Brazil cuts to the chase on tax havens

By A. A. Anonymous, a guest blogger

Brazil is developing some useful new legislation related to transansactions with tax havens.

Like several other countries, Brazil makes two things apply to tax havens: first, they apply special transfer pricing rules to transactions between Brazilian persons (that is, individuals and entities) and these places, and, second, they apply special withholding tax rates on payments by Brazilian persons to persons in such regimes.

Now they have come up with something extra.

The usual definition of a tax haven in the past was the zero or low tax jurisdictions (such as Cayman, or the Bahamas). Yet as of January 1, 2009, Brazil has in effect expanded the scope of its list of “privileged tax regimes” (that is, tax havens), so that the rules cover transactions by Brazilian persons with a broader category of foreign entities, including limited certain liability companies in the United States.

A privileged tax regime (regime fiscal privilegiado) in this context is a jurisdiction that meets one or more of the following:

1. It does not tax income, or taxes it at a maximum rate of less than 20%.
2. It grants tax benefits to non-resident persons (individuals or entities) (a) without a requirement of substantial economic activity within the jurisdiction: or (b) contingent on the absence of substantial economic activity within that jurisdiction.
3. It does not tax foreign-source income, or taxes it at a maximum rate of less than 20%.
4. It does not permit access to information about (a) ownership structure, (b) title to assets or rights, or (c) realized economic activity.
   

The importance of the new Brazilian rules is that they apply to transactions with jurisdictions which may have a relatively high tax rate (like the United States) but which benefit from special tax treatment, such as a limited liability company in the United States that has no business activities in the United States, like a Delaware limited liability company owned by a non-US person if that Delaware limited liability company has no business activities in the US. So the focus of the new Brazilian rules is the actual tax paid by the company (zero percent in the US in the case described above), not the general applicable tax rate in the jurisdiction (about 34 percent in the US).

These seem like useful tools for combating abuse via tax havens. Will other countries adopt similar rules?