Doing Business in Brazil – Certain Tax Aspects
Apr 29, 2015
QuickCounsel
By Cristiano R. Carvalho, member of the Instituto de Estudos Tributários – IET
Overview
Brazil is in full economic crisis, technically already in recession. In 2014, gross domestic product achieved growth of only 0.2% and inflation
exceeded 6% per year
Moreover, as the government failed to meet the primary fiscal surplus target, spending much more than it earned, it proposed and managed to change
the budget law, deducting, beyond the limit, tax exemptions and investments in infrastructure (Investment Acceleration Program).
Thus, change the rules of the game was the only way to prevent that the President of the Republic be implicated in fiscal responsibility crime, but
denotes the fragility in which the administration of the current government is found.
The government tax measures to deal with the economic crisis With the re-election of the President at the end of 2014, the economic team was remodeled, bringing to the Ministry of Economy Joaquim Levy,
executive of one of the largest Brazilian banks, PhD from the Chicago School of Economics and with experience in previous governments.
The immediate solution to generate revenue for the State and to adjust public accounts, as per usual, was to increase taxes and to revoke certain tax
benefits.
Among such measures, it is important highlight that social contributions of PIS and COFINS on imports were increased (9, 75% to 11.25%), as well
as the tax on financial transactions (from 1.5% to 3%), and PIS and COFINS and Contribution of Intervention in the Economic Domain (CIDE) on
fuels (gasoline and diesel). What is most troubling, however, is not the marginal increase of some taxes, but other less democratic measures that have
been considered by the government, especially with regards to administrative tax proceeding.
The impact of the economic crisis on Administrative Tax Disputes The most influential administrative court in Brazil is the Administrative Council of Tax Appeals - CARF, responsible for trying disputes relating to
federal taxes, for natural persons and legal entities, gathering cases that reach trillions of reais. These proceedings are the result of deficiency notices
issued by the Federal Revenue Service against taxpayers that, by virtue of due process of law, have the right to a defense.
If taxpayers obtain a favorable judgment before CARF, or in some cases, in the last instance (Higher Chamber of Tax Appeals), is no longer possible
for the government to charge such tax. One of the reasons for this is that the administrative court belongs to the Federal Revenue Service, i.e. it is the
essentially the same entity. Considering that the administrative court has the power to control the assessments made by the tax authority.
If, however, it ruled in favor of the taxpayer, then another section of the Federal Revenue Service would not be able to oppose such ruling and
continue to charge such tax. In other words, it would be as if the Federal Revenue Service were litigating against itself, contradicting its own
decisions. The opposite is not true, because even when defeated in the administrative court, the taxpayer may still submit the case for review by the
Judiciary.
Considering that the federal government will need to further increase its already gigantic tax collection, not only tax authorities will further prosecute
companies, but CARF itself should be inclined to rule against taxpayers. This is due to the fact that, even though CARF is a joint body composed by
both Federal Revenue representatives and representatives of taxpayers, CARF trial panels are chaired by a member of the Federal Revenue, whose
casting vote is usually favorable to the Treasury.
Mr. Levy appointed Mr. Carlos Barreto as CARF's new President even after he made controversial statements in a recent press conference, declaring
that his mission will be to increase Treasury wins in court, in order to generate more revenue for the government. The controversial tone is due to the
fact that the President of a court must always be impartial, even if coming from the Treasury.
III – An briefly analysis of the Constitutional and Legal Taxation System The Brazilian Constitution places due process as one of the fundamental
rights of the individual and affords the same guarantees to both administrative and judicial proceedings. Such statement, therefore, directly infringes
on the principle of due process, indicating that the most important decisions will be biased or that there will be unfair favoritism for the government.
Even though the taxpayer may still seek jurisdictional protection, valuable resources will be wasted if such cases are presented before Courts when
they could be closed in CARF. It is essential that the court is fair and impartial and that it rules in favor of who is right, whether that is the tax
authorities or the taxpayer.
In Brazil, the standard general anti avoidance rule has its peculiarities. It so happens that, as it was tentatively by means of an amendment to the
National Tax Code in 2001, lawmakers incurred in two problems.
The following is a transcript of Article 116, sole paragraph of the Code:
The administrative authority may disregard acts or legal transactions executed for the purpose of concealing the occurrence of the taxable event
or the nature of the elements that constitute the tax liability, subject to the procedures to be established in statutory law.
The first, less serious, is to condition the effectiveness of the rule to the subsequent creation of a specific law stipulating all the criteria and conditions
that would allow the tax authority to disregard legal transactions seeking to accomplish abusive tax planning, in concrete cases. In order to preserve
legal certainty and the freedom to conduct transactions with lower tax costs, it is necessary to establish limits to the discretion of the tax agent.
However, the law stipulating these criteria has not been created until this day, which prevents the effectiveness of the general anti avoidance rule.
The second, more serious, is in the very wording article. With the use of the word "concealing" to the occurrence of the taxable event, lawmakers
clearly refer to tax evasion and not to tax avoidance. As such, there is incurrence in mere bis in idem, considering that evasion was always prohibited,
punishable not only by tax laws but also by the criminal law.
However, even with the serious semantic error and the lack of effectiveness of the anti-avoidance rule, tax authorities have sought to apply it in a
disguised form, appealing to the concept of simulation in civil law, i.e., falsehoods in performance of legal transactions with the intent to circumvent
taxes. And these assessments ultimately become cases to be ruled by CARF, which, as we have seen, tends to become increasingly against the
taxpayer. Therefore, additional care should be taken by companies when practicing tax planning, in order to maintain substance and purpose in the
business such companies undertake, even if for the purpose of economizing taxes.
Conclusion
Even with this turbulent economic environment, it is important to remember that Brazil has a market of great proportions, being the seventh economy
in the world, ahead of France and the UK, with almost 200 million inhabitants and, despite the crisis, with stable currency. In addition, thanks to the
purchasing power strengthened as a consequence of currency stability obtained 20 years ago, with the creation of the Real Plan, there is a strong and
repressed demand on the part of millions of Brazilians for consumer goods that have been extremely common in developed countries for decades.
Therefore, it is an attractive market for foreign investment, but whose legal system, especially taxation, requires caution.
In this regard, efforts should be redoubled to avoid tax assessments, and, therefore, careful and preventive tax planning should be the main focus of
tax attorneys for years to come. It should be noted, however, that the global trend is a recrudescence to the so called aggressive tax planning, with the
emergence of general anti avoidance rules in most countries. These rules, usually legislated in the form of general clauses that allow for a good
margin of discretion to tax agents in assessing the integrity of business transactions, apply indeterminate concepts such as "substance over form",
"business purpose" and "abuse of legal forms" to disregard structures undertaken by the taxpayer for the purpose of tax avoidance.
Additional Resources
Tax adjustments as a tool of macroeconomic policy
http://www.internationaltaxreview.com/Article/3348419/Tax-adjustments-as-a-tool-of-macroeconomic-policy.html
Brazil's Crash Landing: Corruption Engulfs Petrobras Amid Economic Contraction And Rising Inflation
http://www.forbes.com/sites/afontevecchia/2015/03/10/brazils-crash-landing-corruption-engulfs-petrobras-as-dilma-rousseffs-leadership-falters/
Brazilian Central Bank (Inflation Report released - March 2015) http://www.bcb.gov.br/?english
Overview on Federal Administrative Tax Disputes in Brazil – Part I
http://www.acc.com/legalresources/quickcounsel/federal-administrative-tax-disputes-in-brazil.cfm
Overview on Federal Administrative Tax Disputes in Brazil - Part II
http://www.acc.com/legalresources/quickcounsel/fed-administrative-tax-disputes-brazil-ii.cfm
About the Author
Cristiano R. Carvalho, Professorship in Tax Lax, University of São Paulo, Senior Visiting Scholar, University of California at Berkeley, Law School.
Senior Partner, CMTED- Carvalho, Machado, Timm & Deffenti Advogados, Brasil. E-mail: [email protected]
http://www.acc.com/legalresources/quickcounsel/certain-tax-aspects-of-doing-business-in-brazil.cfm