Analysis of the limits of tax planning can be divided into two streams:
· The traditional, which assesses the validity of planning based on the lawfulness or unlawfulness of the act (negative limits of conduct – lawfulness of acts); and
· The current flow, which asserts the existence of additional constraints to the tax planning structures, generically called business purpose (positive limits of conduct).
In essence, the traditional stream assumes that the taxpayer who carries out a certain transaction has the right to choose the alternative that implies the lower tax cost. This right is based on the taxpayers’ unlimited freedom to organise their businesses as assured by several constitutional principles.
Therefore, if the taxpayer structures its operations in the most tax efficient manner, within the applicable legal constraints, the exercise of this right should be accepted as legal tax planning by the authorities.
In the recent past, the administrative courts were firmly adopting the line of reasoning above, and grounded decisions mostly in the principle of legality, which is an analysis exclusively based upon the formality required by law.
Nevertheless, lately, a few scholars have been debating the applicability of the principle of legality, preaching in favour of a new flow, which supports the use of the substance over form doctrine in Brazil, under which the legal form of a transaction is ignored and taxation is levied in accordance with the economic substance.
These scholars have also defended the so-called “abuse of law” doctrine, under which the intention of the legislator would be meant to prevail over the actual form of a transaction. So if a certain transaction is arguably carried out with a certain degree of artificiality and abnormality in a tax avoidance context (motive), this transaction could be challenged by the tax authorities, since it presents certain evidence of not being consistent with its economic reality.
Based on these ideas and theories, the administrative courts seem to be reviewing the previous precedents mentioned. More recently, their decisions have been looking for the essence of the disputed transactions so as to find their business purpose, before accepting them (or not) as legal and legitimate.
Though it is early to anticipate the position to be adopted by the Brazilian administrative and judicial courts regarding this issue, it is important to keep in mind the necessity of business purpose when carrying out transactions that result in a reduction of the tax burden in Brazil.
By principal Tax Disputes correspondent for Brazil, Alessandro Amadeu da Fonseca (afonseca@mattosfilho.com.br), partner of Mattos Filho.
