the levy and the individual benefits
to be received, shall not be regarded as taxes on the total amount of wages.
Nevertheless, an a contrario interpretation reveals that social contributions that do not have a direct connection with an individual benefit
can be covered by article 2 of the OECD Model (2014).[20] This is precisely the case of the CSLL in Brazil.
3.3. Interim conclusions: Is the CSLL included within the meaning of the word “tax” in
the tax treaties concluded by Brazil?
As noted in section 2.5., the CSLL can be considered to be a tax that is substantially similar to income tax. The only differences between
the two levies relate to the destination of their tax revenues and on the specific aspects of their tax bases.[21]
Based on these particularities as regards the wording of article 2 of the tax treaties concluded by Brazil, tax scholars in Brazil usually
follow a temporal approach in deciding whether the CSLL is covered by the Brazilian tax treaties. According to this criterion, the CSLL
is included in the substantive scope of tax treaties concluded by Brazil before 1 January 1989, the date on which the CSLL entered into
force on the enactment of Law 7,689/1988,[22] as it is a substantially similar tax that is imposed in addition to the IRPJ after the date
of the conclusion of such tax treaties. This understanding applies to the tax treaties that Brazil has concluded with Argentina, Austria,
Canada, the Czech Republic, Denmark, Ecuador, France, Hungary, India, Italy, Japan, Luxembourg, Norway, the Philippines, the Slovak
Republic, Spain and Sweden.[23]
On the other hand, with regard to tax treaties concluded by Brazil after 1 January 1989, the CSLL would only be included in the substantive
scope if it is expressly referred to either in the list in article 2(3) or in the protocol. In this sense, the CSLL is expressly referred to only in
the protocol of the tax treaties concluded with Belgium, Portugal, Trinidad and Tobago, and Turkey, which means that, in all other cases,
the CSLL is not covered by the tax treaty.
Consequently, on a residual basis, it is possible to conclude that the CSLL is considered by both a variety of tax scholars[24] and the case
law of administrative courts of Brazil as a tax not covered by the tax treaties concluded by Brazil with Chile, China, Finland, Israel, Korea
(Rep.), Mexico, the Netherlands, South Africa and Ukraine.
However, this scenario has recently changed with the entry into force of article 11 of Law 13,202/2015, which states that, for interpretation
purposes, the tax treaties concluded by Brazil include the CSLL in their substantive scope. The discussions raised by this law are analysed
in section 5., which immediately follows an overview of the case law on this topic in section 4.
4. Brazilian Case Law on the Inclusion of the CSLL within the Objective
Scope of Tax Treaties
4.1. Decision of the Administrative Council of Tax Appeals (Conselho Administrativo
de Recursos Fiscais)
Following the premises presented in section 3.3., the prevailing case law of the Administrative Council of Tax Appeals (Conselho
Administrativo de Recursos Fiscais, CARF) supports the view that the CSLL is covered by all of the tax treaties concluded by Brazil
before its imposition on 1 January 1989, such as those with Argentina, Austria, Canada, the Czech Republic, Denmark, Ecuador, France,
Hungary, India, Italy, Japan, Luxembourg, Norway, the Philippines, the Slovak Republic, Spain and Sweden.
As an example, the 4th Section, 1st Division, 1st Ordinary Panel of the CARF in 2014[25] held that the CSLL is covered by the Austria-Brazil
Income and Capital Tax Treaty (1975)[26] and the Brazil-Spain Income Tax Treaty (1974).[27] The summary of that decision is as follows:
19. OECD Model Tax Convention on Income and on Capital: Commentary on Article 2 para. 3 (26 July 2014), Models IBFD.
20. Dubut, supra n. 12, at p. 126.
21. See R.M. de Oliveira, Fundamentos do Imposto de Renda p. 964 (Quartier Latin 2008), who states that “[t]hat contribution ... is, in fact, a true appendix to the income
tax, as it was born from it and only differs from it in its essential points in its destination and in some aspects of its quantification”.
22. BR: Law 7,689/1988 of 15 December 1988.
23. For an overview of the literature in this respect, see Rosa, supra n. 13, at p. 103
24. See, for example, A.T. Tavolaro, Impostos abrangidos pelos Tratados de Dupla Tributação, in Direito Tributário Internacional Aplicado, vol. 5, p. 90 (H. Tôrres ed. Quartier
Latin 2008); J.F. Bianco, A Cide sobre Royalties e os Tratados Internacionais contra a Dupla Tributação, in Grandes Questões Atuais do Direito Tributário vol. 8, p. 257
(V.O. Rocha ed. Dialética 2004); Rosa, supra n. 13, at p. 103; De Oliveira, supra n. 21, at p. 985; and S.A. Rocha, A Lei n. 12.973/2014 e os Tratados Internacionais
Celebrados pelo Brasil, Estudos de Direito Tributário, pp. 339-349 (Quartier Latin 2015).
25. BR: CARF, 7 Jan. 2014, Decision No. 1401-001.037.
26. Convention between the Republic of Austria and the Federative Republic of Brazil for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital
(unofficial translation) (24 May 1975), Treaties IBFD.
27. Convention between the Spanish State and the Federative Republic of Brazil for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect
to Taxes on Income (unofficial translation) (14 Nov. 1974), Treaties IBFD.
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CSLL – SOCIAL CONTRIBUTION TAX ON PROFITS. INTERNATIONAL TREATIES REGARDING INCOME AND CAPITAL.
SPAIN. AUSTRIA. APPLICATION. Analysing the basis for imposition of Income Tax and Social Contribution Tax on Profits, it is
possible to identify that both have as material preconditions the obtaining of income. Thus, despite the different structuring of the
predominant types of taxes under internal law, I believe that Corporate Income Tax and Social Contribution Tax on Profits must
be joined for the purpose of applying international treaties, as they are levied on a basis that, principally from an international
perspective, is equivalent to the income of the entity subject to taxation. (Emphasis added)
Similarly, it is possible to cite decision no. 1101-000.902, of 18 March 2014, handed down by the 1st Section, 1st Division, 1st Ordinary
Panel of the CARF,[28] which considered that the Austria-Brazil Income and Capital Tax Treaty (1975) applies to the CSLL. The decision
reads as follows:
CSLL. CONVENTION SIGNED WITH AUSTRIA TO AVOID DOUBLE TAXATION. APPLICABILITY. The substantial similarity
between the IRPJ and the CSLL requires the application of the provisions of the convention to avoid double taxation.
It should, however, be noted that the issue is not yet settled case law before the CARF. In 2015, the 1st Section, 3rd Division, 2nd Ordinary
Panel of the CARF[29] held that the Austria-Brazil Income and Capital Tax Treaty (1975) does not apply to the CSLL, as the CSLL was only
imposed after the tax treaty was concluded by the contracting states and ratified by the Brazilian Congress. This decision reads as follows:
VOLUNTARY APPEAL. CSLL. BRAZIL-SPAIN AND BRAZIL-AUSTRIA DTC. INAPPLICABILITY. Nothing prevents the CSLL from
inclusion in the list of taxes covered by the DTCs in question, but, to this end, it is necessary for the Brazilian Government to notify
the other signatory country, as the DTCs signed prior to the institution of CSLL cannot be automatically applied to it without the
parties’ agreement to the inclusion of CSLL. (Emphasis added).
In the grounds for the decision, the reporting judge, Alberto Pinto Souza Junior, argued that, as the Austria-Brazil Income and Capital Tax
Treaty (1975) was concluded prior to the introduction of the CSLL, the Brazilian government should have notified Austria to the effect that
the CSLL was covered by article 2 of the tax treaty, as Brazil had done regarding the Belgium-Brazil Income Tax Treaty (1972)[30] and the
Brazil-Portugal Income Tax Treaty (2000).[31] As the reporting judge went on to state:
However, in those two cases, the Brazilian Government, which has the power to enter into the DTCs, did not notify the counterparties
that CSLL had been included in the list of taxes covered by the agreement. This is not the result of forgetfulness or omission, as,
in other cases, a Protocol was signed to include the CSLL in the list of taxes covered by the DTCs, as for example in the Brazil–
Portugal and Brazil-Belgium DTCs. Thus, I believe that only following formal notification by the Brazilian Government may the CSLL
begin to be a tax covered by the DTCs in question. (Emphasis added)
With all due respect, in the authors’ opinion, the arguments presented by the reporting judge must be taken with caution, given that the
Brazilian Congress approved the text of the Austria-Brazil Income and Capital Tax Treaty (1975) with the inclusion of article 2(2), which
expressly refers to taxes of an identical or substantially similar nature introduced after the conclusion of the tax treaty.
In addition, contrary to arguments of the reporting judge in the decision, it is clear that it is not possible to attribute constitutive effectiveness
to the notification provided for in article 2(2) of the Austria-Brazil Income and Capital Tax Treaty (1975), according to which:
The competent authorities of the Contracting States shall notify each other of any changes which have been made in their respective
taxation laws, in particular with respect to paragraph 7 of Article 23.
The purpose of article 2(2) of the Austria-Brazil Income and Capital Tax Treaty (1975) is to establish that its objective scope should cover
identical or substantially similar taxes to avoid the renegotiation of the tax treaty following each amendment to the domestic laws of both
contracting states. The notification provision keeps the other contracting state aware of future legislative changes, thereby facilitating
28. BR: CARF, 18 Mar. 2014, Decision No. 1101-000.902.
29. BR: CARF, 3 Feb. 2015, Decision No. 1302-001.620.
30. Convention between the Kingdom of Belgium and the Federal Republic of Brazil for the Avoidance of Double Taxation and the Settlement of Certain Other Questions
with respect to Taxes on Income (unofficial translation) (23 June 1972) (as amended through 2002), Treaties IBFD.
31. Convention between the Portuguese Republic and the Federative Republic of Brazil for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
respect to Taxes on Income (unofficial translation) (16 May 2000), Treaties IBFD.
6

compliance with treaty obligations. It is, however, clear that it is not an indispensable requirement for the application of tax treaty provisions,
as held by the CARF in 2015.[32]
4.2. The Commentary on Article 2 of the OECD Model and Vienna Convention on the
Law of Treaties
The Commentary on Article 2 of the OECD Model recognizes that the list of taxes is declaratory in nature, thereby including other identical
or similar taxes that are imposed after the conclusion of a tax treaty, in reading:
This paragraph provides, since the list of taxes in paragraph 3 is purely declaratory, that the Convention is also to apply to all
identical or substantially similar taxes that are imposed in a Contracting State after the date of signature of the Convention in
addition to, or in place of, the existing taxes in that State.[33] (Emphasis added)
It can also be added that the Commentary on Article 2 of the OECD Model does not contain a specific form or maximum time period for
the contracting states to carry out such notifications, precisely because it is an obligation of an independent nature that does not affect or
limit the objective scope of article 2 of tax treaties based on the OECD Model. In addition, the OECD does not impose any consequences
on the breach of the obligation to notify.[34]
Consequently, the obligation to notify the other contracting state regarding changes in the other state’s tax law derives from the principle
of “pacta sunt servanda” and from the need to interpret tax treaties in accordance with the principle of good faith, as set out in article 31(1)
of the Vienna Convention on the Law of Treaties (the “Vienna Convention”).[35] However, non-compliance with the notification requirement
results in no sanctions on taxpayers, just as it does not prevent taxes created after the conclusion of a tax treaty from being covered by
its provisions.[36] Instead, even in the lack of notification, taxpayers still have the subjective right of requiring the application of tax treaty
provisions to the new tax created.[37]
In this context, it should be noted that, in several instances, the position argued by the 2nd Ordinary Panel of the CARF in 2015[38] works
to the benefit of the contracting state that fails to comply with its duty to notify the other contracting state. This is because, by conditioning
the application of article 2(2) of a tax treaty to the sending of a notification, a contracting state that does not comply with its obligation to
notify the other state may not extend lower tax rates, restrictions on the exercise of its taxing rights and exemptions granted to certain
types of income to new taxes created following the conclusion of the tax treaty, a fact that would benefit its own tax revenues.
4.3. Further considerations
The principle of administrative integrity, which prevents a public power from benefiting from its own moral turpitude or failings, reveals
that the interpretation adopted by the CARF in 2015[39] cannot prevail, given that it exclusively benefits the Brazilian tax authorities by
denying the application of treaty provisions to the CSLL. This is based on the argument that Brazil failed to comply with its duty to notify
Austria regarding the changes in its internal laws. Consequently, it must be recognized that this interpretation is incompatible with the
legal maxim “Nemo auditur propriam turpitudinem allegans”, which may be translated into English as “no one can invoke his own turpitude
to his own benefit”.
Another clear mistake on the part of the rapporteur, which was followed by the other judges, is the reference to the Belgium-Brazil Income
Tax Treaty (1972) and the Brazil-Portugal Income Tax Treaty (2000) as grounds for the necessity of express notification as a condition for
including the CSLL in the objective scope of tax treaties. For instance, the Brazil-Portugal Income Tax Treaty was signed on 16 May 2000,
after the introduction of the CSLL in Brazil. Consequently, as this related to a tax that was already in existence on the date on which the tax
treaty was concluded, it is clear that the contracting states had the opportunity to expressly include the CSLL in the list of taxes covered.
Similarly, the Belgium-Brazil Income Tax Treaty (1972) was amended on 20 November 2002, when the CSLL was already in effect. As a
result, even if at first glance it was unnecessary to expressly include the CSLL in the list, as the original tax treaty was concluded before
the introduction of the CSLL, it should be recognized that the express reference to the CSLL at the time of the amendment of the tax
treaty provided taxpayers with greater legal certainty. This is because, in the absence of an express reference, it would be possible to
imagine that both of the contracting states intentionally omitted the CSLL in the negotiation regarding the amendment of the tax treaty,
which was signed after the CSLL was introduced.
32. Decision No. 1302-001.620 (2015), supra n. 29.
33. Para. 7 OECD Model: Commentary on Article 2 (2014).
34. Imer & Blank, supra n. 6, at p. 168, m.no. 66.
35. UN Vienna Convention of the Law of Treaties (23 May 1969), Treaties IBFD.
36. See P. Brandstetter, Taxes Covered - A Study of Article 2 of the OECD Model Tax Conventions sec. 2.7. (IBFD 2011), Online Books IBFD, who states that “[i]ndeed,
the “obligation” of the state to notify the treaty partner of changes in its tax system can be derived from effective application of the principle pacta sunt servanda - that
legally binding treaties should be carried out in good faith. … Although failure to notify the treaty partner does not give rise to legal consequences, it will entail political
and economic consequences. Consistent with the principle of good faith, notification of changes in domestic (tax) laws serves a valuable purpose with regard to all
aspects of application of the Convention.”
37. De Oliveira, supra n. 21, at p. 984.
38. Decision No. 1302-001.620 (2015), supra n. 29.
39. Id.
7

Finally, it should be noted that article 2 of the OECD Model is designed to ensure the permanence of the protection granted by international
tax treaties to taxpayers, such that changes in the composition of the taxes existing in the tax system of one of the contracting states do
not affect the degree of protection conferred by the treaty provisions. Consequently, if the purpose is to grant protection to taxpayers, it
would make no sense to condition the effect of article 2 of the OECD Model on the notifications made by the contracting states.
4.4. Interim conclusions
In light of what has been said in section 4.1. to 4.3., it can be seen that Law 13,202/2015 is most welcome by taxpayers in general,
as it may avoid unnecessary discussion as to whether the CSLL is a tax substantially similar to the IRPJ. As the tax authorities and
administrative courts are tied to the legal provisions in the Brazilian legal system, taxpayers have much to gain by the official recognition
that the CSLL is covered by the equivalent of article 2 of the OECD Model in tax treaties.
5. Law 13,202/2015 and Its Effects
5.1. Law 13,202/2015: a treaty override?
As noted in section 1., Brazil recently introduced Law 13,202/2015. Article 11 of this Law states that, for interpretation purposes, the tax
treaties concluded by Brazil include the CSLL in their substantive scope. The immediate effect of Law 13,202/2015 is to circumvent the
current litigation as to whether, and under what circumstances, the CSLL is covered by the tax treaties concluded by Brazil. As in any
legal system governed by the principles of rule of law, only the judiciary can assess and decide on the unconstitutionality of a national
law validly enacted by the National Congress. Consequently, the tax authorities and administrative courts must apply article 11 of Law
13,202/2015 in recognizing that treaty provisions cover the CSLL, which is a tax substantially similar to the IRPJ.
As this new legal provision uses a language that clearly and unequivocally indicates the intent in interpreting existing tax treaties, it is
likely that the courts will attempt to reconcile this law with the wording of article 2 of tax treaties concluded by Brazil. This is especially so
given that courts are usually reticent to interpret domestic law provisions in a way that violates treaty obligations.
The domestic legal provision introduced by Law 13,202/2015 is currently generating much debate as to whether it constitutes a treaty
override, as it is later domestic law superseding and extending, in certain cases, the scope of article 2 of the tax treaties concluded by
Brazil, i.e. those tax treaties signed after 1 January 1989 that do not include the CSLL in their substantive scope. This is the case with the
tax treaties that Brazil has concluded with Chile, China, Finland, Israel, Korea (Rep.), Mexico, the Netherlands, South Africa and Ukraine.
A treaty override, in addition to representing a breach of international law, also gives rise to serious consequences, as it undermines
the legal certainty that tax treaties are intended to develop. From an international law perspective, article 60 of the Vienna Convention
establishes that:
a material breach of a bilateral treaty by one of the parties entitles the other to invoke the breach as a ground for terminating the
treaty or suspending its operation in whole or in part.
From an economic and a practical perspective, a treaty override results in non-resident taxpayers losing their confidence in the behaviour
of the other contracting state, as the tax treatment applicable to their investments may be suddenly changed through unilateral and
uncoordinated action. In Brazil, article 98 of the CTN expressly provides for the supremacy of international tax treaties over domestic tax
law. It is important to be aware of this, as it clarifies that, in Brazil, provisions inserted into a tax treaty must prevail over domestic law
under any circumstances, regardless of their characterization as a special rule in relation to the domestic law.[40] In addition, as tax treaties
are concluded by sovereign states, it is certain that the provisions set out in the tax treaties must be observed, in view of the international
public law principle of “pacta sunt servanda”, as it is stated in article 26 of the Vienna Convention, which provides that “every treaty in
force is binding upon the parties and must be performed in good faith”. This fundamental principle is supplemented by article 27 of the
Vienna Convention, according to which “a party may not invoke the provisions of its internal law as justification for its failure to perform
a treaty”. Consequently, the contracting states embrace a commitment that binds them to not impose taxes on situations in which a tax
treaty restricts their taxing rights. As a result, under international law, there are no possible justifications for a treaty override.[41]
Despite this, it is important to remember that the structure and functioning of tax treaties requires coordination between international tax
law and domestic law. This particularity of tax treaties may influence the analysis as to whether a treaty override exists, as several treaty
provisions interact with domestic provisions in such a way that a domestic law that is amended after a tax treaty is concluded does not
necessarily disrupt this interaction and affect the obligations assumed at the international level. By way of example, it is possible to refer
to the following treaty provisions:
– article 2 (Taxes covered) lists the taxes existing in the domestic law of each contracting state and encompasses other identical or
similar taxes that may be introduced later;
40. For the contrary, see, for example, L. Amaro, Direito Tributário Brasileiro 8th edn. pp. 173-175 (Saraiva 2002).
41. P.R. de Souza, Tax Treaty Override, in Schilcher & Weninger eds., supra n. 11, at p. 255.
8

– article 3(1)(g) (General definitions), by using the word “national”, depends on domestic criteria in determining the nationality and
citizenship of individuals and the status of legal entities;
– article 3(2) authorizes the interpretation of undefined terms in accordance with their domestic law meanings, except when “the context
otherwise requires”;
– article 4 (Resident) refers to the criteria for determining residence in domestic laws, such as domicile, residence, the place of
management or other similar criteria;
– article 6(2) (Income from immovable property) refers to the domestic law of the contracting state in which property is located in the
interpretation of the term “immovable property”;
– article 10(3) (Dividends) is completed by domestic law provisions, as it includes in the concept of dividends income from other corporate
rights that are subject to the same tax treatment as income from shares under the law of the source state;
– article 23 (Methods for elimination of double taxation), where the credit method is used to relieve double taxation, may interact with
a domestic law provision that deals with foreign tax credits; and
– articles 25 (Mutual agreement procedure, MAP), 26 (Exchange of information) and 27 (Assistance in the collection of taxes) depend
to a great extent on the practical procedures in the domestic laws of each contracting state.
As can be seen, treaty provisions do not completely disregard domestic law. On the contrary, as only domestic laws give rise to tax
obligations and several treaty provisions interact with their legal provisions, it is necessary to establish how a specific tax treaty provision
regulates the interaction between national and international laws. As a result, it is possible to conclude that establishing whether there is
a treaty override is essentially a matter of interpretation, which requires a careful analysis of the case in question.[42]
5.2. Interaction between international and national law
Article 2(4) of the tax treaties based on the OECD Model is at the core of the interaction between international and national law, as
it expresses a general commitment of the contracting state with regard to future taxes introduced after the signature of a tax treaty to
avoid the situation that amendments to the tax system of a contracting state make treaty provisions obsolete and inoperative. Indeed,
as changes in tax law provisions are expected due to the influence of changes to economic relationships in national tax systems, article
2(4) of the OECD Model gives an automatic extension of the objective scope of tax treaties to new taxes introduced after the conclusion
of the tax treaties in question.
Disregarding the debate on monism or dualism, there is a general understanding that, as far as international law is concerned, a contracting
state cannot invoke the provisions of its domestic law in breaching obligations assumed at an international level. Notwithstanding this, it
is not self-evident that article 11 of Law 13,202/2015 effectively violates treaty obligations.
As explained in section 3.2., article 2(4) of the OECD Model was specifically designed to expand the substantive scope of a tax treaty
to deal not only with the taxes existing at the time of its conclusion, but also to apply to similar taxes introduced later. Consequently, for
the tax treaties that Brazil concluded before 1 January 1989, there is no doubt that article 11 of Law 13,202/2015 has an interpretative
nature, as it simply completed the intended purpose of the treaty provision.
With regard to the tax treaties that Brazil concluded after 1 January 1989 that do not refer to the CSLL, such as those with Finland, Israel,
Chile, China, Finland, Israel, Korea (Rep.), Mexico, the Netherlands, South Africa and Ukraine, a possible interpretation of article 11 of
Law 13,202/2015 would be to regard it as an official interpretation of the concept of federal income tax.
As noted in section 3.2.2., the tax treaties concluded by Brazil typically adopt a simplified wording in article 2(2), in stating that “the taxes
which are subject of this Convention are... in the case of Brazil... the federal income tax”. Taking into account the fact that the inclusion
of the CSLL in the substantive scope of a tax treaty does not have negative effects on Brazilian taxpayers, foreign taxpayers or even
the other contracting state, article 11 of Law 13,202/2015 can again be considered to be a legislative interpretation of the term “federal
income tax” used in the wording of this treaty provision.
5.3. The CSLL: Potential conflict the between contracting states
In normal circumstances, the interpretation of the term “taxes” and the phrase “identical or substantially similar taxes” may give rise to
litigation between the contracting states or between the tax authorities and taxpayers. These concepts may result in conflicts between
the contracting states primarily at the time of the imposition of source taxation or of relief for double taxation, especially when one of
the states uses the credit method.
However, in the case in question, the inclusion of the CSLL in the substantive scope of a tax treaty does not have negative effects on
the other contracting state. Only Brazil must apply the restrictions established in treaty provisions to the CSLL. This is because the CSLL
is not withheld at source on payments made to non-residents, being levied only on the profits derived by companies domiciled in Brazil.
Consequently, as article 23 of the tax treaties based on the OECD Model does not grant underlying tax credits, the other contracting
42. C. De Pietro, Tax Treaty Override and the Need for Coordination between Legal Systems: Safeguarding the Effectiveness of International Law, 7 World Tax J. 1, sec.
2. (2015), Journals IBFD.
9

state does not have to grant a credit in respect of the CSLL paid in Brazil, at least not on the basis of a tax treaty obligation. In practice,
domestic tax rules often grant indirect tax credits to avoid economic double taxation, but this is a consequence of the national laws of
each country. As a result, this bears no relation to treaty obligations and the credit method set out in article 23-B of the OECD Model.
In theory, the only situation that would require the other contracting state to grant a tax credit corresponding to the CSLL levied in Brazil
would involve the characterization of a permanent establishment (PE) in Brazil. In this case, the profits attributable to the PE in Brazil
would be subject to both the IRPJ and the CSLL imposed by Brazil and the other contracting state would have to apply article 23 of the
tax treaty with Brazil to grant an exemption or a tax credit, depending on the method adopted in the treaty provision.
However, except in exceptional situations relating to sales made in Brazil through agents or representatives of entities established
abroad,[43] Brazilian tax legislation does not use the concept of PE to create tax obligations. Consequently, even when the threshold
provided for in the tax treaty is met and the foreign taxpayer has a PE in Brazil, domestic tax legislation does not constitute a tax obligation
based on the fact that the non-resident has a fixed place of business.
In this context, it should be noted that article 126 of the CTN states that a taxpayer’s tax capacity does not depend on the regular
incorporation of a legal entity in Brazil. Rather, it is sufficient that the taxpayer is an economic or professional unit. This means that, at
least in theory, the tax authorities may qualify a foreign company operating in Brazil as taxpayer for tax purposes, even if the foreign
company is not regularly incorporated in Brazil. Nevertheless, the CTN cannot constitute a tax obligation by itself, as it has the legal status
of supplementary law, which only sets out general rules in tax matters.
Even in the case of sales made in Brazil through agents or representatives who have power to bind the seller, i.e. the non-resident
company, to the purchaser in Brazil under a contract, the tax authorities rarely apply these legal provisions to tax non-residents. As a
result, it is possible to state that, at least in practice, Law 13,202/2015 only gives rise to obligations for the Brazilian government and
does not affect the other contracting state.
A hypothetical situation that could arise in practice would be the characterization of a subsidiary of a foreign company as a PE in Brazil.
Article 5(7) of the OECD Model uses the wording:
the fact that a company which is a resident of a Contracting State controls... a company which is a resident of the other Contracting
State... shall not of itself constitute... a permanent establishment,
which implies that a parent company may have a PE in the subsidiary’s residence state if the general requirements set out in article 5(1)
to (5) of the OECD Model are met.[44]
In this case, as the subsidiary is taxed as a regular legal entity in Brazil, being subject to the IRPJ and the CSLL on the profits ascertained
for each fiscal year, the other contracting state may have to grant a tax credit corresponding to the CSLL levied in Brazil if the credit method
is adopted in article 23 of the tax treaty with Brazil. Although this situation is extremely unlikely to arise in practice, as most countries
grant such tax credit in their domestic legislations, regardless of whether a PE is characterized in the subsidiary’s residence state, the
fact is that a Brazilian domestic law cannot create an obligation to the foreign state. Consequently, if this situation eventually arises in
practice, the other contracting state should interpret the material scope of the tax treaty based on the general rule of treaty interpretation.
Law 13,202/2015 is only relevant to the extent that it leads to a result compatible with the treaty provisions and their interpretation. This
is so because a domestic law enacted by Brazil cannot give rise to obligations for the other contracting state. Consequently, one thing is
certain, i.e. article 11 of Law 13,202/2015 cannot impose obligations on the other contracting state.
Law 13,202/2015 was, therefore, not enacted in clear contradiction to international treaty obligations or to reverse an interpretation
expressly or tacitly accepted as common by both contracting states. As a result, Brazil did not enact subsequent legislation with the
objective of moving away from a common interpretation of a treaty provision, as would be required to characterize a treaty override. In
simpler terms, this is not a treaty override, as the Brazilian state did not breach its international obligations.
Based on this, it is possible to conclude that the idea that article 11 of Law 13,202/2015 represents an official interpretation of the concept
of federal income tax does not cause any negative effects for the other contracting state. This line of reasoning is strengthened by the
analysis of article 3(2) of the OECD Model, which reads as follows:
As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the
context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to
which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term
under other laws of that State.
43. These situations are regulated in BR: Income Tax Regulation (ITR), arts. 398, 399 and 539. The legal basis of arts. 398 and 399 ITR is BR: Law 3.470/1958 of 1958, art. 76.
44. L.E. Schoueri & O.-C. Günther, The Subsidiary as a Permanent Establishment, 65 Bull. Intl. Taxn. 2, (2011), Journals IBFD.
10

This treaty provision, the content of which has been debated by tax scholars, states that undefined terms must be interpreted in accordance
with the domestic law meaning, unless the context requires otherwise. For the purposes of this article, it is not necessary to discuss
whether priority should be given to an autonomous interpretation or to the domestic law of the contracting state applying the tax treaty.
What is particularly important to emphasize here is that the use of Law 13,202/2015 for the interpretation of the concept of federal income
tax in tax treaties concluded by Brazil does not harm the other contracting state, for which reason the domestic law meaning may be
used for interpretation. Instead, the interpretation of including the CSLL in the substantive scope of tax treaties encourages and fosters
economic ties between states, in offering greater certainty regarding the applicable tax treatment to taxpayers who are entitled to treaty
benefits.
It is true that the expression “unless the context otherwise requires” may be understood as stating that the context prevents references
to domestic law whenever an autonomous interpretation provides for a proper interpretation that avoids double taxation or double non-
taxation.[45] Nevertheless, in the case in question, an autonomous interpretation leads to unclear results, as demonstrated by the analysis
of the case law in the section 4. On the other hand, the reference to domestic laws may serve to avoid residual double taxation in Brazil,
which is the probable reason why the National Congress voluntarily decided to enact an interpretive law stating that the CSLL is included
within the material scope of the tax treaties concluded by Brazil. Consequently, the autonomous interpretation must be disregarded. As
a result, the term “federal income tax” can be interpreted based on domestic law provisions, such as in Law 13,202/2015, given the fact
that, at least in this specific case, the context does not require otherwise.
In this respect, the use of Law 13,202/2015 is in line with the object and purpose of the tax treaty as a whole, as the inclusion of the
CSLL within its objective scope contributes to the objective of avoiding double taxation. In this context, it should be noted that article 31
of the Vienna Convention specifically states that:
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.
As is known, states enter into treaty negotiations to alleviate double taxation by allocating the taxing rights between them. It can, therefore,
be assumed that the contracting states only accept treaty provisions that restrict their right to tax elements of income to reduce tax
barriers to cross-border trade, services and investment. This being so, in view of the clear objective of avoiding double taxation, it is more
convincing to include the CSLL within the material scope of a tax treaty, as otherwise residual double taxation would be verified in Brazil.
5.4. The CSLL: Static or dynamic interpretation of tax treaties?
Another aspect to be highlighted is the fact that the use of the internal law definition may result in a common national interpretation of
taxes covered by the tax treaties concluded by Brazil, thereby avoiding further investigation regarding the context surrounding each set
of negotiations. The attempt to build an autonomous definition of the term “federal income tax” may only add complexity, something that
appears to be unnecessary in this particular case, as the inclusion of the CSLL in the material scope of a tax treaty does not affect the
other contracting state. Consequently, the other state is unlikely to disagree with the inclusion of the CSLL within the material scope of
the tax treaty.
Contrary to this interpretation, it can be argued that it was only from the OECD Model (1995)[46] that a dynamic reference to domestic
law under article 3(2) is expressly permitted. As a result, with regard to tax treaties prior to the 1995 version of the OECD Model, the
contracting states should consider their domestic legislation as it reads at the time when the tax treaty was concluded, rather than when
the treaty provision is being applied.
It is disputable whether this amendment to article 3(2) of the OECD Model (1995) represents a simple clarification or a substantial change.
The prevailing opinion among tax scholars supports the view that even tax treaties concluded before the OECD Model (1995), which
were based on the previous wording of the OECD Model, should follow an ambulatory approach.[47] This line of reasoning argues that
the amendments in the 1995 version of the OECD Model constituted a mere clarification, which were inserted in reaction to the decision
in Melford (1982).[48] In this historic precedent, the Canadian Supreme Court (SC) adopted a static reference to domestic law in deciding
whether guarantee payments were covered or not by article 11 of the Canada-Germany Income Tax Treaty (1956).[49]
,
[50]
Apart from the questionable nature of this assumption against the ambulatory approach of domestic law, it is important to bear in mind
that Law 13,202/2015 is intended to clarify, and not to change, the meaning of the expression “federal income tax”, by expressly stating
45. B.A. da Silva, The Tie-Breaker Rule (Art. 4º of the OECD MC): Relevance of Domestic Law or Autonomous Interpretation, in Schilcher & Weninger eds., supra n. 11,
at p. 339.
46. OECD Model Tax Convention on Income and on Capital, as amended on 21 Sept. 1995 (“The 1995 Update to the Model Tax Convention”, adopted by the OECD Council
on 21 Sept. 1995), Models IBFD.
47. A. Rust, Introduction, in Reimer & Rust, supra n. 6, at pp. 210-211, m.no. 119.
48. CA; SC, 28 Sept. 1982, Melford v. Her Majesty the Queen, [1982] 2 S.C.R. 504, Tax Treaty Case Law IBFD, also available at http://scc-csc.lexum.com/scc-csc/scc-
csc/en/item/5509/index.do.
49. Convention between Canada and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes
on Income. Signed at Ottawa, on 4 June 1956 (4 June 1956), Treaties IBFD.
50. S.R. Richardson & J.W. Welkoff, The Interpretation of Tax Conventions in Canada, 43 Can. Tax J. 5, pp. 1765-1766 (2005).
11

that the tax treaties concluded by Brazil encompass the CSLL. Consequently, the statement of Brazil’s National Congress may be used
as a means of interpretation of older tax treaties, as it only binds the Brazilian government. Whether the tax authorities, tax courts and
taxpayers are also bound is a question to be answered based on domestic law, without impairing the treaty provisions.
In addition, among the tax treaties concluded by Brazil after 1 January 1989, the wording of article 3(2) of the tax treaties with Chile,
Israel, Mexico, South Africa and Ukraine is based on the OECD Model (post-1995 version). In such cases, article 3(2) of these tax treaties
makes a dynamic reference to domestic laws, which means that the tax treaties refer to the laws that are currently in force and not to
the laws in force when the tax treaties were concluded. As a result, the criticism of a dynamic reference to domestic laws, even if valid,
could only be applied to the tax treaties concluded by Brazil with China, Finland, Korea (Rep.) and the Netherlands, which are based on
the wording of article 3(2) of the OECD Model (pre-1995 version).
In this regard, it is also important to distinguish between the public international level and the domestic level of interpretation. As noted
in section 5.3., the application of Law 13,202/2015 by way of a dynamic reference to domestic laws only gives rise to obligations on the
part of Brazil, without affecting the other contracting state. If both contracting states rely on a static interpretation of a tax treaty provision
based on the domestic law existing at the time of its conclusion, it could be argued that a dynamic reference to domestic law would breach
a commitment assumed in international law. However, if this is not the case, subsequent changes to the domestic law on one of the
contracting states could be accepted, provided that such changes do not adversely affect the other contracting state.
In this particular case, a dynamic reference to domestic law would not result in a different meaning being given to a specific term by both
contracting states, which could lead to conflicts of qualification and the consequent negative results that should be avoided, i.e. double
taxation or double non-taxation. Instead, the reference to domestic law in the determination of the taxes covered under article 2 of a tax
treaty is perfectly feasible, either because the material scope strongly interacts with the national tax system of each contracting state or
because the lack of negative consequences arising from the interpretation of undefined terms based on Law 13,202/2015. Based on this
interaction between national and international laws, article 2 of tax treaties appears to admit that each contracting state may interpret the
scope of a tax treaty in accordance with its own domestic law, a “lex fori”, except when the context restricts recourse to domestic tax law,
a condition that is not fulfilled in this case. In addition, as the enactment of such a new legal provision does not upset the expectations of
treaty states, domestic taxpayers and non-resident investors, a dynamic reference to domestic law should be admitted.
5.5. Taxes only covered by a tax treaty?
A further argument against the enactment of Law 13,202/2015 presupposes that article 3(2) of the OECD Model only applies to taxes
covered by a tax treaty.[51] From this perspective, it would first be necessary to ascertain whether the CSLL is included within the material
scope of a tax treaty and only, then, make use of article 3(2) in the interpretation of the undefined terms. This would avoid the application
of domestic laws in interpreting article 2 of tax treaties. Nevertheless, this line of reasoning is not convincing, as it implies that article 3(2)
of the OECD Model could never be used in the interpretation of article 2, which is a restriction that is not supported either by the text of
this provision or by the Commentaries on the OECD Model. Therefore, better arguments regard the CSLL as falling within the concept of
federal income tax under article 2 of tax treaties concluded by Brazil, regardless of the fact that, in most circumstances, an autonomous
interpretation of treaty provisions should prevail over the decisive nature of the domestic law of the contracting states.
In addition, as Brazil expressly recognizes in the protocol of its tax treaties with Belgium, Portugal, Trinidad and Tobago, and Turkey
that the CSLL is covered by article 2, it would be at least arbitrary to not follow the same approach with regard to other tax treaties. In
this respect, Xavier (2015) argues that the amendment of the protocols to these tax treaties, instead of the list contained in article 2(3),
suggests that this approach represents an act of interpretative nature, especially if it is considered that one official interpretation should
not be valid in one state and, at the same time, be disregarded in the other.[52] Furthermore, even in the absence of a most-favoured-
nation (MFN) clause on this issue in the tax treaties concluded by Brazil, it is undeniable that the federal government has recognized that
the CSLL is a tax on income or, at least, a tax substantially similar to the IRPJ, as it included the CSLL in the protocol of some tax treaties.
Notwithstanding these arguments, it is important to remember that the inclusion of the CSLL within the scope of article 2 of some tax
treaties that Brazil has concluded does not extend its effects to tax treaties signed with other states, as it does not have an integrative
effect.[53] In the authors’ view, the arguments of Xavier (2015) would only be the right approach to adopt if the tax treaties concluded by
Brazil were drafted exactly as is the OECD Model, in which the list of taxes in force at the time of conclusion is not exhaustive. In this
case, the mere omission of a specific tax in some tax treaties would neither override nor restrict the application of article 2(1) and (2),
which determine the material scope of the relevant tax treaties.[54] However, as Brazil adopts an exhaustive list of the taxes covered in
the tax treaties that it concludes, the discussion as to whether a tax fulfils the criteria in article 2(1) and (2) is only relevant to new taxes
introduced at a later date.
The determination of the material scope depends on the analysis of each tax treaty, which results from the balance between the conflicting
interests of the contracting states. It is already commonplace to say that each tax treaty is unique, and therefore it is difficult to realize
the long-standing objective of promoting the uniform application and interpretation of treaty provisions. As a result, although it may be
51. This is the opinion of Kasaizi, supra n. 11, at p. 366, who states that: “... the use of Art. 3(2) of OECD MC is restricted to application to taxes to which the convention applies”.
52. A. Xavier, Direito Tributário Internacional do Brasil, 8th edn., p. 144 (Forense 2015).
53. S.A. Rocha, supra n. 24, at p. 349.
54. Imer & Blank, supra n. 6, at p. 164, m.no. 55.
12

arbitrary, it is perfectly possible that a new tax is covered by some tax treaties, but not by others. For instance, in a case of 2006,[55]
the French Supreme Administrative Court (Conseil d’Etat, CE) decided that the “contribution exceptionnelle de solidarité en faveur des
travailleurs privés d’emploi” was not covered by the France-Japan Income Tax Treaty (1995),[56] as its material scope was very limited.[57]
This point also relates to the issue of whether parallel tax treaties may have binding effects on the interpretation of similar provisions
of other tax treaties concluded by the same state.[58] It is acknowledged that tax treaties represent the final outcome of the negotiation
process carried out by the two contracting states, which means that the inclusion of the CSLL in some of the tax treaties concluded by
Brazil and not in others may be a simple consequence of the bargaining process. This is due to the fact that each individual tax treaty is
autonomous, thereby reflecting the interests of both contracting states, often after long, difficult and protracted negotiations.[59] It follows
that the use of parallel tax treaties in the interpretation of similar provisions may conflict with the relative effect and autonomy of tax
treaties. For this reason, in the interpretation of a particular tax treaty, inferences from other tax treaties concluded by the same state
can only be drawn with great caution.[60]
In the case in question, it is no longer necessary to resort to parallel tax treaties to include the CSLL within the material scope of the tax
treaties that Brazil concludes. Indeed, in considering the possible relevance of parallel tax treaties in the interpretation of other tax treaties,
it is generally argued that the other tax treaties concluded by the same contracting state are part of the law of that contracting state for the
purposes of article 3(2), which permits the interpretation of undefined terms based on domestic law when the context does not require
otherwise. In this sense, it is argued that article 3(2) of such tax treaties is not necessarily limited to domestic national laws, in being broad
enough to include other tax treaties,[61] which, at least in the case of Brazil, are concluded by the president, approved by the National
Congress, ratified at the international level and, then, are published as a Presidential Decree. As part of Brazilian domestic law, such a
Decree may be invoked to support the use of parallel tax treaties. Nevertheless, as article 11 of Law 13,202/2015 expressly established
that the CSLL is to be included within the material scope of all of the tax treaties concluded by Brazil, it appears to be unnecessary to
resort to parallel tax treaties in this particular case.
6. Conclusions
Brazil has recently enacted Law 13,202/2015, which states, for interpretation purposes, that tax treaties concluded by Brazil include the
CSLL within their substantive scope. This law is raising several questions in Brazil in relation to its effects on the tax treaties currently
in force.
The CSLL was introduced by Law 7689/1988, as a real addition to the IRPJ, from which it only differs in relation to its subjective scope, the
destination of the resources collected and certain aspects of the tax base. However, considering that the tax treaties concluded by Brazil
deviate from the OECD Model in the wording of article 2, the prevailing opinion among tax scholars and the case law of administrative
courts in Brazil was that the CSLL was only covered by tax treaties concluded by Brazil before its introduction on 1 January 1989. With
regard to tax treaties concluded by Brazil after 1 January 1989, the CSLL should only be included in the substantive scope if it was
expressly referred to, either in the list in article 2(3) or in the protocol of the relevant tax treaty.
As the inclusion of the CSLL within the substantive scope of a tax treaty cannot have negative effects on the other contracting state, it
is possible to conclude that article 11 of Law 13,202/2015 represents an official interpretation of the concept of federal income tax. The
immediate effect of Law 13,202/2015 is to avoid the current litigation on whether, and under what circumstances, the CSLL is covered
by tax treaties that Brazil has concluded, as only the judiciary can assess and decide on the unconstitutionality of national laws validly
enacted by the National Congress. Consequently, Law 13,202/2015 will have to be applied by the tax authorities and the validity or
otherwise of such an application decided on by the administrative courts.
Finally, Law 13,202/2015 was not enacted in clear contradiction to Brazil’s international treaty obligations or to reverse an interpretation
expressly or tacitly accepted by both contracting states. As a result, Brazil did not enact subsequent legislation with the objective of
moving away from a common interpretation of treaty provisions, as would be required for the characterization of a treaty override.
55. FR: CE, 24 May 2006, Case No. 278976, RJF 8-9/06 No. 1126.
56. Convention between the French Republic and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Tax Evasion and Fraud with Respect
to Taxes on Income (together with an Exchange of Letters) (unofficial translation) (3 Mar. 1995), Treaties IBFD.
57. Dubut, supra n. 12, at p. 129.
58. According to P. Baker, Double Taxation Conventions - A Manual on the OECD Model Tax Convention on Income and on Capital, para. E-32 (Thomson Reuters/Sweet
& Maxwell 2007) “it is doubtful, however, if parallel treaties prove very much. If a provision appears in a revised form in a later treaty, or is left out of a later treaty, for
example, this does not necessarily explain much about the provision in the earlier treaty. Occasionally, a succession of provisions in consecutive treaties may display the
development of an approach by the negotiators of one country. There is no reason why parallel treaties should not be referred to, but their value as aids to interpretation
will generally be low.”
59. K. Vogel & A. Rust, Introduction, in Reimer & Rust eds., supra n. 6, at p. 52, m.no. 114.
60. Id., at p. 52, m.no. 115.
61. F. Avella, Using EU Law to Interpret Undefined Tax Treaty Terms: Article 31(3)(c) of the Vienna Convention on the Law of Treaties and Article 3(2) of the OECD Model
Convention: The Case for an EU Approach to Beneficial Ownership and Other Tax Treaty Issues, 4 World Tax J. 2, sec. 3.2. (2012), Journals IBFD.
13

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