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Brazil: Free enterprise and tax planning

The enactment of Provisional Measure (MP) 685 on July 21 2015, which obliges companies to reveal to the tax authorities transactions that result in the suspension, reduction or deferral of taxes, represents an unfortunate chapter of Brazil’s fiscal history, argues Julio de Oliveira of Machado Associados.

The Brazilian Executive Branch appears to some extent to be in disarray, and its tax collection agency is acquiring Herculean strength. The question that remains is: why?

Those who cherish individual liberty will feel anxious by the government’s disposition towards the relationship between the tax-collecting state and the taxpayer.

The official discourse – when treating the matter as an improvement of tax transparency or as a reduction of litigation – sounds ambiguous. The argument concerning the reduction of litigation between the tax authorities and the companies sounds almost like a Kafkaesque speech.

All of a sudden, I wake up, and I am being sued, but I do not even have a right to know for what crime! The tax crime is assumed according to broad strokes that depend on the absolute interpretation of the tax collection agencies: indirect legal business; extraneous tax reasons; unusual form; disfeaturing contract clause; or a prohibitive list of transactions drawn up beforehand by the tax-collecting agency without public process and not provided for by law.

It should be further noted that the provision of article 12 of the MP, which creates another type of criminal tax evasion (willful failure to deliver the statement of all transactions involving legal acts or transactions that entail suspension, reduction or deferral of taxes, or ineffectiveness of such statement) seems to be inherently unconstitutional, because the Brazilian Federal Supreme Court (STF) has already ruled that criminal legal rules that arise out of provisional measures are unconstitutional – for example, the ruling on Extraordinary Appeal 254.818.

In this context, should the remedy against article 7 of such MP – clearly a self-incriminating clause, related to the obligation of the individual to produce evidence (against itself) of acts that may not be accepted by the tax authorities for tax planning purposes, and further considering the effects of article 12 (presumed evasion by willful omission or omission or commission error) – be a Writ of Mandamus, a Habeas Corpus, or both?

Given the heavy nature of the fines that would be incurred (150%), the disclosures a taxpayer must make are governed by language that seems too ambiguous to accurately comply with.

For example, a taxpayer is required to declare:

  • Legal acts or transactions without relevant extraneous tax reasons;

  • Indirect legal business or contract with disfeaturing contract clause; and

  • Legal acts or transactions prohibited by the Brazilian Federal Revenue Service in non-statutory act, and a procedure not provided for in any law.

There are limits to the silence of those who respect the democratic institutions. Article 7 combined with article 12 of the MP could violate the Brazilian Federal Constitution (CF) by allowing for the creation of open concepts of prohibition and the creation of a list of prohibited transactions/businesses without legal provision.

There are also questions over the apparent mismatch between the aforementioned provisions and the foundations of the Democratic State of Law, namely:

  • The principle of free enterprise, the cornerstone of which is found in article 1, IV, of the Federal Constitution (CF);

  • The principle of legality, included in article 5, II, and article 150, I, both of the CF;

  • The principle against self-incrimination, provided for in article 5, LXIII, of the CF;

  • The principle of presumption of innocence, set forth in article 5, LVII, of the CF; and

  • The criminal vagueness doctrine (article 5, XXXIX, of the CF) and tax vagueness doctrine (article 150, I, of the CF).

The path to create a Republican anti-avoidance rule and/or a rule that allows the taxpayer to open its information should, in our view, go through a bill of law discussed in public hearings — without the advanced criminalisation of corporate practices — with the creation of a public and voluntary space for discussion between the government and the private sector.

If the state intends to import tax transparency models from the OECD or from other countries, it should do so within the molds of such systems, based on a respectful relationship without threats. The pursuit of dialogue, or of the creation of an area of tax transparency, or of the decrease of litigation between tax authorities and taxpayers, does not communicate with the prior application of onerous penalties, either in the civil or the criminal scope.

The dialogue must be accompanied by the breaking of the paradigm that exists between the authorities and the tax evader. When another tax evasion figure is created, the taxpayer is not invited into the dialogue, but rather a gap is created between the authorities and the institutions representing the citizen-taxpayer.

If the state wants to show its strength, it must also show that it is legitimate, acting within constitutional guarantees and the constitutional limitations of the taxing power.

Finally, if the state wants to expand the transparency and the dialogue with the private sector, it should choose a path without traps.

Júlio M de Oliveira ( is partner of Machado Associados’ indirect tax team.

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