Tax litigation, be it administrative or judicial, is a long and expensive process in Brazil. It represents a large portion of the so called Custo Brasil (the Brazil Cost), given the time it takes for matters to be adjudicated, the unpredictability of outcomes, and the sheer number of assessments imposed by the tax authorities. Changes depend on tax reform, which is on the agenda of the Economy Ministry. Nevertheless, even in this adverse environment, taxpayers have been able to obtain significant victories.
Taxpayers often start discussing tax assessments administratively, which suspends payment obligations. The federal administrative path is a (fairly) level playing field when the discussions are eminently technical (relating to accounting details, for example) and not of high value. But there are disadvantages: tax assessments of low value (less than BRL 15 million – about USD 4 million) can take up to a decade to be settled.
Considering only the cases awaiting trial at the Administrative Council of Fiscal Appeals (CARF – responsible for the last say on whether tax assessments should be upheld or cancelled), the backlog of uncollected tax is estimated at BRL 603 billion (USD 161 billion). This is why the Union of the Federal Tax Auditors has recently proposed the end of CARF, in an effort to help accelerate tax collection (an inadequate solution that does not take into account the big picture).
Tax assessments of higher value can be settled in up to five years, but in such cases (likewise, if the matter is controversial) decisions by CARF tend to favour the tax authorities. A study showed that 64% of the decisions rendered from January to August of 2016 by the Superior Chambers (CSRF) of CARF favoured the tax authorities. CARF ends being an inexpensive way to buy time, as a path to the Judiciary, perceived as (more) independent and impartial.
But judicial litigation also has its downsides, such as the risk of having to pay up to 20% of the tax assessment in fees in case of adverse decision by the court and the costs with guaranties to avoid seizure of properties. Just as important is the fact that a final decision can take 10 years or more, which subjects taxpayers to unpredictability and to the need of updating tax liability provisions, as case law can change according to the Judges appointed to the Superior Courts and can result in new discussions. All the while, Federal tax obligations are also subjected to monthly adjustment by the SELIC interest rate, which has summed 260% in the last 20 years.
Recently, however, taxpayers have obtained significant victories, as shown by three different examples. In August 2018, CSRF addressed a highly controversial topic and ruled legitimate the transfer of goodwill (relating to the acquisition of a company) to a related party. In March 2017, the Supreme Federal Court ruled that the State VAT Tax (ICMS) could not be included in the basis of calculation of the PIS and Cofins federal social contributions. In April 2018, the Superior Court of Justice ruled illegal a Normative Instruction from the Federal Revenue Service that restricted tax offsets regarding PIS and Cofins. These last two matters were of high value, and the Government estimates it will have to reimburse taxpays over BRL 300 billion (about USD 80 billion).
These recent decisions may be interpreted as the first steps to an improved tax litigation environment. Much more needs to be done, though. A tax reform has been promised by President Bolsonaro’s administration and that should involve reducing the number and complexity of taxes, as well as streamlining legislation. As a result, there would be more predictability and smaller margins for interpretation, thus resulting in fewer tax assessments and lawsuits, reducing the burden and workload imposed on CARF and the Judiciary. All that would be good news to attract new investment to Brazil.
L&S Authors
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