Zealots is a new entry this year
Operação Zelotes, or Operation
Zealots, was a two-year police investigation into court
corruption in Brazil that resulted a complete closure and
overhaul of the tax courts, with the ramifications still being
felt today. While the police investigation ran from 2013 to
2015, its aftermath has been felt most keenly by taxpayers in
2016. Since the courts reopened, they are far more likely to
find in favour of the tax authorities.
More than 70 companies – some of which were named
in 2015 – were investigated under the suspicion that
they had paid bribes to Brazil's Administrative Council of Tax
Appeals (Conselho Administritivo de Recursos Fiscais,
or Carf) to reduce, or avoid, fines for tax evasion.
A spokesperson for the Ministry of Finance told
International Tax Review earlier this year
that "the Carf is investing in the restructuring and
improvement of its work processes, with a focus on governance,
integrity and transparency".
After the investigation was concluded, the Ministry of
Finance, in June 2015, reduced the number of Carf courts from
36 to 13 and reduced the number of judges from 216 to 160.
Judges were also offered a salary ($3,600) for the first
Half of the judges in Brazil's tax courts are appointed by
the tax authorities, with the other half appointed by
taxpayers. Once these changes were confirmed, the majority of
taxpayer-nominated judges resigned. This was because practicing
attorneys are not allowed to be appointed as judges due to the
potential for conflicts of interest, leading to a very
different makeup of judges at the Carf.
"As of December last year they had to replace the judges as
appointed by taxpayers," said Francisco Moreira, a tax partner
at CBSG. "So what we began to see was a number of law
professors, accounting professors, or independent consultants.
The profile of the judges has changed significantly."
This has contributed to a dramatic change in fortune for
companies trying to defend their tax cases at Carf courts. A
study by FGV Direito SP, a law school in São Paulo,
reviewed 1,409 decisions from December 2015 to June 30 2016.
During that period, the courts found in favour of the
authorities 68% of the time.
While some of this change was a result of lower levels of
corruption, advisers and companies feel that previously
winnable cases are no longer going their way due to a variety
of factors, including the different makeup and lower levels of
experience in the revamped judiciary, and public pressure to
see companies punished tax-wise due to anger at the scale of
corruption uncovered by Operation Zealots.
One area where the operation's effect has been felt
particularly keenly is in transfer pricing, specifically in the
use of the PRL60 method, on Brazil's resale price method, which
stems from a 2002 normative instruction. PRL60 imposed a fixed
margin of 60% rather than allowing for market margins, and
created a larger liability for taxpayers. Since December 2015,
the Carf has found more often on the side of an adjustment
based on the normative instruction – i.e. in favour of
the tax authorities.
For now, taxpayers can only hope that the swing in favour of
the tax authorities is temporary, and as a result of public
pressure on decisions in the wake of widespread corruption
"This is just the beginning and they [the judges] need to
provide the message to society that they are independent and
not biased toward taxpayers," said Moreira. "After the dust
settles down, the judges will begin to take only technical
aspects in favour and not the necessity of providing a message