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The effects of Brazil’s recently published Law No. 13.655/2018 and tax legal safety

30 July 2018

ITR Correspondent

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The Brazilian tax system is broadly recognised as complex a result of several different taxes levied on similar tax bases, different levels of taxation and legislations imposed at national, state and municipal level, and high rates affecting products and corporate transactions.

Consequently, tax controversy plays an important role for almost all companies located in Brazil, which usually suffer assessments by the Federal Revenue Service and have to discuss it through long years and in many different instances at the administrative and judicial levels. In April 2018, President of the Tax Administrative Court (CARF) Adriana Gomes Rego said the BRL600 billion ($161 billion) is under discussion before the CARF. Considering that the CARF only appreciates federal taxes under discussion in the administrative level, it is easy to deduce that, overall, tax litigation in Brazil has even more significant amounts involved.

In face of that instability, it worth mentioning that the Federal Constitution (Article 5, XXXVI) establishes legal safety, determining the protection of acquired rights, "perfect legal acts" and situations already judged (decisions rendered final). Specifically in the tax sphere, legal safety is also guaranteed by the article 146 of the National Tax Code, which states that new criteria the tax authorities use for assessments can only be reached following tax events, never returning to affect previous acts.

Despite those norms, however, it is clear that tax legal safety has not been really protected in Brazil. Tax authorities commonly change their opinions, imposing different tax assessments, with qualified penalties, and can hold legal representatives and shareholders responsible for tax matters.

Fortunately, in April 2017 Law No. 13.655/2018 was published, bringing relevant changes in Brazilian legislation, especially for tax legal safety and in the efficient creation and application of public law.

Decree-Law No. 4.657/1942 (named the introduction law for the Brazilian legal norms) is extensively applicable across Brazilian legislation once it establishes some rules that serve as basis for the interpretation and application of other norms, such as vacation legis, the effects of legislative modifications to prior facts, the enforcement of the law, etc. In that sense, Law No. 13.655/2018 added some articles to Decree-Law No. 4.657/1942 in order to impose some imperative commands that public authorities must pursue.

According to Article 1° of the Law No. 13.655/2018 (included Article 24 to Decree-Law No. 4.657/1942), decisions in the administrative and judicial spheres regarding the legality of acts, contracts, proceedings or administrative norms have to take into consideration the "general orientations" of the time in which they were produced, avoiding ulterior new orientations reflecting on previous acts.

The only subsection of that article states that "general orientation" should be understood as the interpretation contained in general public acts, majority administrative and judicial precedents, as well as those widely known repeated practices of the authorities.

Moreover, Article 1° of Law No. 13.655/2018, which includes Article 30 to Decree-Law No. 4.657/1942, establishes that public authorities must pursue the increase of the legal safety in the application of the norms, as launching summaries of discussions and overviews of its opinions.

It is clear, therefore, that Law No. 13.655/2018 represents a huge advance for all Brazilian legislation when safeguarding taxpayers is concerned, given that the "introduction law for the Brazilian legal norms" has unlimited scope and is also applied as a basic rule for the tax legislation.

In respect of the cases under discussion before the CARF, there are several subjects in which the tax authorities have changed recently their understanding and, while some tax behaviours were allowed previously, later they were disqualified by the tax authorities and taxes were charged with qualified penalties with individuals (shareholders/directors) held responsible for the tax assessments.

As an example, since 1997 Law No. 9.532 has stated that taxpayers that acquire other companies with goodwill may use it as a form to reduce their Income Tax ("IRPJ"). Those transactions were broadly used during privatisations of public companies in Brazil.

For many years, the administrative jurisprudence ruled the right to deduce the goodwill was related to transactions involving companies from different economic groups, in which the goodwill was effectively paid in cash, even though the incorporation was allowed through a company constituted specifically for that (conduit companies). This was a common transaction during privatisations.

In general, the understanding of the CARF has changed and the tax authorities have ruled unfavourably on goodwill amortisation related to privatisation transactions, even when taxpayers fulfilled those previously accepted requirements.

While some foreign investors were attracted to the Brazilian market with the tax benefits of the goodwill deduction based on Law No. 9.532/1997, in which the prevailing jurisprudence was favourable to them, later those companies were surprised with the CARF’s new understanding, that maintained huge amounts of taxes as well as penalties at the rate of 150% and personal responsibility of its shareholders and directors. In other words, the taxpayers have been penalised based on similar arguments that, initially, were entirely favourable to them.

Another example of tax uncertainty in Brazil relates to the thesis named "CSLL – trânsito". Several Brazilian companies filed lawsuits in the 1990s casting doubts on the enforceability of social contribution on net income (CSLL) established by Law No. 7.689/88, which was declared unconstitutional by several judges in individual lawsuits (decisions rendered final). Thus, taxpayers have not been obliged to collect CSLL since then.

Besides the individual decisions, aftermost the Supreme Court ruled the CSLL constitutional, as stated by the Direct Unconstitutionality Action No. 15 (June 2007). The taxpayers then faced a new instability, once many of them were not collecting CSLL. The discussion remained focused on what decision should take precedence: the individual one (to not collect CSLL) or the general issued by the Supreme Court (which ruled the law constitutional and requires the taxpayers to pay CSLL).

For many years, the CARF (including its highest council of appeals) followed the Superior Court of Appeals (STJ) in order to accept the individual decisions and to cancel the tax assessments intending to collect CSLL. However, lately we have seen that the Administrative Court has changed its understanding to maintain the tax assessment of those taxpayers who were benefited with individual decisions rendered final in order not to collect CSLL. Once again, the CARF changed its prevailing jurisprudence affecting previous facts, which causes more tax uncertainty.

In light of that context, Law No. 13.655/2018 comes to protect the taxpayers against those changes in the jurisprudence, especially when transactions were structured in accordance with the majority understanding at the time, but posteriorly the Courts modify it. As exposed above, unfortunately this a regular situation in Brazil. The attorneys of the Federal Revenue Service have been required by CARF to launch its opinion regarding the effects of Law No. 13.655/2018, which remains pending.

Be that as it may, taxpayers have the right to be ruled based on the prevalent jurisprudence applicable during its facts. Assessments in discordance with the prevailing decisions of the time when the facts occurred (in general, adding qualified penalties and personal responsibility) reveal a certain unfair procedure.

We expect that, collectively, the administrative and judiciary tax courts, not only the CARF, will apply the rules provided by the Law No. 13.655/2018 to secure tax legal safety as already established by Federal Constitution and the National Tax Code.

This article was written by Ana Paula Lui and Rafhael Romero Bentos, partner and associate respectively at Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados






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