Tax Litigation in Brazil
Editor’s note: Mattos Filho, Veiga Filho, Marrey Jr. and Quiroga Advogados’ Roberto Quiroga has featured at the top of Chambers and Partners’ tax rankings since 2007. An undisputed leading light in the tax realm, with a 36-year career, Quiroga is recognised as one of the greatest in his generation. He represented Brazil’s stock exchange B3 and private bank Santander before the federal administrative tax tribunal CARF in landmark cases worth more than BRL10 billion. In addition to his successful practice as a tax litigator, he is widely respected as a law firm manager, having led Mattos Filho’s modernisation project, which resulted in its evolution from a tax boutique to one of the leading full-service firms in Brazil. A benchmark for many firms in Latin America, Mattos Filho currently tops Chambers and Partners’ rankings in key transactional and non-transactional areas and maintains a leading practice in key industries and sectors. Quiroga has co-authored the following overview with Mattos Filho’s lawyers Eduardo Melman Katz and Natalie Matos Silva. Companies disputing tax matters in Brazil can expect a consequential year, with structural changes in the federal administrative court and key precedent-setting cases to be judged by the Supreme Court, not to mention the upcoming legislative reform. This all takes place while the government handles the economic pressures of years of recession, slow growth and the impact of the Covid pandemic. But, the authors argue, “technical criteria, rather than arguments related to the impact of decisions on public revenues” should guide the ruling of cases.
Tax Litigation in Brazil
As 2021 gets underway, there is an air of great expectation in the Brazilian tax field. At stake are important issues being disputed in the administrative and judicial spheres, while in tax litigation in court both significant challenges and opportunities are visible on the horizon.
The dynamics of tax litigation have also been affected by the Covid-19 pandemic and the resulting reality of quarantines and lockdowns.
Regarding tax litigation in the administrative sphere, a new rule that came into effect in 2020 is likely to lead to shifts in the Administrative Council of Tax Appeals’ (CARF) case law. CARF’s judgment panels are composed of an equal number of judges, appointed both by the national tax authority and by taxpayer associations. Until April 2020, whenever a dispute was deadlocked, the tie was broken by a casting vote from the head of the panel – who was always appointed by the tax authority.
Over the past few years, the casting vote has played a crucial role in establishing case law contrary to taxpayers’ interests in a series of important and controversial matters, such as the deductibility of goodwill amortisation and the application of increased penalties due to fraud allegations.
In stark contrast, the new rule establishes that tied disputes will be solved in favour of taxpayers. This change, praised by taxpayers and tax experts alike, represents an inversion of a longstanding trend of cases of great importance to taxpayers being decided solely in favour of the tax administration.
As expected, not everyone welcomed this new tiebreaker rule. Its constitutionality was immediately challenged in the Supreme Federal Court, based on allegations regarding loss of government revenue and violation of proper legislative process. The Brazilian Ministry of Economy also quickly determined that the new tiebreaker rule could not be used to solve every kind of CARF proceeding, in a clear attempt to mitigate the application of the rule.
The current scenario is uncertain and 2021 may yet bring us some further news on this matter. First, taxpayers must anxiously await the decision of the Supreme Court, which has the final word on the constitutionality of the new rule.
Within CARF, taxpayers have not yet had the chance to see this new rule applied to some of the more important cases. Due to the Covid pandemic, judgment sessions are only being held virtually, concerning either less controversial cases or those involving smaller amounts of money. Therefore, the evolution of the pandemic will also impact the evolution of administrative tax case law.
In the judicial tax litigation sphere, it will become routine to see tax issues of great importance become part of the Supreme Court’s agenda. Its decisions will have binding effects on a significant number of cases. As an example, the Supreme Court is expected to rule over several issues related to PIS and COFINS (gross revenue contributions), ICMS (value-added sales tax), social security contributions and ISS (service tax), among others.
There is also a great expectation that the Supreme Court will finally settle larger-scale tax disputes during the year – in particular, one worth potentially billions of Brazilian reais regarding the inclusion of ICMS in the calculation bases of PIS and COFINS. In this case, an appeal (motion for clarification) filed by the Brazilian Federal Revenue is pending. The objective of this appeal is to mitigate the decision's effect upon public revenues. This case was expected to be placed on trial last year but it was postponed.
It is expected that this case – as well as others of great importance to taxpayers under analysis by the courts – should be judged based on technical criteria, rather than arguments related to the impact of decisions on public revenues. This kind of analysis should be the main concern in the tax litigation sphere during 2021.
Legislative changes should also come under the judiciary’s focus in 2021, especially given the decrees approved by some Brazilian states known as ‘fiscal adjustment programs’, which will come into effect in the current year.
These fiscal adjustment programs will establish either a reduction or an end to tax benefits, along with an increase in tax rates. This is based on the argument that it is necessary to balance public accounts drained by both the recent economic recession and public expenses associated with the pandemic.
Since the beginning of 2021, a number of companies and entities have challenged these measures in court, disputing their constitutionality and legality. They also argue that they should not have to bear the economic impact of an increased tax burden because they were already affected by the crisis.
In this scenario, the economic impacts of Covid will remain in the background of many tax disputes under the spotlight in 2021. They remain a topic of the greatest importance and thus must be analysed in a serene and balanced manner.
New disputes are expected to arise between taxpayers and Brazilian city administrations due to changes to ISS (service tax) legislation applicable to various sectors, such as health insurance operators and credit card administrators. The Supreme Federal Court is expected to play a major role in these disputes, as it is already analysing the constitutionality of the changes to the ISS legislation.
In addition to all these new trends expected to take place in 2021, tax reform proposals are also expected to move forward, resulting in greater stability, simplicity and certainty within the tax field.