Brazil: Partner and manager tax liabilities and the position of the Administrative Tax Appeals Council
When Brazilian tax auditors intend to hold third parties liable for a legal entity's tax debts, they issue a notice of joint tax liability (Termo de Sujeição Passiva Solidária) to the company's partners. In some cases, the notice will simply set out the name of the partner or manager and give notice of the assessment of taxes against the company, "for the purposes of article 135 of the National Tax Code". The usual explanation is that a notice of joint tax liability will be issued to partners responsible for the management of a company whenever the tax assessment includes the increased fine that the tax authorities will impose when they believe that fraud was committed.
According to article 135(III) of the National Tax Code (Código Tributário Nacional), a legal entity's officers, managers and legal representatives cannot be held personally liable for the entity's tax debts unless they exceed their management powers, or act contrary to law.
Nonetheless, the tax authorities have issued notices of joint tax liability against partners and managers even in the absence of any proof that they acted outside their corporate powers or contrary to the law or the company's bylaws or articles of association. This arbitrariness in seeking to impose personal liability on partners and managers undermines their right to a full defence, as Brazil's highest court on non-constitutional matters, the Superior Court of Justice (Superior Tribunal de Justiça) itself has found.
It is well-settled in Brazilian law that the expression "contrary to law, or the company's bylaws or articles of association" contained in article 135 of the National Tax Code means that partners and managers are not always liable for tax debts owed by their company. The simple fact that tax was not paid does not constitute a violation of the law or the company's incorporating instruments: it must be shown that the manager personally benefited from the failure to pay, or dissolved the company in an irregular manner, before the manager can be held personally liable for the company's tax debts.
Given the individual nature of the legal requirements for imposition of personal liability, clearly there must be proof that an offending act has been committed, and the burden of proving that act falls on the tax authorities. It is entirely unacceptable for the tax authorities to attempt to transfer the corporate taxpayer's liability to the company's managers without a proper investigation into whether the managers have engaged in conduct that constitutes a prerequisite for such a migration of liability.
Put another way, a unilateral assertion by tax authorities, on assessing taxes, that the taxpayer's managers or partners are liable for the assessed tax is a practice that finds no support in applicable legislation and regulations because it undermines the constitutionally-guaranteed right to a full defence.
Under Brazilian law, tax authorities have the power to seek out the truth of the facts when conducting tax audits and issuing tax assessments and penalties, and they are entitled to use all types of evidence to demonstrate failure to comply with tax obligations.
Equally, tax authorities have a corresponding duty to justify, giving good reason, all the administrative acts they are empowered to perform. This duty of the Treasury is imposed by the highest source of law, the Constitution of the Federative Republic of Brazil, as a corollary of the principle of legality and the related principle that legislation which imposes taxes must be clear and complete as to the application and calculation of the tax, leaving no margin for discretion on the part of the tax authorities. The duty therefore arises out of the Constitution itself (article 5(II) and (XXXIX), article 37, and article 93(X)): it is not a simple procedural burden that falls on one of the parties to a dispute. Indeed, legal scholars agree that the administration's obligation to give the reasons for its acts precedes even the existence of any possible dispute between an administrative authority and those subject to its jurisdiction.
In effect, failure to fulfil the legal duty of giving reasons for an administrative act – specifically, the attempt to impose liability on third parties without good evidence to support the attempt – must result in the annulment of the notice of joint tax liability.
All notices of assessment contain a statement of the grounds for assessment: the occurrence of a taxable event (article 142 of the National Tax Code). But in addition to the grounds, the notice must contain the reasons that justify the assessment; in other words, a demonstration that the taxable event occurred.
The reasons for assessment must be based in evidence. There is no room for presumption, because it is in the reasons for assessment that the ground for the assessment is effectively shown to exist. In short, the administrative authority has the obligation to prove the grounds for assessment.
When a notice of joint tax liability is issued against a partner-manager and the tax auditor fails to provide proof of any infraction by the partner-manager, the assessment has no factual grounds to support it. Without evidence that the manager engaged in fraud or perpetrated a sham, contrary to the law or the company's incorporating instruments, without any attempt to show fraudulent management of the company, tax authorities cannot purport to impose liability on the company's management. Lifting the corporate veil is not something to be undertaken lightly, not just because of the consequences for the company's management and owners but also, and more importantly, for its repercussions on the country's economy.
Although there are some decisions that, unhappily, reinforce the errors committed by tax auditors when issuing notices of joint liability, there are many decisions by the Administrative Tax Appeals Council (CARF – Conselho Administrativo de Recursos Fiscais) – a majority, in fact – that refuse to allow liability to be imposed on partner-managers unless sufficient evidence to support the transfer of liability can be extracted from the record of the proceeding.
The basis for CARF's majority position is that liability cannot be imposed on a third party, pursuant to article 128 of the National Tax Code, unless there is proof to link the third party to the event that gave rise to the tax obligation. Furthermore, article 135(III) of the National Tax Code cannot be applied unless the tax authorities clearly demonstrate that the tax obligations results from acts performed by the partners in excess of their powers or contrary to the law or the company's bylaws or articles of association.
Another important point is that tax auditors cannot attempt to base the personal liability of managers indiscriminately on article 124 or 135 of the National Tax Code because the two provisions start from entirely different premises: the first provides for joint liability between the corporate taxpayer and the third party, while the second deals with the transfer of liability from the taxpayer to the third party.
The attempt to apply both article 124 and article 135 at the same time, without any proof that the requirements of either provision have been met, is in itself ample demonstration of the errors sometimes made in issuing notices of joint liability.
In fact, article 135 of the National Tax Code provides for personal, exclusive liability, such that on transfer of liability for the tax debt to the third party, the claim against the original taxpayer ceases to exist.
In other words, it is not possible to demand payment of taxes from both the company and its managers on the basis of article 135(III) of the National Tax Code: this provision applies when managers act to their own benefit, against the interests of the company they represent.
Mauricio Pereira Faro Barbosa Müssnich & Aragão – Taxand