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Winds of change in the Brazilian tax system: reform, arbitration and settlement

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Tax reform discussions have been consistent

Renata Correia Cubas of Mattos Filho provides an insight into what Brazil’s tax system can expect in 2020, as it actively looks to address the flaws which have played spoilsport in recent years.

The complexity, bureaucracy and tax litigation overload in courts within the Brazilian tax system are some of the themes that have played a leading part in the government’s debates with private entities and investors in Brazil during the last year. 

Tax reform initiatives throughout 2019 have had similar goals: reducing bureaucracy, reducing the number of taxes and respective litigation, and having a better share of the collection between states, municipalities and the federal government. 

The three most relevant tax reform proposals in the National Congress (#45/2019, #110/2019, #128/2019) foresee the unification of five to nine taxes (municipal, federal and state jurisdiction), mainly indirect taxes, and the creation of new taxable events, such as, but not limited to intangibles, licensing/assignment of rights, and digital services. The move has been inspired by the goods and services tax (GST) from New Zealand, but takes into account all the obstacles that Brazil offers in concentrating the heavy burden of taxation on consumption.

Debates also regularly arise in concern of the revoking of the current exemption for the distribution of dividends, and the total modification of the corporate income tax calculation. Further issues considered are in concern of transfer pricing rules, as well as other initiatives of alignment for potential access to the OECD. 

In February 2020, the House of Representatives announced that all the debates will restart and a tax reform is highly expected to occur during 2020. The Senate and the Ministry of Finance – where the other two proposals had originated – have confirmed this agenda.

The political challenge of ensuring that 27 states’ representatives, and over 5,500 municipalities agree on sharing their wide and exclusive ability to tax goods and services with the federal government – and maybe depend on uncertain cash transfer back to re-balance regional development – is one that has prevented every similar reform proposal in the past decades from being approved. This again remains on top of most agendas for the current debates.

Nevertheless, no other tax reform proposal has received as much engagement from the private and public sectors from the last few years. Campaigners have been searching for constructive solutions, like the aforementioned, in order to simplify the operation of current tax management for entities in Brazil, which includes collection and litigation. 

Besides acknowledging the need for simplifying the tax system, the need for immediate measures to address the current trillions of reais in disputes involving tax in Brazil was also the object of intense debate on the possible alternative methods for resolving tax disputes.

This is due to the fact that the increasing numbers of tax administrative and judicial disputes, and the length of procedures (which on average, take 2 to 10 years) in Brazil had led the government’s initiatives to focus on fronts to avoid the growth of litigation levels and reduce current existing cases through various measures provided in the latest procedural code. The recent procedural code’s main focus was, among other things, to reduce the time of current litigation. Some other measures provided in the code seemed to be a rehearsal for future arrangements with a wide range of options in terms of tax resolution for ‘settlements’.

Settlements, as well as other alternative methods of tax dispute resolution, had not been regulated in Brazil for years. The few specific possibilities foreseen in legislation were still very limited to amnesty programmes and installment payment programmes that come from time to time.

In that sense, the debates during last year also brought up the new possibilities for settling debts with the federal government under dispute. New possibilities of settlement are now to be proposed by the taxpayer, or specific possibilities of settlement for cases that have no longer chances of success, defined in a bid, so that taxpayers can apply open new doors in terms of possibilities for settlements. 

A tax arbitration bill (PL 4257/2019) was also presented last year which proposed an amendment to tax foreclosure legislation which foresaw that a taxpayer (defendant) could opt for arbitration, provided that a lawsuit had a collateral attached to the records as a guarantee of the amount disputed. According to this proposal, the arbitration decision would not be appealable unless it ruled against the Supreme Court’s binding precedent.

However given the shortcomings on this matter, it is still hoped that there can be a change to the current status quo of tax challenges in Brazil. A lot of this remains to be seen on how Brazilian entities adapt with the changes of the tax environment and culture in 2020.

Renata Correia Cubas

T: + 55 11 3147 7777


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