Contributed By Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados
The year 2019 started with a new government in Brazil and the desire for change extends to the tax environment, as taxation has always been seen as one of the most relevant areas in need of improvement.
Whether due to the high tax burden, which is frequently imposed without attention to the guarantees assured by the Federal Constitution, or whether as a result of the high degree of uncertainty that permeates legal-tax relations, resulting from the great variation in case law, Brazil has an intense culture of litigiousness with regard to tax matters, a scenario that will continue if relevant changes to the country's tax system do not occur.
In addition, the litigious culture in relation to tax issues has eclipsed discussions related to the merit of taxes, affecting procedural questions that have great impact on the daily routine of Brazilian taxpayers, such as the attribution of tax liability to company managers and to other companies belonging to the same economic group, the listing and non-availability of assets, criminal implications, etc.
Furthermore, at the end of 2018, new rules were edited by the tax authorities in the sphere of the Brazilian IRS and the National Treasury General Attorney's office, regulating the imposition of measures with regard to the points above, which will certainly have serious repercussions and will be subject to scrutiny in 2019 and the years that follow.
Nevertheless, despite the fact that the tax environment in Brazil is challenging, it is worth mentioning that taxpayers have obtained good decisions in the sphere of the administrative and judicial courts with regard to relevant subjects, such as the acknowledgement of the unconstitutionality of including ICMS (value-added tax on sales) in the calculation of PIS and COFINS (gross revenue contributions) by the Supreme Federal Court, and favourable decisions rendered by the Administrative Council of Tax Appeals (CARF) regarding the possibility of using PIS and COFINS credits for expenses characterised as 'inputs.'
Moreover, it is important to note that one of the priorities of the new government is the reform of the Brazilian tax system. One of the main aims is the de-bureaucratisation of the productive environment through simplification of the tax system, starting with the unification of taxes (especially those levied on consumption) and the standardisation of the countless ancillary obligations required of taxpayers.
Brazil is in one of the lowest positions in the World Bank's 2019 report on Doing Businessunder the section "payment of taxes," which takes into account the high tax burden, the complexity of the tax system, the administrative burden related to the payment of taxes and contributions (number of hours it takes to pay taxes) and procedures linked to the payment of taxes (inspections/tax audits, restitution and tax appeals).
This scenario certainly contributes to the extremely high number of judicial disputes in Brazil involving tax matters. In this context, it is expected that the tax reform planned by the government will contribute to the reduction of judicial discussions regarding tax matters, improving the country's business environment and allowing taxpayers to concentrate their efforts and resources on their business activities.
Tax Audits and CARF
In the last decade, in the sphere of the Brazilian IRS, the focus of inspection activities has been on recovering tax debts of greater value, and this was achieved by using technological tools, personnel training, cross-checking of data of different ancillary obligations, and differentiated monitoring of certain taxpayers.
The Brazilian IRS still has not published its guidelines for the year 2019, but the public deficit and the necessity of collection lead to the conclusion that the procedures initiated in previous years, far from improving the situation, have caused it to worsen.
Another trend of inspection in recent years has been into the accountability of individuals and legal entities, listed as jointly responsible for the tax debt owed by other legal entities, for their supposed participation in operations that generated tax deemed as undue.
The recent publication of normative acts dealing with the subject of joint liability is a strong indication that this will continue to be one of the focuses of the Brazilian IRS both in 2019 and in the coming years, mainly because this is an effective instrument by which to apply pressure. The notifications attributing liability to third parties tend to be accompanied by other constrictive measures, such as the listing of assets and rights and tax complaints for criminal purposes, which have a more permanent effect on individuals becoming an important indirect source of taxation.
In the federal sphere, due to the fact that the focus is on the recovery of tax debts of greater value, some subjects have been receiving more attention in the inspection, such as tax planning involving investment funds in private equity, corporate reorganisation with the generation of goodwill, the analysis of credits that may be appropriated in the determination of PIS and COFINS (social contributions focusing on the gross income of legal entities), and the levy of social security contributions in stock option and profit-sharing plans.
Notifications arising from operations jointly performed by the Brazilian IRS and other investigation agencies, to combat crimes against the tax order, corruption and money laundering, also deserve to be highlighted.
These areas, which were already the object of inspection and notification in previous years, shall continue to be analysed by CARF, the council responsible for judgment of federal administrative procedures.
In 2015, the Zelotes Operation, undertaken by Federal Police to investigate corruption at CARF, ended up paralysing the council's activities for some months. The resumption of activities, at the end of that year, also saw a relevant change in the case law of the Superior Chamber of Tax Appeals (CSRF), CARF's higher administrative instance, with the consolidation of positionsin several matters regarded as unfavourable to taxpayers.
As an example, cases of goodwill, which were numerous at CARF and which represented an substantial number of the tax debts in dispute in that sphere, were judged almost in their totality to be unfavourable to taxpayers, despite the specific characteristics of each operation.
The Zelotes Operation also represented the implementation of several efficiency measures at the administrative council, such as changes in the rules and regulations governing access to judges representing taxpayers, reforms in internal regulation, the creation of a Commission of Ethics, the addition of new binding abridgments, and judgment of cases by thematic subjects. An effort is clearly being made to reduce the number of pending procedures, which in June 2018 represented 119,000 administrative procedures, involving around BRL575 billion in tax debts.
The change in the federal government has generated several discussions about CARF's future and even about the continuity of the council. However, there is no concrete information indicating significant changes in 2019, apart from the natural periodic shifts in the judging panel, due to the end of their term of office, which could result in changes in case law with regard to certain matters.
A large variety of tax matters have been considered in the judiciary, with a high number of disputes relating to main taxes in the spheres of municipalities, states and federal government.
This scenario is represented in numbers: in 2018 the Supreme Federal Court computed almost 10,000 active lawsuits on tax subjects, which represents about 10% of the total active lawsuits at that court. This number is conservative, because we still have 33,151 lawsuits involving matters related to public administrative law, which represent 33.7% of the appeals in the Supreme Federal Court and could also be related to tax disputes, even if indirectly.
Naturally, several of these appeals are repeated with regard to the subject under dispute. In this context, there are more than 100 themes related to tax controversies already selected by the Supreme Federal Court for judgment with binding effects.
Considering appeals with and without binding effects, more than 70 lawsuits that deal with tax matters are scheduled for judgment at the Supreme Federal Court in 2019, involving disputes related to the main taxes focusing on business activities, such as PIS and COFINS, income tax (IRPJ) and value-added tax on sales (ICMS).
Furthermore, the changes brought about when the Code of Civil Procedures was introduced in 2016 are still in effect, including the mechanisms to reduce the number of disputes through the selection of subjects with a high degree of repetition by the second level courts for judgments.
This judgment technique, which until then was only possible in the scope of the superior courts (Superior Court of Justice and Supreme Federal Court), has been used increasingly by the lower courts as a way to standardise case law relating to matters that represent a high number of disputes, which contributes to the improvement in legal safety and the predictability of tax relations. In other words, case law standardisation provides a higher level of certainty to companies in regard to tax aspects related to their business, providing previous knowledge of the court positions concerning sensitive matters such as the tax burden applicable and the attribution of tax liability to company managers, among other things.
Another trend observed in the judiciary, also in relation to tax matters, is the decrease in the duration of lawsuits, as a result of the implementation in all Brazilian courts of an electronic processing system for judicial lawsuits.
In addition, it is possible to note an early trend – but one that will possibly intensify – in terms of the reduction of the judicialisation of issues related to tax debt guarantees under the scope of federal taxes, a subject that has always caused debate due to the fact that a guarantee of tax debts is required for the issuance of a tax clearance certificate, an indispensable document for the performance of business activities.
In fact, in the second semester of 2018, the National Treasury General Attorney's office enacted rules that allow the regularisation of tax debts through the presentation of a guarantee, without the necessity of filing a lawsuit to that purpose.
Furthermore, such rules allow taxpayers to challenge tax debts after the administrative procedure has been closed and before the filing of tax foreclosure, mainly in case the collection is at odds with the case law of the superior courts. This procedure has also been seen as a mechanism that reduces the judicialisation of tax disputes, avoiding the judicial collection of supposed debts that are clearly not due.
Also, such rules establish procedures for agreements between taxpayers and the tax authorities to be entered regarding:
Such measures have the potential to reduce the number oflitigations relating to secondary subjects that involve tax debts, and that directly impact the company’s day-to-day life.
Hot Areas of Interest
While there are several ongoing subjects related to tax matters under dispute in the Brazilian administrative and judicial courts, some should be closely monitored throughout 2019, whether due to the high sums of money involved, or due to their important impact on companies' tax planning.
Disputes related to PIS and COFINS
In 2018 a relevant part of the judicial discussions was centred on PIS and COFINS and further developments in the matters analysed indicate that these taxes will be on the agenda again in 2019.
One of these subjects is the definition of the concept of 'inputs' by the Superior Court of Justice, since the law applicable to PIS and COFINS provides that certain expenses incurred in the performance of business activities may be used as credits for the purpose of payment of such taxes, if such expenses are characterised as inputs.
At the beginning of 2018, the court deemed that actions taken by the Brazilian IRS to restrict this concept were illegal, ruling that the concept of input shall be determined by assessing how essential or relevant the expense incurred for the development of the economic activity performed by the taxpayer is. In November 2018, an appeal filed by the National Treasury against such decision was denied by the Superior Court of Justice.
As this decision has a binding effect on the judiciary and the administrative courts, and taking into account a normative from the National Treasury itself acknowledging the need to define essential and relevant criteria for the purposes of using PIS and COFINS credits, CARF started to adopt such guidance in its most recent judgments, promoting the case-by-case analysis of items that may generate entitlement to credit, due to their role in the taxpayer's economic activity. In 2019, new decisions will be rendered about the matter in the Administrative Court, verifying in a casuistic manner the importance of each input in the business activity developed by the taxpayer.
In 2019, new developments in the billionaire dispute, in which the Supreme Court ruled that the inclusion of the ICMS in the PIS and COFINS calculation bases is unconstitutional, are also expected. After years of being processed in the judiciary, the matter was judged by the Supreme Federal Court, with binding effects, at the beginning of 2017. At the moment, there is an appeal from the National Treasury (motion for clarification) pending, in an effort to mitigate the decision's effect on public coffers.
With regard to this, the Brazilian IRS published a normative in which it affirmed that, for taxpayers who have a res judicata decision on the subject, the ICMS value to be excluded from the calculation bases of PIS and COFINS is the one effectively collected, not the one indicated in the invoice.
In fact, the position taken by the Brazilian IRS represents a reduction in the ICMS amount to be excluded from the calculation bases of PIS and COFINS, since the portion paid at each stage, reduced by the amounts collected in previous stages, is lower than the ICMS indicated in the sale invoice of the product. This understanding will generate new questioning by taxpayers since, in our view, it is contrary to the verdict rendered by the Supreme Federal Court.
ICMS – criminal repercussions
One of the judgments that will be passed in 2019 by the Supreme Federal Court and that will cause great repercussions to Brazilian taxpayers arises from a discussion that originated in criminal law.
The Supreme Federal Court will decide whether or not the non-collection of ICMS (state tax levied on operations for the circulation of products), declared by the taxpayer to the tax authorities, constitutes a crime of misappropriation.
The subject to be judged by the Supreme Federal Court originates in the fact that ICMS, as well as other taxes levied over consumption, has its cost transferred to the consumer of the product sold. Taking that into account, the Public Prosecution office argues that, by "transferring" the financial charge of the tax to the consumer, without collecting it for the tax authorities, the manager of a company is involved in the crime of misappropriation. This was the position adopted by the Superior Court of Justice when analysing the subject in 2018.
Taxpayers, in turn, maintain that in such a case, there is no misappropriation, as the purchaser of the goods or product does not have any tax obligation to the tax authorities. Therefore, this would be a mere transfer of ICMS financial burden, as it occurs for other costs supported by the company, such as rent, wages, etc. From this perspective, by failing to collect the ICMS levied on a sale, the company would be incurring a mere tax default, without any criminal repercussions.
The decision to be taken by the Supreme Federal Court will certainly have an impact on several sectors of the economy, also influencing tax-planning strategies and the tax management of companies.
ICMS – tax substitution
A high number of taxpayers are also affected by the tax charged under the regime of tax substitution, which is a differentiated tax collection technique applied to certain products (such as medication, fuel, some types of beverages, construction materials and auto parts), in which the ICMS due by the retailer is collected in advance at the previous stage of the economic chain.
In 2016, the Supreme Federal Court recognised the right that the taxpayer substituted in the economic chain (ie, the retailer that sells the products to the end consumer subject to the tax substitution regime) has to be refunded part of the advanced ICMS value, in cases where the product was sold for a smaller amount than presumed for the purposes of advance payment of the tax.
However, since then the tax authorities in several Brazilian states have imposed obstacles and illegal restrictions to the exercise of such right by taxpayers. Among such restrictive measures adopted by tax authorities is the requirement (even retroactively) for complementation of ICMS when the product is sold for an amount exceeding the expected price, even if such obligation was/is not provided by law.
Debates on this subject are ongoing, mainly due to the large impact the matter has on both taxpayers and the states involved.
The signs are that the tax authorities shall continue to inspect the activities of taxpayers, and it is predicted that new notices of infraction will be issued affecting not only those that, in the understanding of the Brazilian IRS, failed to collect the amounts due, but also legal entities, managers or even other companies belonging to the same economic group.
The changes in the administrative council (CARF) may also indicate changes in the court's case law, a fact that has already been verified, especially after the Zelotes Operation.
The judicial courts will be the certain destination of the administrative procedures closed at CARF that are unfavourable to taxpayers. Moreover, the intense culture of judicialisation of tax matters leads us to assume that the number of lawsuits will also grow throughout 2019.
There is a lot to be decided in the superior courts, both in relation to new tax subjects – there are countless matters pendingat the Superior Court of Justice and in the Supreme Federal Court – and in relation to matters that have already been adjudicated, but not definitively closed, which will have a large impact on companies. Examples of this are the discussions about the exclusion of ICMS from the calculation bases of PIS and COFINS, and on the definition of the concept of input for these same taxes.
The new government, in turn, has a tax reform project on its agenda, which, even if it does not settle past disputes, may help counteract the judicialisation culture, bring greater stability to the tax environment in the country and, finally, contribute to much-needed Brazilian economic growth.
Al. Joaquim Eugenio de Lima, 447
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+55 11 3147 7600www.mattosfilho.com.br