Brazil addresses the establishment of joint and several tax liability
Brazil's tax authorities may now establish liability of third parties before court judgement. Mattos Filho's Ana Paula S. Lui Barreto and Leonardo Fernandes Rebello discuss the impact to third parties and their defence.
Brazil’s Federal Revenue Office published normative instruction No. 1862 on December 28 2018, addressing the procedure for the establishment of joint and several tax responsibility, the situation where a taxpayer and third party may be jointly and severally liable for a tax obligation.
Among the novelties addressed, those related to the moment and procedure deserve more attention. According to the normative text, the tax authorities may now establish liability of third parties before judgment by the first instance and once the administrative proceeding is concluded, as well as in cases discussing tax compensation claims.
In this scenario, according to the text of the normative instruction, when the establishment of liability occurs during the tax administrative proceeding (before the first instance decision), and in cases of tax offsetting, the third parties may present their defenses according to the procedure established in Decree No. 70.235/72. In these cases, it is also possible to appeal to the Administrative Council of Tax Appeals (CARF).
In cases where such an establishment takes place after the conclusion of the tax administrative proceeding, the third party shall file a request for reconsideration to the same tax auditor who made the establishment. In case it is not upheld, the request may also be considered by the officer of the Internal Revenue Service unit and by the Regional Superintendent.
It is important to observe that these new procedures brought by the normative instruction challenge Article 142 of the Brazilian National Tax Code, which is express in assigning the tax authority to identify the taxpayer and the parties jointly and severally liable for the tax obligation through tax assessment notice (i.e not along or upon conclusion of the tax administrative procedure).
In cases where the establishment of liability is made after the conclusion of the tax administrative proceeding, and there is a clear violation of the right to contest, they will have to defend themselves through an internal procedure of the Brazilian Internal Revenue Service, and are not granted access to the procedure of Decree No. 70.235/72 (and to the judgment by the CARF, which is a technical and joint body council).
Notwithstanding the considerations, normative instruction No. 1862/2018 also set forth provisions aimed at assigning more transparency to the taxpayers and to the administrative and judging authorities regarding the procedure for the establishment of joint and several tax liability.
As noted in Article 1, the Brazilian Internal Revenue Service explains that the tax liability established to a third party, who is not a taxpayer nor a tax substitute, presupposes the existence of a specific rule, and is different from the one that gives rise to the tax.
Furthermore, the normative opinion clarifies the requirements that must be included in the tax assessment notice in order to establish tax liability. These are qualification of the third party, description of the facts that give rise to the establishment of liability, and the legal classification and the delimitation of the tax credit to be ascribed to the responsible party.
In conclusion, the new rules regarding the establishment of joint and several tax liability after the issuance of the tax assessment notice, especially after the conclusion of the tax administrative proceeding, deserve attention since they challenge Article 142 of the Brazilian National Tax Code, and the right to contestation and a full defense of the responsible third parties.
On the other hand, it has also brought new rules that should assign more certainty regarding the procedure of establishing tax liability.
Ana Paula S. Lui Barreto
Leonardo Fernandes Rebello
This article was written by Ana Paula S. Lui Barreto and Leonardo Fernandes Rebello of Mattos Filho.