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Ariane Costa Guimarães
Mattos Filho, Veiga Filho, Marrey Jr. E Quiroga Advogados Associados, Brasília
ariane.guimaraes@mattosfilho.com.br

Pâmela Larissa Miguel Gottardini
Mattos Filho, Veiga Filho, Marrey Jr. E Quiroga Advogados Associados, São Paulo
pamela.gottardini@mattosfilho.com.br

Overview of Brazilian litigation

In 2021, tax and accounting matters are key to guaranteeing business integrity. Implementing a compliance practice when it comes to the performance of tax obligations and compliance with accounting rules are mandatory for companies. In Brazil, considerable changes have taken place in the past ten years, with the implementation of international accounting rules and standards, the execution of international treaties and conventions to exchange tax and economic information, and, furthermore, the adoption of inspection procedures and tax liability control.

At the same time, there are many disputes which threaten to overload the Brazilian courts, in particular litigation regarding controversial interpretations of Brazilian legislation and tax legislation in particular.

According to the report Justice in Numbers issued in 2020 by the National Council of Justice regarding judicial litigation in Brazil in 2019, there are R$77.1m reais of lawsuits ongoing in the lower Brazilian judicial courts.[1]

Moreover, in the Supreme Court, the highest judicial court in Brazil, tax cases account for almost 12 per cent of the total ongoing cases.[2] In the year 2020 alone, judicial disputes were decided in the Supreme Court involving more than R$500bn reais (almost USD100bn).

This litigation scenario in Brazil is quite relevant, since it directly affects businesses, who must factor in a high level of litigation concerning tax matters.

The Brazilian tax system is complex and triggers a significant number of disputes due to controversies regarding the interpretation of tax legislation, such as the legality of the charge of taxes; tax planning; the definition of tax basis; the extension of tax benefits; and tax credits, among others.

Any unfavourable outcome in these tax cases may adversely affect a company’s business, since it may trigger the attention of tax authorities for the levy of taxes by means of the issuance of tax assessments or for the restraint of its interpretation of tax legislation (such as for reviewing tax planning, the use of tax benefits, tax credits, etc).

Brazilian companies therefore monitor closely the evolution of case law in the Brazilian courts, since unfavourable precedents may adversely affect their current tax planning, policies and compliance with tax laws (payment of taxes and compliance with tax reporting obligations).

Tax offences – relevant case law issued by the Brazilian Supreme Court

Rationale in the appeal of habeas corpus

The thesis approved by the plenary of Supreme Court in the appeal of Habeas Corpus No 163.334[3] is that the failure to pay ICMS (state VAT)[4] as reported by taxpayers constitutes a criminal offence.

If convicted, the taxpayer is liable to a penalty ranging from six months to two years’ imprisonment, and a fine.[5] Depending on the specific circumstances, the taxpayer may be discharged from this penalty if they pay the ICMS.

The Supreme Court deemed this misconduct as a tax offence of undue appropriation on the basis that the misconduct was ‘contumacious and wilful’.

According to the reporting Justice Luis Roberto Barroso, the decision does not affect the taxpayer who does not pay the tax due to certain financial difficulties, but is destined to impact ‘the contumacious taxpayer, who does not pay the taxes almost as a business strategy, which gives him a competitive advantage that allows him to sell cheaper than others, inducing others to adopt the same criminal strategy’.[6]

In this regard, it is the intention of the taxpayer that is critical, whether to appropriate the resource destined for the public treasury, either because it incorporated the value into the price and did not collect the tax on purpose or because it sold the assets or products at predatory prices, like the usual debtors. From this standpoint, mere noncompliance should not be deemed an offence.

These elements trigger a subjective analysis on a case-by-case basis since the intention of the taxpayer in each specific case and context of the transactions should be investigated and evaluated.

Impact for Brazilian taxpayers and investments

Ongoing litigation regarding the interpretation of tax legislation and recent case law issued by the Supreme Court plays a relevant role, especially for the review by tax authorities of taxpayers’ tax planning and compliance with tax laws.

This is because in view of the reasoning adopted by Supreme Court, which involves the need for investigation and evaluation of subjective elements, tax and criminal authorities may interpret such case law to enforce tax legislation.

Moreover, there is an uncertainty regarding the interpretation of the concepts of contumacious and wilful since Brazilian legislation does not define such terms or their application. In fact, there is a bill in Congress that conceptualises a regular debtor and aims to establish sanctions for taxpayers who use the non-payment of taxes as a commercial strategy.

The expectation is that such interpretation will be disputed since it involves certain controversial considerations. For example, which misconduct should be considered contumacious? Is the period of noncompliance of itself enough to define the existence of contumacious misconduct – in which case, should the period extend to months or longer, for example, a year? And does recidivism alone suffice to characterise misconduct as wilful?

In these circumstances, taxpayers currently disputing tax matters before the Brazilian courts are concerned that the tax authorities may assume that their actions should be characterised as misconduct and therefore be deemed a tax offence.

Although judicial precedent indicates that mere noncompliance would not lead to its characterisation as an offence, if there is a noncompliance due to recurrent disputes before tax authorities regarding the application of legislation, could such fact be considered as an element to sustain a finding of wilful misconduct? The situation remains unclear.

According to a study by Unafisco, the federal tax authorities’ group, which constituted a survey based on the legislation of 39 countries, 22 countries – that is, 56 per cent of the total – have systems in which there is independence between fiscal and criminal spheres, with no possibility for the discharge of punishment with the payment of the tax, or with a specific timeframe in which the penalty can be discharged if the tax is paid, defined before the start of the tax procedure. It is noteworthy that the model adopted in Brazilian legislation, which does not specify any such time limit, is little used elsewhere, being found only in seven other countries worldwide: Colombia, the Czech Republic, Malaysia, Mexico, Panama, Portugal, and Singapore. The conclusion reinforces the importance of the precedent in view of the tax authorities’ position.

The application of such case law to support the enforcement of tax law exposes the liability of partners and managers not only from a tax standpoint, but also to criminal charges due to the potential characterisation of undue appropriation; and, in this context, may lead to even more disputes in the Brazilian courts.

Conclusion

Evidently, tax compliance, and the application of the law to taxpayers, is now very important. However, the precedent adopted in the Brazilian courts raises concerns regarding the interpretation and application of tax legislation, since although the precedent indicates that only cases of contumacious and wilful misconduct will be deemed as crimes of appropriation, there remains a subjective interpretation of what cases will fall into such misconduct terms.

Non-payment of taxes for more than one year may, for example, constitute an act of fraud, even if the taxpayer has the legitimate right to litigate the application of the tax legislation before Brazilian courts. It is unclear in the circumstances if this might be considered legitimate or if the continuous dispute of the matter will be considered as recidivism, leading to such conduct being characterised as an offence.

Such considerations make the application of the case law controversial, which should be further debated and disputed before the Brazilian courts.

For the time being, taxpayers will have to face this interpretation on a case-by-case basis, which may lead to uncertainty and insecurity, since tax authorities may use such case law for the enforcement of tax legislation and taxpayers will have to deal not only with the litigation of the proper tax legislation, but also potential criminal charges where misconduct is characterised as a tax offence.

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