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In Riggs IV, 295 F.3d at 22, the Court of Appeals stated:
“As we understand the Brazilian tax system, a borrower paid the
entire amount of interest owed on a foreign debt and then later
received a credit equal to the amount of the pecuniary benefit.
Such a system necessitates two separate and independent
transactions.”
With due respect, we wish to clarify that the Brazilian
borrower paid the withholding tax and simultaneously received the
pecuniary benefit before paying the interest to the foreign
lender. The Brazilian borrower paid the interest by purchasing
foreign currency at the official exchange rate by means of an
exchange contract with the exchange bank handling the payment of
the interest to the lender. The borrower could not pay the
interest without a copy of the DARF evidencing the payment of
withheld tax. On each payment date, the borrower delivered a
copy of the DARF and the Certificate of Registration to the
exchange bank. The exchange bank then prepared an exchange
contract that enabled the borrower to purchase foreign currency
to be paid to the foreign lender. The exchange bank recorded the
amount of interest and tax on the Certificate of Registration and
submitted the certificate, along with the exchange contract and
DARF, to the Central Bank for approval. Before approving the
payment of interest, the Central Bank would verify that the
amount of the interest payment corresponded to the amount
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