Since the reform of the Administrative Council of Fiscal Resources (CARF) earlier in 2016, we have noticed a clear change of position in the “new CARF” regarding the tax treatment of goodwill resulting from the privatisation processes. Only a few years ago, many decisions were being found in favour of the taxpayers, but now many are being decided in the opposite way, i.e. against taxpayers.

For the period between 2010 and 2013, within the scope of the Regular Chambers, the jurisprudence of the CARF was set through the validation of goodwill from privatisations through a number of cases (see table).

During this three-year period, the decisions delivered by the administrative ruling body were, in the overwhelming majority, favourable to the taxpayers. Therefore, independently of the use special-purpose entities (SPEs) or the transferring of goodwill to a company outside the economic group, the CARF issued decisions by validating the taxpayer’s records and the transaction and, consequently, its tax depreciation.

However, at the time, the position of the Upper Chamber of Tax Appeals (CSRF) was still completely unknown in some of the cases mentioned in the table and its decisions were, unfortunately, unfavourable to the taxpayer. In early 2016, in the hearing of the special appeals filed by the Federal Union in the Cosern and Celpe cases, the position of the CSRF became known.

The Cosern and Celpe cases delivered by the CARF

When the Regular Chambers of the CARF were hearing these two emblematic cases of Cosern and Celpe, the court referred to the judgment in the Santander case (ruling number 1402-00.802).

The Regular Chambers analysed what they described as the three basic authorising assumptions for determining the tax depreciation of financial goodwill, as follows:

·         The effective payment of the total cost of the acquisition, including goodwill;

·         The carrying out of the original transactions between unrelated parties; and

·         Proof of a proper evaluation of the acquired company, including its profit forecast.

With these assumptions evidently fulfilled in the cases of acquisitions in privatisations, the panels in both cases – but especially in the Cosern case – recognised the demonstration of the business purpose.

In the Celpe case, the vote of the reporting judge in the ruling delivered by the Regular Chambers affirmed that because it was impossible for Celpe to incorporate the parent companies due to administrative and corporate issues, there was no impediment to creating new companies in order to make the tax depreciation feasible (p. 51 of ruling number 1201-00.689).

In this sense, the two rulings recognised that in the moment the title of the acquired stock was transferred, accompanied by the goodwill underlying them, to a third-party company to the economic group (the SPE), then the latter (the SPE) would become the real acquirer of such assets, making possible the legitimate tax utilisation of the goodwill after the acquisition transaction is complete.

If no defects are found in the generation of the goodwill, because of the existence of effective payment and a legitimate evaluation report including a demonstration of the profit forecast, the tax depreciation cannot be questioned based on the suitability to apply tax legislation.

The CSRF’s rulings in Cosern and Celpe

The CSRF’s decision in Cosern and Celpe was substantially different to the judgment of the Regular Chambers.

Looking at the main foundations of the CSRF’s decisions, the validity of the formation of the goodwill was not enough to authorise its tax depreciation. The CSRF examined the corporate aspects involved in the transaction, looking at, above all, the utilisation of the SPE and the corporate acquisition without the participation of the original acquiring party.

In the Cosern and Celpe cases, it decided that tax utilisation of goodwill could only occur when the original investor and investee transform into a single entity. The tax norm would be restricted to the originating corporate investor, the one that creates the added-value of the investment through research into profit forecasts and disbursing the resources for the acquisition to the corporate investee, which gave rise to the acquisition.

The restriction to the tax utilisation of goodwill in transactions involving the original investee and investor is unquestionably the central point of both the decisions delivered by the CSRF.

This limiting point of view does not allow, for example, the transfer of goodwill originally registered by the investor to another corporate entity within the economic group and its subsequent tax depreciation, nor does it allow the utilisation of a SPE for the acquisition.

This being the case, the essential question that arose within the scope of the CSRF’s decision concerned the impossibility of having a corporate structure with filed corporate entities (SPEs) for the tax utilisation of goodwill; or the transfer of this asset to another company within the economic group, which would preclude an acquisition transaction between the original investor and investee.

The companies have appealed the decisions by filing an “Embargos de declaração” (a declaration of embargoes).

Conclusions

The controversial decisions delivered by the CSRF are a cause for significant concern on the part of corporate entities because of the fact that they reflect, not only on further privatisation cases, but also on those that discuss depreciation of goodwill resulting from private transactions, seeing as the applicable tax legislation and concepts are the same.

In fact, in the majority of the tax assessments, the collection of the tax depreciation of goodwill is based on the use of a SPE, or on the transfer of the goodwill to a third party company of the economic group, which are precisely the points faced by the CSRF and characterised as prohibitive for the deduction.

We note that this jurisprudential tendency has already been reflected in the bases for new tax assessments before the CARF. Contemporary checking procedures have pursued the disqualification of the original investor and/or investee and the identification of supposed SPEs in order to replicate the understanding delivered by the CSRF. This means that taxpayers are unlikely to win cases in the CARF that relate to goodwill amortisation when privatising a business.

Ana Paula S Lui Barreto represents clients in administrative proceedings involving complex tax disputes before the Brazilian Federal Administrative Tribunals. She has successfully argued against federal tax authorities assessments and she has extensive experience in presenting oral arguments before the CARF.