This content is from: Brazil

The criminalisation of defaulting on tax debts

Gabriela Silva de Lemos explores the conflict between tax authorities and taxplayers as they strive to achieve a balance in concern of tax debt defaults.

In Brazil, the deliberate behaviour of taxpayers to involve fraud or simulation to avoid paying taxes, and tax misappropriation (where a taxpayer obligated to pay tax for someone else transfers the burden to the third party, but fails to make proper payment), can have criminal consequences.

On the other hand, this construal should not apply in situations where the taxpayer merely fails to pay the tax due, without taking any steps to prevent the identification of the levy of the tax by the tax authorities.

Nevertheless, this position, which has been historically confirmed by case law, can be reviewed by the higher courts, especially where indirect taxes are involved. This occurs because there was a recent ruling by the Federal Court of Appeals which interpreted the imposition of criminal penalties on managers of companies (taxpayers) who, having declared the Imposto sobre Circulaçao de Mercadorias e Serviços (ICMS) – the state value added tax - due, have failed to pay it. In the eyes of the Federal Court of Appeals, they have committed the crime of tax misappropriation.

The case in hand involves a situation in which the taxpayer, in no condition to pay the tax due, has timely provided all the information to the tax authorities (tax returns), but simply failed to pay the tax. Besides, the tax is related to the taxpayer own operation, not a tax due by third parties, but collected to the company/taxpayer.

The interpretation of criminal conduct is due especially because of the nature of ICMS, a tax which has its own systematic characteristics by which the tax burden is informed in the invoice, transferring the burden to the consumer/purchaser.

So far as the tax burden is transferred to the consumer/purchaser (third party), the interpretation was that the taxpayer had failed to transfer the tax collected from the consumer (the actual ICMS taxpayer) to the tax authorities.

However, maintaining this interpretation gives rise to significant concern that it could be repeated for other taxes which, although not having the same collection structure as the ICMS, are indirect in nature, such as IPI (excise tax on manufactured products), ISS (service tax), PIS and COFINS (social contribution on revenues).

The interpretation also seems to us to be unprecedented when one compares the civil and criminal liability of the manager, since the individuals responsible for the company – even if they are not responsible for the debt itself (since situations of succession of responsibility are specific and sui generis) – end up bearing the criminal consequences of the failure to pay the taxes.

Given this scenario, the taxpayer has filed the pertinent appeal with the Federal Supreme Court, which should have been tried by one of its panels in February 2019. However, given the importance of the issue, the reporting judge (Justice Luiz Roberto Barroso) has opted to present it in the Plenary Session of the Supreme Court, so that the issue can be analysed once and for all and be replicated by local appeal courts.

As of February 2019, the case is expected to be tried very soon by the Plenary Session of the Federal Supreme Court, thus arriving at a final resolution and creating greater legal certainty for taxpayers.


Gabriela Silva de Lemos - Partner, Mattos Filho

T: +55 11 3147 7831

E: gabriela.lemos@mattosfilho.com.br

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