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ruling did not reflect the applicable Brazilian law, we will deal
with petitioner's act of state argument separately infra.
Respondent, on the other hand, primarily contends that public-
sector entities, like the Central Bank, were not required to pay
withholding tax on their net loan interest remittances abroad
because of their immunity from taxation under Article 19 of the
Brazilian Constitution. Respondent maintains that this was the
applicable law in Brazil both before and after 1984, as reflected
by the Brazilian IRS's issuance of SRF 368 in June 1980 and by
certain Brazilian Supreme Court decisions, including the Parana II
and Santo Andre I decisions. Respondent further asserts that these
Supreme Court decisions involved foreign currency net loans, not
net loans for the financing of imported goods. We agree with
respondent.
The record reflects that to help meet the Brazilian
Government's and the Central Bank's commitment to provide DARF's to
the foreign lenders during the relending periods of the DFA's and
CGA's, top Brazilian IRS officials concocted an elaborate legal
fiction--the borrowers-to-be theory. In light of the States,
municipalities, and other public-sector entities with foreign net
loans, it was not politically feasible for the Brazilian Government
to change the applicable Brazilian law and require all public-
sector entities to pay withholding tax on their net loan interest
remittances abroad. Moreover, as these public-sector entities,
like the Central Bank, were immune from paying withholding tax on
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