Contributed By MJ Alves e Burle Advogados e Consultores
Brazil’s Constitution establishes the Brazilian Tax System guidelines, which divide the power to levy taxes among the federal, state and, local governments based on certain triggering events that occur in the territories. The Brazilian Federal Constitution also states several principles to control and mitigate the power given to all the quoted public entities.
These guidelines are complemented by federal laws such as the National Tax Code and Supplementary, which are enforced in the entire Brazilian territory. Completing the Tax Legislation, the federal, state and municipal governments may also issue laws enacting tax obligations on activities carried out in their area.
The fact that Brazil has 27 states, more than 5,500 municipalities, and approximately 200 million inhabitants demonstrates the complexity of these systems.
As a result of such a large volume of tax legislation, the majority of tax controversies in Brazil arise from misinterpretation or resistance from public entities to comply with the Constitutional Principles, most notably the Principle of Legality, which states that taxes can only be created (or increased) through laws enacted by the legislative branch.
Most commonly, tax controversies arise after a tax authority verifies inconsistencies during a tax audit proceeding, which can confirm the previous assessments presented by the taxpayer or even be initiated as a random check of the self-assessments and reassessments submitted by the taxpayers.
On the other hand, considering the volume of tax legislation and the inevitable taxpayer uncertainty about its interpretation, the other usual way that controversies arise is through lawsuits lodged by taxpayers to clarify and protect themselves in advance, ensuring the protection of taxpayers' constitutional rights.
According to the Brazilian Federal Revenue authorities and Federal Prosecutors' reports, corporate income taxes (Corporate Income tax – “IRPJ”, Social Contribution on Net Income – “CSLL”, and taxes on revenues), Contribution for the Social Integration Program (“PIS”) and Contribution for Social Security Financing (“COFINS”) are the cause of most federal tax controversies, corresponding to a significant percentage of the approximately BRL2.2 trillion involved in tax-related litigation.
The state tax that causes the most tax controversies is the value-added tax on sales and services (“ICMS”), which has a very high relevance in the states where industrial and commercial development is more developed, such as São Paulo and Rio de Janeiro, where the value of administrative and judicial litigation is estimated at BRL379 billion and BRL12 billion, respectively.
The most relevant municipal tax is the Service Tax (“ISS”), which is also responsible for a considerable amount of administrative and judicial litigation in regional courts.
Recently, there has been a focus on disputes between taxpayers and tax authorities regarding compensation of credits aimed at reducing tax burdens in industrial, commercial and services operations. Tax authorities have already indicated their concern with this situation, and are conducting specific tax audits to identify and assess these controversial credits.
Taxpayers’ attention should be on documental evidence of their operations and taxable events. Bearing in mind that the most relevant tax issues tend to be analysed by the superior courts in taxpayer proceedings with binding effects, the evidence is the best way to support a specific case for a favourable judgment. Therefore, it is essential to review internal proceedings, documentation, invoices, and contracts to ensure that they are in line with the tax legislation.
The possibility of tax controversy is mitigated by compliance with the Brazilian Tax System rules, which requires the assistance of a qualified accounting counsel and advice from a tax specialist to prevent liabilities.
However, the highly regulated and complex environment of the Brazilian Tax System will probably expose the companies to many factors that affect the tax risks. Such risks include the frequency of tax audits performed by federal, state and municipal authorities (eg, a company can be audited by the relevant authorities more than once during the statute of limitations), the high penalties and high interest charges in the case of non-compliance, and an enforcement process that is difficult to predict.
Another way to avoid further controversies regarding an administrative proceeding or following a tax audit, and to prevent the filing of a tax enforcement action with the respective seizure of assets, is by responding within 30 days of the final decision in the administrative proceeding.
The Brazilian Tax System has a general anti-avoidance rule under Article 116, sole paragraph, of the CTN, which authorises tax authorities to disregard the formal aspects of a transaction and analyse only its economic substance for taxation purposes (substance over form). This rule lacks further regulation and, therefore, could not be enforceable in theory.
However, Brazilian Tax Authorities have been using Article 116 to assess taxpayers, using the substance over form concept and also the 'abuse of law' and 'sham' concepts contained within the Civil Code. This issue has been discussed at Brazilian administrative tax court, on a case-by-case basis, and the transactions considered to lack “business purpose” are generally punished by the tax authorities with a tax assessment and notice of infraction demanding the payment of applicable taxes plus a higher fine of 150% (instead of the general penalty of 75%).
From an international perspective, it is worth mentioning that Brazilian transfer pricing rules were adopted in Brazil in 1996. The conciliation of Brazilian transfer pricing rules with internationally accepted transfer-pricing methods became one of the biggest challenges faced by multinational enterprises in Brazil. The difficulties relate mainly to the deviation of the Brazilian rules from the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Regarding such variations, it should be noted that there is no leeway for advance pricing agreements under the Brazilian transfer pricing legislation, and that Brazilian law has adopted fixed margins for the various methods, regardless of the nature of the taxpayer’s business, industry or role in the transaction (ie, there is no functional analysis). The law provides that the Minister of Finance may establish other statutory margins for each industry to determine the parameter price in controlled transactions.
Cross-border transactions carried out by legal entities incorporated in Brazil are subject to transfer pricing controls when they are entered into with related parties, or with parties located in low-tax jurisdictions or jurisdictions with underprivileged tax regimes, irrespective of whether such parties qualify as associated enterprises. Brazilian transfer-pricing rules do not apply to cross-border payments of a trade mark or patent royalties, or fees payable as compensation for the transfer of technology, or the rendering of technical, administrative or scientific assistance services with a transfer of technology or know-how. Relevant agreements must be registered with the Brazilian Intellectual Property Agency and the Central Bank of Brazil.
Brazil has not signed the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (MLI) and has chosen to negotiate specific changes to Double Tax Treaties bilaterally. In this context, the first treaty modified to incorporate limitation-of-benefits (LOB) and anti-avoidance clauses was the treaty signed with Argentina. The LOB and anti-avoidance terms were also included in recently signed Double Tax treaties with Singapore and Switzerland, but have not yet been enforced.
Brazilian additional tax assessment occurs when a tax self-assessment is partially paid, or when it does not reflect the entire tax obligation. When tax authorities verify such a situation, an additional tax assessment is issued in the form of an infraction notice.
If a taxpayer does not recognise such an additional assessment, it is possible to file a defence to such infraction notice, stating the reasons why such notice should be cancelled and then officially commencing litigation in a tax administrative court.
Such an administrative proceeding does not require any payment or guarantee. However, if the taxpayer chooses to litigate in a judicial court, a judge may require a guarantee to discuss such a matter in court and stop any further execution by the tax administration.
Tax authorities may also file additional tax claims involving taxes that were not declared, or were declared and not paid by a taxpayer. Such lawsuits may also impose aggravated penalties when a tax authority perceives that a taxpayer’s conduct is deemed to be fraudulent. Such situations usually lead to a criminal investigation.
All Brazilian taxpayers are subject to tax audits by any public entity within its correspondent jurisdiction (federal, state and municipal revenue services), but the criteria used to select which taxpayers will be investigated are not publicly known. Brazilian companies must maintain proper records of taxes paid for a minimum of six years, in case of a tax audit.
It is common for the tax authorities to audit companies or business sectors with relatively high income and net worth. In this context, tax authorities organise themselves in specialised groups considering specific industries or tax collection regimes that, in the majority of cases, indicate high net worth companies and individuals.
In the federal area, for example, eight specialised Federal Revenue Services are focusing on specific groups, such as financial market companies and the international trade market, as the biggest taxpayers.
This specialisation is usual in states with a predominant industry, such as in Rio de Janeiro, where there is a special state revenue service groups dedicated to specific industries, such as the oil and gas and supermarkets.
As a general rule, a tax audit can be initiated at any time, and does not have to be completed within a predetermined time.
The statute of limitations in Brazil for tax purposes is generally five years, beginning on the first day of the calendar year following the year when the tax could have first been assessed (in practice, up to six years). A longer statute of limitation period applies for the Severance Pay Indemnity Fund - FGTS (up to 30 years). During the statute of limitations, a company can be inspected by federal, state and municipal tax authorities even though an audit of a given tax or fiscal period might have already occurred.
The statute of limitations cannot prevent a tax audit from being initiated, which may take place after the limitation period is due, considering that a tax authority is not subject to any binding statute on this matter (ie, it cannot prevent a tax audit, but it can affect an eventual future tax claim).
Even though a certain tax period may have already been submitted to inspections, a taxpayer can still be inspected and assessed by tax authorities.
In Brazil, tax audits occur in the taxpayers' premises if they concern taxes over products or goods, but they can also occur in a tax authority’s headquarters based on the information and assessments submitted by a taxpayer, which can be submitted in print or electronically.
Due to ancillary obligations, tax authorities already have access to most of the relevant tax information in digital form, which improves the efficiency of the system for reviewing taxpayer procedures.
As stated before, the tax administration tends to give special attention to the biggest taxpayers, which can be high net worth companies or individuals. In the authors’ opinion, tax audits will focus primarily on the volume of transactions made by a taxpayer, and on the contradictions of information presented to the revenue services.
To date, Brazil has signed a total of 32 treaties, and most of them have provisions regarding the exchange of information. Such treaties generally provide for relief from double taxation on all types of income, limiting taxation by a given country if a company is resident in another one, and protecting companies resident in one country from discriminatory taxation in another.
Mutual assistance for tax audits is still not a reality in Brazil since most dispositions of such treaties, together with the model proposed by the OECD, are still under study by the Federal Revenue Service.
The actual scenario shows substantial improvements in the efficiency and effectiveness of the Tax Administration after some actions taken over the past two decades, most notably the implementation of a programme named SPED – Public System of Digital Bookkeeping. This implementation started in the middle of the past decade and comprised a broad framework of tax, commercial and operating data, organised in standard formats, which taxpayers must prepare and submit electronically to tax authorities.
SPED submissions are mandatory, irrespective of any related tax inspection. Depending on the file, an electronic filing must be made monthly, annually or even instantly, on a transaction‑by‑transaction basis (which is the case of the “Nota Fiscal Eletrônica” – NF-e – Electronic Tax Invoice).
In the course of a tax inspection, the Federal Revenue has unrestricted access to a taxpayer's tax documents and bank details. Concerning this, there has been a discussion in case law about the legality of tax authorities obtaining bank data directly, which implied a breach of confidentiality. However, the Supreme Court has recently decided that the Administration can collect this data directly, by asking the relevant financial institutions.
The most important strategy, in the author’s view, is to anticipate possible liabilities with the aid of an accounting professional and a tax expert lawyer, in order to prevent future audits.
Tax disputes in Brazil may take place in the administrative or judicial area, but taxpayers are not required to pay a disputed tax before the start of administrative proceedings.
Litigating in the administrative courts is optional and not binding on taxpayers, meaning that taxpayers may choose to sue directly in the judicial courts, and an unfavourable final decision in the administrative court can still be challenged in a judicial court. However, if taxpayers choose to bring a tax dispute directly before a judicial court, bypassing the administrative courts, this is legally deemed as a waiver of the right to an administrative debate.
It is an important decision for a taxpayer, because litigation in an administrative court is usually more straightforward, quicker and less burdensome, as such proceeding is less complicated than judicial litigation, and most importantly it is not necessary to give a guarantee during the procedure.
Administrative proceedings commence after an audit made by the Brazilian tax authorities if any evidence of a flaw in the taxpayer's obligations is found; such finding will be stated in a tax infraction notice seeking to collect the corresponding debt (comprising the principal, interest and any penalties).
After an infraction notice is sent to a taxpayer, there are three options: i) pay the debt within 30 days, usually with a discount on the penalty; ii) file a defence to the infraction notice, stating the reasons why such notice should be cancelled and then officially commencing the litigation in a tax administrative court; or iii) take the dispute directly to judicial court by filing an ordinary claim or a writ of mandamus.
Instead of paying the debt (in a lump sum, in instalments, or under a tax relief scheme), a taxpayer can challenge the tax infraction notice before administrative judgement authorities in the federal, state or municipal sphere; such authorities are composed of technical and expert administrative judgement panels and are knowledgeable and skilled in the specific tax issues under dispute – this is another aspect to consider when choosing between the administrative or judiciary sphere.
In the federal sphere, a taxpayer has 30 days from service of an infraction notice to present its defence (“opposition”). This opposition and its case records are sent over to the Federal Revenue Judgment Unit (“DRJ”), which is in charge of deliberating on the case and issuing a first-instance decision, generally upholding the infraction notice (except when there is any material breach that would render such notice void).
Taxpayers may then appeal (voluntary appeal) to the Administrative Tax Appeals Board (“CARF”). Each CARF judgment chamber is made up of members nominated by both taxpayers and tax authorities. A tie is construed favourably to tax authorities.
A third administrative level – the Higher Tax Appeals Chamber (“CSRF”) – is only called upon to arbitrate if the taxpayer or the tax authority, as applicable, shows that the same or distinct CARF judgment chambers rendered conflicting decisions on the same subject.
Therefore, if a taxpayer is defeated but finds a different CARF decision on the same subject, he or she may lodge a special appeal at CSRF. The contrary also holds: the defeated tax authorities can also file a special appeal at CRSF under those same circumstances. Also at CSRF level, a tie is construed favourably to the tax authorities.
A similar three-tier structure is replicated at a state level, and even some municipalities (eg, the City of São Paulo) have administrative tax courts to review infraction notices issued by the tax authorities. However, small municipalities usually lack human or financial resources to put this complex dispute resolution structure in place and, for this reason, disputes over a local infraction notice are generally much less formal.
It usually takes two to four years on average for a final ruling on tax disputes in an administrative court. The SELIC benchmark interest rate accrues on the overall tax debt throughout the litigation period. No bond needs to be posted.
If the final administrative decision is favourable to the taxpayer, the tax authorities cannot take the case to the judiciary, except under exceptional circumstances. By contrast, a final administrative decision that is unfavourable to the taxpayer can be disputed in court under the same or different line of reasoning.
Brazilian tax authorities do not have a deadline within which to decide an administrative claim that has been lodged by a taxpayer, and no hierarchical appeal or judicial request is possible if the tax authorities do not reply within a specific timeframe.
There is no specific hierarchical appeal to lodge a claim if the tax authorities do not reply within a particular timeframe. However, in 2018 a federal justice issued an order in a writ of mandamus requiring the CARF to judge a claim that was waiting for the definition of a reporting judge for more than five years. The judge considered that this timeframe was unreasonable, and determined the immediate appointment of a reporting judge, but this was the first case of this kind.
Judicial tax litigation in Brazil can be initiated by the tax authorities through enforcement lawsuits, or by the taxpayer through anti-enforcement lawsuits and proactive claims (eg, ordinary claims or writ of mandamus), which may be presented to the Federal or State Courts, depending on the specific tax matter.
Enforcement claims are lodged by the tax authorities to fulfil a tax obligation that was not fulfilled spontaneously by a taxpayer at the moment established in the legislation or during/after the administrative proceedings. This situation is stated on an overdue liabilities certificate (“CDA”). This claim is known as a Tax Execution Proceeding and, according to Law 6.830 of 1980, various instruments can be used to fulfil the payment, such as seizure of properties, assets or goods, and even the confiscation of funds found in the taxpayer's bank accounts and investments.
Anti-enforcement claims are divided into two groups, depending on whether or not a Tax Execution Proceeding exists.
If a Tax Execution Proceeding was already lodged, a taxpayer usually has a Motion for a Stay of the Tax Execution Proceeding to expose his or her arguments to cancel the overdue liabilities certificate, or a Motion for Advance Dismissal of Enforcement.
A Motion for a Stay of the Tax Execution Proceeding can be lodged within 30 days of the presentation of a guarantee. The relevant difference of this motion is the necessity to present a guarantee for the debt stated on the CDA, which means that the taxpayer must first post a bond in benefit of the court and then defend itself, but these claims have a discovery phase. However, judicial precedents have lessened this requirement so that a taxpayer can file such lawsuit without a guarantee, though he or she will not obtain a suspension for the debt’s enforceability. In some specific cases, a suspension of the enforceability can be granted by a court upon the presentation of other types of guarantees or, exceptionally, without any warranty.
The Motion for Advance Dismissal of Enforcement is lodged on a Tax Execution Proceeding as a simple petition, and can terminate the proceeding before any further seizure. However, such motion does not provide for a discovery phase, so that the evidence presented with such motion must be able to prove the arguments. It is not necessary for the taxpayer to post a bond for court costs to defend itself.
Proactive claims lodged by taxpayers generally seek to avoid the taxation imposed by legislation on the grounds that it does not comply with constitutional principles or the interpretation of the law, and its constitutionality may be subject to different interpretations.
If the final administrative decision is unfavourable to the taxpayer (or if the latter has waived its right to challenge the tax infraction notice in the administrative sphere), the taxpayer may take this issue to the judiciary (via ordinary action or motion for writ of mandamus) or else wait until enforcement occurs and then bring a motion to stay enforcement.
The Brazilian judiciary is based on written civil procedure, and is divided into specialised and ordinary courts; the ordinary courts are then divided into federal and state matters. In a tax litigation context, federal courts judge claims regarding federal taxes, while state courts judge matters related to state and municipal taxes.
Both federal and state courts have two levels:
Plaintiffs must prove the facts substantiating the right claimed on the lawsuit, while the defendant must prove facts that modify, extinguish or prevent the right claimed by the plaintiff. Facts that enjoy legal presumption, such as the CDA mentioned previously, do not require proof of existence or veracity.
After the defendant has responded to the plaintiff claim within the right time, the discovery phase takes place, after which a court decision will be delivered in writing, containing a brief description of the parties' arguments, the issues under dispute and the legal resolution of the conflict.
Civil tax litigation only admits documentary evidence, and the moment for the discovery of such proofs varies according to the type of claim.
As mentioned above, most tax litigation concerns the interpretation of the law. In most cases, it is necessary to prove that a determined fact has occurred, so the applicable legislation is that noted by the plaintiff.
In this context, documentary evidence is essential to prove the facts that a plaintiff or defendant argues to make its case.
In civil law, the burden of proof is on the party making the relevant allegation. Therefore, a taxpayer that files a lawsuit challenging a specific obligation must both demonstrate the existence of an obligation and provide the judge with all evidence showing that a given tax is illegal or unconstitutional.
In the case of tax execution proceedings filed by the government against taxpayers, the tax is presumed to be due and to affect the taxpayer's assets (for the satisfaction of the tax obligation). Therefore, if the taxpayer intends to challenge a requirement under a tax execution order, as stated before, it must first post a bond for court costs and then defend itself. The burden of proof is also on the taxpayer in these cases.
Under Brazilian criminal law, the burden of proof is on the prosecution, which submits the case before the court. In the event of doubt following the criminal investigation, the defendant must be acquitted.
As stated above, the majority of judicial tax claims regard the interpretation and application of the laws and principles of the Brazilian Tax System, and enforcement and anti-enforcement lawsuits characterise the judicial litigation. Furthermore, settlements are not allowed in the Brazilian Tax System.
In this context, taxpayers must always be clear about the strength of their arguments before entering into any litigation. The first thing that a taxpayer should do when facing a tax assessment notice or tax infraction notice is assess the convenience of complying with any payment requirements.
From a strategic point of view, taxpayers must always consult a specialised attorney and a trusted accountant before making this decision.
If a taxpayer chooses to lodge a judicial claim, it is necessary to present all evidence at the time of the first allegations. Depending on the procedure chosen, it is possible for the judge to provide the opportunity to produce other evidence during the process, such as expert examination by a court-appointed expert. This claim will depend on the perception of the judge regarding the utility of such evidence for the judgment.
The jurisprudence of the Superior Courts, the Brazilian Supreme Court and the Superior Court of Justice is crucial for judicial tax litigation, considering the number of tax rules and principles in the Brazilian Constitution and Complimentary Laws. On the other hand, the jurisprudence of international courts is not often utilised in judicial tax discussions, and, when it is, it is used as a comparative argument, not a decisive argument.
Court precedents are not binding, except when rendered under specific circumstances. Nonetheless, they are significant material used by judges when issuing a decision.
Academic studies are also relevant, as tax authors and professors are commonly hired to give opinions over cases lodged before a court.
The international guidelines from OECD are not relevant at any given time since these rules were not incorporated into the Brazilian Tax System and cannot yet be enforced. There are a few citations in judgments regarding international matters, but these quotes are always argumentative and not binding.
The Brazilian procedural system allows appeals from final or interlocutory decisions. Interlocutory appeals may be filed against certain decisions expressly indicated by the Brazilian Civil Procedure Code.
Appeals are submitted to a multi-judge panel in the state or federal court of appeals, which is composed of an even number of judges, who may review the trial court’s decision in light of their interpretation of the law and the facts of a case.
The appellate court’s decisions can be subject to appeals filed with the Superior Court of Justice and/or the Federal Supreme Court – jurisdiction hinges on the nature of the controversy.
The Superior Court of Justice hears appeals against the appellate court decisions that arguably violated federal law or have given federal law an interpretation that differs from that handed down by another appellate court. The Superior Court of Justice is restricted to evaluating matters of law.
The Federal Supreme Court hears appeals against appellate court decisions that have arguably violated the Federal Constitution. To be given leave to appeal, an appellant is required to provide evidence that the constitutional issues addressed in the appeal have widespread repercussions.
The first stage of an appeal is the State or Federal Court panel of justices, which is known as the second instance of the judiciary.
After that, depending on the argument against the appellate court decision, it is possible to issue an appeal to the third instance of the judiciary, as stated above, to the Superior Court of Justice and/or the Federal Supreme Court.
After the final decision is issued at an Appellate Court or one of the Superior Courts, the lawsuit is sent back to the single judge to execute and/or enforce the final decision.
The first instance panel is composed of singular trial judges, who take office after passing a complex public examination.
The second instance – the Appellate Courts – is composed of justices appointed according to criteria such as merit and length of service as a trial judge. One fifth of appellate court seats are mandatorily filled by members of the public prosecutor’s office and practising attorneys.
The third instance has different rules for the composition of the panels of justices: the Superior Court of Justice is formed of 33 judges who are appointed by the President upon approval by the Senate. This indication has to respect the quota of one third of justices coming from federal appellate courts, another third from a state appellate court and the final third must be private practitioners/public prosecutors.
The Federal Supreme Court is composed of 11 justices appointed by the President upon approval by the Senate, and does not have any quotas.
The Brazilian Tax System does not have any alternative ways to solve disputes in tax matters; as stated above, litigation is the legal mechanism used not only to contest levies and tax assessments that are deemed undue but also as a proactive way to gain judicial recognition of taxpayers’ rights regarding possible tax law interpretations.
However, there is a Draft Bill to enable the transaction of interests and penalties of federal taxes, but the Draft has been in the initial phase of discussion since 2009, and its approval does not look imminent.
The difficulty of adopting ADR in the Brazilian Tax System is that the law is binding on all public workers in all spheres of government, who have no discretionary power. The Federal Constitution states that only the law may impose or exclude tax obligations.
In the past few years, due to Brazil’s economic crisis, the federal and state governments have legally approved periodic tax amnesty programmes that allow the payment of tax debts in instalments, and grant reduced fines and interest.
As stated before, the Brazilian Tax System does not have alternative ways to solve disputes in tax matters.
As stated above, the Brazilian Tax System does not have alternative ways to solve disputes in tax matters. However, the Draft Bill under discussion refers only to interest and penalties, and does not cover agreements to reduce tax assessments.
The request for Binding Advance Information and Ruling Requests may be an effective alternative to prevent disputes.
A taxpayer may file a request for ruling on the interpretation of the tax law applicable to any specific fact. Such rulings will be effective until the law changes, or until the taxpayer is notified that the tax authorities have revoked the verdict. Tax authorities do not need court authorisation to rescind a ruling.
Tax authorities may revoke a ruling at any time, at which point there is no legal defence to keep the decision in force. However, if such authorities issue an assessment because a taxpayer continued to follow a revoked ruling, the taxpayer may always discuss such matter in an administrative or judicial court.
As stated above, the Brazilian Tax System does not have alternative ways to solve disputes in tax matters. However, the Draft Bill under discussion refers only to interest and penalties, and does not cover agreements to reduce tax assessments.
As stated above, the Brazilian Tax System does not have alternative ways to solve disputes in tax matters.
Brazilian transfer-pricing rules are substantially based on a fixed profit system, rather than on overall margins (OECD model), and thus require a careful analysis of intercompany prices and conditions to be carried out by specialists, should intercompany sales be significant in the business model.
These rules were adopted in Brazil in 1996. The conciliation of the Brazilian transfer-pricing rules with internationally accepted transfer-pricing methods became one of the biggest challenges faced by multinational enterprises in Brazil, with difficulties relating mainly to the deviation of the Brazilian rules from the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Regarding such differences, it should be noted that there is no leeway for advance pricing agreements under the Brazilian transfer-pricing legislation, and that Brazilian law has adopted fixed margins for the various methods, regardless of the nature of a taxpayer’s business, industry or role in the transaction (ie, there is no functional analysis). The law provides that the Minister of Finance may establish other statutory margins for each industry to determine the parameter price in controlled transactions.
Cross-border transactions carried out by legal entities incorporated in Brazil shall be subject to transfer-pricing controls when entered into with related parties, or with parties located in low tax jurisdictions or jurisdictions with underprivileged tax regimes, irrespective of whether the two parties qualify as associated enterprises.
The Brazilian transfer-pricing rules do not apply to cross-border payments of a trade mark or patent royalties, nor to fees payable as compensation for the transfer of technology, or the rendering of technical, administrative or scientific assistance services with a transfer of technology or know-how. The relevant agreements are to be registered with the Brazilian Intellectual Property Agency and the Central Bank of Brazil.
Usually, tax authorities tend to file tax assessments to claim taxes not paid, without criminal implications. However, the tax authorities may also seek to impose aggravated penalties when the conduct of the taxpayer is deemed to be fraudulent. These penalties constitute a lead to the filing of a criminal investigation.
Most commonly, criminal tax litigation takes the form of a public criminal action filed by the Public Prosecutor's Office. If a final unfavourable decision is granted at the administrative level and there is no payment of tax (or payment in instalments), the Public Prosecutor must file a criminal action to investigate a crime against the tax system.
In this context, the most common tax crimes are fraudulent tax evasion (ie, failing to pay or underpaying tax by omitting information or submitting a false return to the tax authorities) and misappropriation of pension monies (ie, failing to pay contributions collected from contributors to the social security system).
A criminal investigation can only start once the administrative proceeding is completed, and after the tax authorities have established a sufficient amount of the tax debt. This timing was stated by the Brazilian Supreme Court, which ruled that a criminal offence can only be charged after a tax case has been completed at the administrative level, and a failure to pay taxes has been recognised.
However, sometimes a criminal tax complaint is submitted by the Public Prosecutor's Office before an administrative proceeding has been completed. In these cases, a defence adopted by taxpayers, and broadly accepted, is to inform the Public Prosecutor's Office immediately that the tax debt is still under discussion. Therefore, there is no crime to be investigated, so the criminal investigation should be halted and any police inquiry suspended. If a court determines that an investigation should continue, it is possible to apply for an order of Habeas Corpus to end the improper investigation, on the basis that no crime has been committed.
A criminal investigation can only start once administrative tax proceedings are completed, through the submission of a criminal tax complaint. The Public Prosecutor's Office then decides whether to call for a police inquiry or start a criminal prosecution.
A police inquiry is a procedure precedent to criminal prosecution. It is an administrative investigation carried out by the police authorities, intended to collect evidence regarding the existence of a criminal infraction and the identity of the offender. In the case of a tax crime, the purpose of a police inquiry is to identify the person responsible for the offence, as the tax authorities have already demonstrated the materiality of the offence.
Once the administrative proceedings are completed and the amount of the tax debt is definitively established, there are grounds to start a criminal prosecution to investigate a tax crime, which can begin through either a police inquiry to determine the author of the offence, or an accusation (if the Public Prosecutor's Office believes it has sufficient evidence regarding the offender), which, if accepted by the competent court, will result in a criminal action.
Once the investigation is complete, the police inquiry will be sent to the Public Prosecutor's Office. After that, the Public Prosecutor can then take one of the following steps:
The Public Prosecutor's Office will go to court if it considers that there is reasonable evidence of the materiality of the offence against the accused.
Once an accusation is made, the competent court will examine it and open a criminal trial if it believes that an indictment is admissible under law. During the court phase, a preliminary defence is presented and analysed by the court. The accusation is then confirmed or rejected. The prosecution will only be dismissed at this point if there is obvious illegality.
Once the criminal case has been accepted, a date is set for the hearing of evidence, during which witnesses will be heard (including expert witnesses, if any) and the defendant questioned. At the end of this stage, the parties must submit their arguments orally or, if permitted by the judge, in writing. The judge will then issue the criminal judgment.
A way to avoid prosecution is to pay the tax or agree to pay it in instalments as soon as the administrative proceeding is complete. Payment of the tax debt in full will release the taxpayer from the possibility of punishment and can be made at any time, even after the decision to prosecute is issued, provided that it is made before the final judgment. However, payment in instalments can only be arranged before the criminal prosecution starts, in which case the state's punitive powers will be suspended. In the case of payment in instalments, the criminal action will be discontinued until full payment is made, and will be resumed in the event of default by the taxpayer.
Another possibility not provided by law, but occasionally seen in practice, is the suspension of the investigation, when, given the unsatisfactory result of the administrative procedure, the taxpayer chooses to continue with the judicial process, by depositing into court an amount that corresponds to the deferred tax, or by presenting a letter of bank guarantee.
The filing of a tax assessment, at least at the federal level, gives rise to an automatic fine of 75% of the tax due. The amount of the penalty can be doubled if it is established that the taxpayer also committed fraud.
An upfront payment will reduce this amount considerably if made before any additional assessment. After that, fines that can be avoided refer to judicial litigation, which has an automatic penalty of another 10% over the tax due.
As stated before, the Brazilian Tax System does not recognise tax agreements. In other words, there is no legal or constitutional basis authorising taxpayers to negotiate with the government to reach an agreement on the final interpretation of the applicable legislation in respect of the tax due, or to prevent trial and fines.
The only possibility, as already stated, is the occasional tax amnesty programmes, which are indicated by a Law of Amnesty.
It is a fundamental principle of criminal law that a party has the right to have a first instance decision re-examined by a superior court, without the payment of court fees.
The parties can appeal against court decisions, in full or in part, to a higher court that has jurisdiction over the matter, which can be a state or a Federal Court. Deadlines for filing appeals are set out in the Criminal Procedure Code and vary depending on the type of motion.
Once an appeal is decided, another request can be filed before the Superior Court of Justice on the grounds of violation of federal law, and before the Federal Supreme Court on the grounds of a breach of constitutional law.
Recent cases regarding the GAAR and transfer-pricing rules challenged by the tax authority’s assessment give rise to administrative procedures that are ruled on a case-to-case basis. For the GAAR cases, the main concern is the lack of proof of the economic purpose of a transaction or operations. For transfer-pricing rules, the main concern is the deviation of the Brazilian Transfer Pricing Rules from the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (eg, the adoption of fixed margins regardless of the nature of the taxpayer’s business, industry or role in the transaction).
Tax authorities usually address these subjects during a tax audit to contest the transaction or operation as described by a taxpayer, followed by a tax assessment that can be discussed during the administrative or judicial proceeding.
If double taxation occurs due to an additional tax assessment or tax adjustment in a cross-border situation, it is common to use domestic litigation against such an administrative decision.
Treaties signed by Brazil provide for an alternative mechanism to deal with double taxation, but the specific regulation in the Brazilian Tax System does not provide for compensating adjustments.
In this scenario, if an additional tax assessment or a tax adjustment is issued, the case will be treated by administrative and judicial courts as it is stated in the Brazilian Tax System, considering the laws applicable in the Brazilian territory.
The Brazilian Tax System does not have regulations regarding the compensation adjustments to avoid double taxation. The only exception, with some conditions that must be complied with, refers to transactions performed with foreign companies that are controlled by a Brazilian legal entity.
Since the mid-1990s, the federal government has implemented SAARs, which are considered by the Brazilian Federal Revenue Service (“RFB”) to be enough to mitigate the effects of the international tax planning that motivated the BEPS Project. These rules have been implemented in Brazil through legislative changes since 1998, based on the OECD’s recommendations in the Harmful Tax Competition Report.
Examples of SAARs adopted by Brazil are taxation on worldwide income, transfer-pricing rules, a list of low-tax jurisdictions (blacklist) and privileged tax regimes (grey list), an increased rate of income tax on payments to low-tax jurisdictions, limitation on the deductibility of such payments, and thin-capitalisation rules, among others.
In the context of actions aimed at promoting transparency and the international exchange of information, the RFB issued rules to implement the following measures:
Also focusing on international transparency, two agreements regarding the automatic exchange of financial information were signed by Brazil: the Foreign Account Tax Compliance Act (FATCA) with the United States, and the Common Reporting Standard (CRS), within the framework of the Global Forum on Transparency and Exchange of Information for Tax Purposes.
With the above measures, the RFB will receive a substantial amount of information on the general structure of Brazilian taxpayers, which will change tax inspection proceedings. Because of this, the need to introduce measures that seek to align Brazilian rules with international standards will become even more evident, to avoid having global information used merely for tax collection purposes.
The current jurisprudence does not have any relevant case to establish a comparison for a future situation, as this initiative is new to the Brazilian Tax System.
Transfer-pricing adjustments have been challenged under domestic tax courts, both in the administrative and judicial instance. Generally, tax authorities issue a tax infraction notice questioning the methods used by the taxpayer on a transfer-pricing calculation if they are considered to be not in line with applicable rules, or if the supporting documentation is unreliable.
Although OECD standards initially inspired Brazil's transfer pricing rules, Brazil deviates significantly from the OECD Transfer Pricing Guidelines, as there are no profit-based methods (profit split or transactional net margin methods) and the idea of a functional and risk analysis is not included. Another relevant difference in the Brazilian Transfer Pricing standards is the concept of related parties, which is much broader than the idea of "associated enterprises" considered by OECD standards.
It is possible in the near future that the results of the task force created for the admittance of Brazil as a member of the OECD will indicate a new orientation, accepting transnational methods, but there is not the same clarity regarding the change of the rules regarding the deduction of royalties.
Advance Pricing Agreements (APA) are not admitted in Brazil.
The lack of specific legislation regarding cross-border situations gives rise to all sorts of litigation, which is solved on a case-by-case basis, both in the administrative and judicial instance.
To mitigate this complicated situation, taxpayers can file a Ruling Request or a Mutual Agreement Procedure, as stated before, but the lack of legislation will probably result in a more expensive solution for the taxpayer.
In the author’s opinion, the legislation has to accompany these recent changes and the OECD standards, which may take place in a nearby future, as Brazilian and OECD officials have recently launched a joint 15-month project to review Brazil’s international tax and transfer-pricing legislation thoroughly, the better to align it with OECD guidelines and recommendations.
Administrative disputes attract no court costs and assure suspension of the enforceability of debt, granting the excellent standing certificate up to the final decision.
Taxpayers must pay court costs according to tables issued by the Federal Government and the states at the time judicial proceedings are filed. Each instance of judicial courts has its fee.
There is a fee cap for federal courts, and court costs are mostly not significant. Some state courts have a higher cap, such as the State Court of Rio de Janeiro, where the cap is almost BRL40,000 and reflects a percentage of the value discussed in the lawsuit.
The parties are obliged to pay the fees in each instance, with such payment being a requirement to access the court of appeals.
The party who loses the case supports all the costs of a lawsuit.
At the end of a judicial proceeding, a judge will sentence a defeated litigant to reimburse the other party all anticipated court costs, and to pay judicial attorneys’ fees up to 20% of the amount involved according to the chart under Section 85 of the CPC. These fees are mandatory (unless a writ of mandamus is filed) and might become very relevant when significant amounts are discussed.
As stated before, the Brazilian Tax System does not have alternative ways to solve disputes in tax matters.
Statistics regarding tax court cases are provided by the National Justice Council (“CNJ”), which is responsible for overseeing the Judiciary, and by the Federal Revenue Service, which is responsible for the federal administrative courts. Numbers related to the state and municipal courts of the Judiciary are absorbed by the numbers stated in the CNJ report. The state and municipal courts do not provide statistics for the public.
According to the last CNJ report, in 2017 there were approximately 32 million Tax Execution Proceedings in Federal and State Courts, with only 8% of proceedings coming to an end in 2017. According to the National Treasury Attorney's Office, these judicial proceedings represent BRL2 trillion in debts.
According to the National Treasury Attorney's Office statistics, the majority of cases refer to corporate income taxes – Corporate Income Tax ("IRPJ") and Social Contribution on Net Income ("CSLL"), Federal Excise Tax ("IPI"), Import Tax ("II"), Financial Transactions Tax ("IOF"), Economic Domain Intervention Contribution ("CIDE") and Withholding Income Tax ("IRRF") – with a total sum of approximately BRL1.5 billion. Taxes on revenues – Contribution for the Social Integration Programme (PIS) and Contribution for Social Security Financing (COFINS) – account for the next highest proportion of cases, with a total sum of approximately BRL430 million.
The State and Municipal Revenue Services do not provide a centralised report, which makes it challenging to establish statistics regarding tax matters.
The only publicly available report that emphasises the success rate is the Federal Revenue Service statistics, according to which approximately 74,000 administrative claims were decided in 2017, with the taxpayer having complete success in 28.5% of cases and partial success in 18.5%, leaving a 53% success rate for the tax authority.
As discussed above, the Brazilian Tax System is highly regulated and complex. Therefore, it is important to pay attention to mitigating liabilities when structuring a transaction – for example, a discussion with a tax expert lawyer and an accountant is usually recommended. Such consultation will focus on the types of business entities that are commonly used in Brazil, their residence definitions and implications, and their basic tax treatment. It is also highly recommended to have a second opinion.
In the author's opinion, the best way to avoid tax controversies in Brazil is to have adequate tax planning, which must observe and respect the previous Advance Tax Rulings of the tax authorities, as well as the previous understandings and legal opinions of the Public Attorney’s Office.
It is essential to double check the documents sent to the Revenue Service and establish if every tax law and regulation has been correctly applied after a controversy is initiated at administrative or judicial court; more importantly, it is essential to check that the Revenue Service also followed the legal applicable proceeding.
After that, there are several ways to handle the situation, but the previous decisions of administrative courts must always be considered; more critically, the case law of the Federal Supreme Court and Superior Court of Justice must also be assessed, since the majority of guidelines for the Brazilian Tax System are stated in the Constitution and Complimentary Laws.
After choosing a way to litigate, there are other choices that a taxpayer needs to make with the assistance of a tax expert attorney, relating to the risk management of asset freezing and other enforcement procedures.
Anti-corruption cases regarding tax corruption enforcement have increased significantly over recent years. Most cases involve public officials granting undue discounts in exchange for bribes, and administrative judges rendering votes in favour of taxpayers in exchange for improper benefits. This new context reinforces the need for companies to maintain effective anti-bribery and anti-corruption programmes, including personnel training, creating standard procedures, and implementing controls over tax matters.
Therefore, such context gives rise to an important issue: lawyers, accountants and managers must give even more attention to predetermined standard procedures in order to prevent any future questioning regarding how a tax matter was procedurally conducted.