How to manage a Brazilian tax dispute
Brazil’s complex tax legislation makes it difficult for companies to steer clear of disputes with the tax authorities. Depending on a taxpayer’s operations in Brazil, it may have to deal with different authorities at local, state, and federal levels.
International Tax Review interviews two of the country’s leading tax litigators – JúlioDe Oliveira, of Machado Associados, and Sergio Rocha, of Ernst & Young – to find out how taxpayers can minimise challenges from the tax authorities and better cope with disputes when they arise.
International Tax Review (ITR): What advice would you give to taxpayers about how to avoid a dispute with the Brazilian tax authorities?
Júlio De Oliveira (JDO) (pictured left): When structuring their business, companies should always have a tax law expert and plan their operations according to the various existing tax models. In addition, periodic reviews of tax procedures can prevent tax assessments or increase the chances of success of defences. The several taxes and their calculation and payment demand great caution and constant updating from companies.
In taxation on consumption alone there are many taxes, not to mention some of the most complex, such as the state value added tax (ICMS), which is different in the 26 states and Federal District; the excise tax (IPI); the Contribution for Social Integration Program/Contribution for the Social Security Funding (PIS/COFINS); the service tax (ISS) which has a tremendous number of municipalities and involves endless issues. The only way to avoid tax assessments or reduce the chances of their occurrence is to follow up the tax legislation and to periodically review the procedures adopted.
Sergio Rocha (SR): Taxpayers must take into account the tax implications of the company’s business at all times. It is quite common that the tax department is only involved in the analysis of a contract or the tax implications of a new business venture after the contract is signed or the new activity has been started. Whenever this happens there are big chances of future unintended and undesired tax consequences, which may lead to tax litigation.
Tax compliance, tax planning, tax structuring, and tax controversy need to be considered as different faces of one single activity. If the company is doing tax planning without considering the related administrative rulings and court decisions, or if it is not reporting its transactions properly, the chances of an assessment will be greater.
ITR: What is the first step a company should take when it becomes involved in a dispute with the Brazilian tax authorities?
SR: Besides the obvious analysis of the merits of the case, the first step is to consider the impact of the dispute in the company’s activities as a whole. Sometimes the company thinks about a tax dispute as an isolated event and this is clearly a mistake.
The impact of the dispute on the company’s capacity to obtain good standing certificates, the need of announcements to the market in the case of public companies, the need of a judicial deposit and the impact the dispute might have over negotiations with an investor are all important factors that the company needs to pay attention to. Not only the taxpayer needs to have all potential consequences in mind, sometimes these consequences will drive the definition of the strategy to be used in a certain case.
JDO: The first step is to involve the professionals who render tax services to the company. Also, the company employees in charge of dealing with the tax authorities must be previously trained. They must face the relationship with the tax authorities naturally and with professionalism. It is important to remember a lack of expertise may give authorities the wrong impression: that the company does not mind being assessed, or does not treat tax authorities with the respect they deserve.
It is common for companies to be more concerned about professional fees than about the tax assessment. If the matter of fees is important, then the companies should previously negotiate the engagement of such professionals based on amounts previously defined so they do not compromise the defence. It is worth noting that the authorities have a long time to assess companies and companies only have 30 days or less to prepare their defence.
ITR: How should a company organise its tax dispute team and tax advisers when it is involved in a dispute?
JDO: In most companies there is a high turnover of people. This fact justifies the outsourcing of all significant proceedings related to tax matters, firstly because the core business of a company is not the legal area, and secondly because turnover compromises the quality of the information. The weakest aspect of most defences in tax proceedings is the slowness in obtaining documents and, in some cases, the lack of professionals that keep the information about the business and the transaction.
The strategy is to maintain digital and physical files with all information related to the tax area. It is recommended that documents be periodically audited by professionals that know the main aspects and methods of tax inspection in the federal, state and municipal levels. Another important aspect is never to discard any documents before the start of any proceedings.
Strategically, it is important that companies have long-term partners in the tax area; they are the sources of the company’s history and know the reasons that justify the adoption of a certain measure or decision.
Before a tax professional leaves the company, they should be interviewed, in order to verify all their professional routines and awareness that may be of interest to the company. In addition to that, all responsibilities of the professional leaving the company should be allocated to another professional.
SR: Tax disputes in Brazil are becoming more and more fact related. Most of the time what is under discussion is not a theoretical application of tax regulations, but the actual transactions carried out by the company. Therefore, the taxpayer needs to be represented by a team of professionals who can not only prepare a good defence, but also understand the facts and prepare a strong set of documents to reflect the transactions carried out by the company.
Since it usually takes years before a tax dispute ends, the company needs to carefully organise and file all relevant tax information. It is important to formalise in internal memorandums the discussions that took place during the preparation of the defence and the reasons why a given strategy/line of defence was preferred over others.
ITR: How can companies maintain a good relationship with the tax authorities during a tax dispute?
SR: As a general rule, federal tax disputes do not get personal very often. Tax disputes with states or municipalities have different dynamics. In some situations, the dispute might be extremely relevant for the state or municipality. However, even in these cases the general rule is that a tax dispute will not have a negative impact over the relationship of the taxpayer with the tax authority. Depending on the case, a careful analysis is recommended before the company starts litigation against a given state or municipality.
JDO: The rule of thumb is to act with total impersonality. The dispute is between theories and the facts and never between people. Taxpayers should ensure: a strictly professional relationship with officials; submission of information within stipulated deadlines or previous justification for not complying with any notice; the involvement of professionals that understand the business and tax law; and formalisation of any request and response in writing.
Furthermore, in case of harassment, the professional must act with sobriety and report the facts to higher-ranked professionals. Depending on the situation, it is also recommended to seek tax authorities or their superiors so that the procedure adopted by the company is justified, and to reinforce the alignment of the measures adopted.