Brazilian tax appeals board rules on industrial establishment equivalency in intragroup transfers

In a significant ruling published on January 13 2025, the Brazilian Administrative Tax Appeals Board (Conselho Administrativo de Recursos Fiscais, or CARF) issued Decision 3201-012.195, addressing the applicability of the federal tax on industrialised products (imposto sobre produtos industrializados, or IPI, a VAT-type tax on production) to intragroup goods transfers. The decision reaffirmed the legitimacy of IPI assessments in scenarios involving internal merchandise transfers, particularly when there is evidence of abusive tax planning practices.

The taxable event in IPI is industrial production, such as manufacturing. The liability arises when the products leave the industrial establishment or at the time of customs clearance, in the case of imported goods. The tax applies regardless of the intended recipient of the goods – whether a third party or another establishment of the same company – provided that the goods undergo an industrial process that qualifies as “manufacturing”, “transformation”, “assembly”, or another form of production and importation as defined under Brazilian tax law.

Under the IPI framework, entities that do not perform traditional manufacturing activities may still be classified as “industrial establishments” for tax purposes if they engage in certain activities, such as packaging, assembly, or refurbishment. Additionally, Brazilian law allows for the classification of certain entities as “equivalent to industrial establishments” (“equiparadas a industrial”) when their business operations closely resemble those of an industrial manufacturer. This classification is crucial for determining whether the internal movement of goods triggers IPI liability.

In other words, the classification of certain intermediary legal entities as industrial establishments aims to prevent companies from restructuring operations to avoid tax obligations. It is a typical SAAR (specific anti-avoidance rule) and is designed to tackle the tax planning strategy of a producer selling its goods with almost no margin to a related party, which is not typically a liable person for IPI purposes because it has not engaged in production and is therefore classed as a trader or distributor. But then this distributor sells with all the margin to unrelated third parties.

By equating certain entities to industrial establishments and making them liable legal persons, these rules seek to ensure that tax liabilities cannot be circumvented through the mere segmentation of operations.

The same applies for the taxation of goods produced abroad. In this case, customs clearance triggers the tax obligation, and the importer/distributor is the liable person. So, the logic applies for setting up an entity between the importer and its clients to concentrate the margins on this intermediary entity.

The core legal issue in the aforementioned case concerned whether the transfer of goods between a company’s distribution centres and retail locations constitutes a taxable event. The Federal Revenue Service argued that the retail company played the role of a distribution centre and should be deemed the actual commissioner of the imported goods, which is why it should be equated to an industrial establishment.

The operation was structured in a specific manner such that the retail company (Company A) imported its goods by a trading intragroup company (Company B), which would resell these goods to the commissioners (companies C and D). These commissioners were considered “ostensible commissioners”, which means that companies C and D were not the destination of the goods – although the companies were listed as recipients in the invoices.

According to the tax authorities, Company A used companies C and D as the ostensible ordering parties, so both companies were charged as jointly liable in this case.

The board determined that companies C and D lent their names “to cover up sham business”. According to the rapporteur of the case, fraud and tax evasion were committed by the three companies, without which it would not have been possible to mislead the fiscal authorities regarding the manufacturer equivalence of Company A.

CARF’s ruling underscored the importance of distinguishing legitimate operational needs from practices that intentionally blur the lines of taxable events, characterising such conduct as “co-mingling of assets”. This occurs when a company uses its internal structure to obscure the true nature of taxable transactions.

An additional issue in the case involved the imposition of penalties for alleged tax infractions. While CARF upheld the assessment of IPI, the decision also addressed the proportionality of fines. Recent judicial case law (Recurso Extraordinário 736090) has emphasised the need to limit penalties to avoid confiscatory outcomes, as enshrined in Article 150, IV, of the Brazilian Constitution. In this case, CARF’s interpretation balanced the imposition of penalties with the constitutional prohibition against confiscatory fines, though the penalty amount remained within the legal thresholds.

In its decision in case 15444.720225/2020-96, CARF reaffirmed that the transfer of goods between different companies of the same economic group may still trigger IPI liability, provided the establishments involved qualify as industrial or equivalent for tax purposes.

For multinational corporations and domestic enterprises alike, Decision 3201-012.195 highlights the importance of understanding Brazil’s complex tax framework and implementing sound compliance practices. The ruling also underscores the balancing act between anti-avoidance measures and the preservation of taxpayer rights, particularly regarding the proportionality of penalties.

As tax authorities continue to look over corporate structures, companies must remain vigilant and proactive in their approach to tax compliance.