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Tax Controversy 2024 Brazil

Por: Sérgio Papini, Ricardo Varejão e Rodrigo Accioly

 1. Tax Controversies

 1.1 Tax Controversies in This Jurisdiction

In Brazil, tax law claims account for around 4.10% of the lawsuits currently being dealt with in all the country’s jurisdictions.

Tax disputes in Brazil usually arise on the initiative of the bodies responsible for tax inspection, through tax assessments and other administrative procedures. On the other hand, taxpayers also initiate tax disputes on their own initiative, usually from internal and external audits, and through accounting and legal offices indication.

 1.2 Causes of Tax Controversies

The high complexity of the Brazilian tax system, composed of a large number of taxes (sometimes levied on the same economic base) divided between different taxing entities, in addition to a complicated structuring of accessory obligations, governed by thousands of rules published by the Union, the States and more than five thousand Municipalities, makes it highly difficult to understand tax requirements and comply with the duty to tax, generating a very high cost of compliance.

As an attempt at simplification, the National Congress published Constitutional Amendment No 132/2023, formulating a reform in taxation on the consumption of goods and services. A sort of dual VAT was created, with a contribution on goods and services (CBS) that will replace federal taxes, and a tax on goods and services (IBS), replacing state and municipal taxes on the consumption of goods and services. CBS and IBS will have practically the same legal rules, with simplification of the different aspects of taxation.

Although there are points of discussion and disagreement, in addition to the fact that during the long transition between the current regime and the reform regime (which will last more than a decade) taxpayers will have to live with two systems, the truth is that tax reform represents an important step in simplifying taxation in Brazil, with the hope that there will be a significant drop in litigation and an easier understanding of the tax system, with a consequent increase in the economy and attraction of foreign investors.

While the EC 132 reform is not implemented and others are carried out, tax disputes remain very high and can be seen from different perspectives.

From a quantitative perspective, taxes that generate the most tax disputes are those that fall under the jurisdiction of the municipalities, such as IPTU (property tax), ISS (service tax) and TLE (location and operating tax). In second place are state taxes, such as ICMS (tax on the circulation of goods and services) and IPVA (tax on vehicles).

From the point of view of the amount of money involved – tax claims in Brazil amounted to be staggering BRL5.4 trillion (approx 75% of the national GDP) –, the taxes that generate the most discussion are IRPJ (corporate income tax), CSLL (social contribution on profit) and PIS/COFINS (contributions on gross revenue). Disputes arise due to complex calculation basis, tax planning controversies and tax credits and incentives. The so-called “Thesis of the Century”, for example, in which the exclusion of ICMS from the PIS/COFINS calculation base was discussed, represented an impact of almost BRL300 billion on public coffers. Currently, one of the controversies with large repercussion concerns the taxation of presumed ICMS credits (tax benefit) by federal taxes. Top Audit subjects expected for 2024 are corporate restructures, new rules of transfer pricing and the referred taxation on state tax benefits.

 1.3 Avoidance of Tax Controversies

As a rule, tax disputes can be mitigated by taxpayers by:

  • maintaining accounting and financial records of transactions, tax filing and supporting documents;
  • implementing robust internal controls to prevent errors and inconsistencies;
  • hiring external auditors or tax professionals to review tax ancillary obligations and taxes, and to identify potential areas of controversy; and
  • hiring qualified accounting and legal professionals (tax professionals) to guarantee their tax compliance with current tax legislation and its constant updates, as well as to guarantee appropriate advice on tax planning, risk assessment (valuation of tax positions and likelihood of disputes) and tax settlement possibilities.

On the other hand, disputes can also be prevented through Tax Ruling Requests, to confirm tax authorities’ interpretation on a specific subject.

Moreover, tax controversy can be mitigated by the so called “malha fiscal”, which is basically a system that cross-checks the information collected by the IRS and state and municipal tax authorities with the data submitted by the taxpayer. If faults or discrepancies are identified in the information declared, the tax authorities notify the taxpayer to provide clarifications and/or rectify their declarations/tax returns, often making it possible to pay any outstanding balance with a full or partial discount on fines and charges.

Other tool that may prevent disputes in the future is the Tax Transparency Program (CONFIA) launched in 2021, a co-operative compliance programme that establishes a special relationship between companies and tax authorities, based on co-operation and transparency. The main goal of the programme is establishing a dialogue between tax authorities and taxpayers, optimising tax compliance in companies, and reducing tax controversy and litigation. In this sense, at the state level taxation, there are programmes available in similar formats, such as “Nos Conformes” (São Paulo), “Contribuinte Arretado” (Alagoas), “Contribuinte Pai D’Égua” (Ceará), “Nos Conformes RS” (Rio Grande do Sul), “Contribuinte Exemplar” (Rio Grande do Norte) and “Fisconforme” (Roraima).

Finally, government has established Self-Regularisation Programmes, allowing the taxpayer to pay tax debts with discounts of interests and penalties and the possibility to use NOLs in some circumstances. These programmes must be analysed to mitigate tax contingencies.

 1.4 Efforts to Combat Tax Avoidance

As a result of the BEPS Project, Brazil committed to minimum standards, represented by the recommendations on Combating Treaty Abuse (Action Plan 6), Country-by-Country Reporting (Action Plan 13), Combating Harmful Tax Practices (Action Plan 5). In addition, Brazil has also committed to making the Mutual Agreement Procedures (MAP) effective (Action Plan 14), specially through Normative Instruction 1846/2018.

The most recent legislative change in the field of aligning Brazil with the international scenario was the country’s new transfer pricing legislation. In line with the OECD, the new law eliminated predetermined margins, requiring comparative analyses between transactions with related parties and transactions under market conditions.

Furthermore, the adoption of a PPT clause by Brazil and Argentina, Singapore and United Arabian Emirates Treaties was a result of BEPS Action 6, considering also the previous and controversial experience of the Brazilian administrative courts with the “business purpose doctrine”.

 1.5 Additional Tax Assessments

Additional tax assessments are directly related to the alleged obligation to pay the tax deemed due and not declared by taxpayers. At the administrative level, taxpayers are not obliged to guarantee the tax assessed in order to be able to lodge a claim. However, at the judicial level (judicial tax enforcement), the taxpayer is obliged to guarantee the debt, unless the defence is sustained on a public matter recognised without the need of burden of proof, through handling of the so-called pre-execution exception.

Taxpayers who fail to fulfil their tax obligations may face punitive measures, both administrative and criminal, as provided for in tax legislation. Penalties might be applied (up to 150% of the principal amount, in case of fraud or equivalent conduct). If an infraction notice is issued, the taxpayer has a 50% discount on penalties if the debt is paid within 30 days and 40% if there is installment within the 30-days period.

As for criminal proceedings brought against the taxpayer for not having declared or paid the tax on time, this can occur if there is evidence of fraud or tax evasion.

After a final decision is reached in the administrative courts, Brazilian tax agents have the obligation to report to Prosecution facts that they notice when assessing taxpayers that, besides constitute a civil or administrative issue, can also characterise a criminal violation.

 2. Tax Audits

 2.1 Main Rules Determining Tax Audits

According to data from the Brazilian Federal Revenue Service, the tax procedures carried out last year were concentrated on legal entities in the industry, commerce and services sectors, accounting for 73.5% of the total tax credit established by the tax authorities.

Another classification given by the tax authorities’ data is that of taxpayers with greater paying capacity, which in 2022 accounted for 80.3% of the tax credit established officially. According to the IRS, these taxpayers are those who carry out operations involving issues such as transfer pricing, abusive tax planning, erosion of the tax base in foreign trade operations and corporate restructuring operations.

According to data from 2023, the main risks analysed by the tax authorities were the use of tax losses in corporate income tax, taxation on social security contributions (especially on state tax incentives) and income tax for individual rural producers.

 2.2 Initiation and Duration of a Tax Audit

Considering that there are several entities in Brazil that are competent to carry out tax audits, there is an equal diversity of deadlines and procedures for inspections. As a rule, at the federal level, the terms of inspection have a maximum duration of up to 120 days, but they can be extended until they are effectively concluded.

The statute of limitations can prevent a tax audit. Tax Authorities have a five-year term to claim any possible outstanding taxes and assess penalties or debts. If the five-year term since the tax was levied elapses, tax agents can no longer demand taxes (so-called tax decadence). The tax audit itself does not suspend or interrupt the limitation period, but the eventual tax assessment will interrupt the limitation period. If taxpayer contests the debt through administrative courts, there is suspension of tax credit enforceability. With the end of administrative discussion, there is a five-year period for a tax enforcement (so-called tax prescription).

 2.3 Location and Procedure of Tax Audits

With the advent of new technologies, digital bookkeeping and tax systems have emerged in recent years with the aim of increasing efficiency and transparency in the relationship between taxpayers and the tax authorities. These systems have replaced the old manual bookkeeping on paper with digital files, making it easier for tax authorities to access and analyse information.

In this context, as a rule, tax audits are based on data made available electronically, and the analysis is carried out at the tax authority’s headquarters. Generally, the request for information is made in writing and the taxpayer should send the information in writing to the tax authorities through the electronic tax domicile (DTE). In more exceptional situations (especially concerning large taxpayers), tax authorities may visit the taxpayer’s premises in order to investigate possible irregularities.

 2.4 Areas of Special Attention in Tax Audits

The areas that deserve special attention from tax auditors are those with the greatest impact on public coffers, that is, taxpayers with the greatest capacity to pay taxes, since they accounted for 80.3% of the tax credit constituted through tax assessments in 2022.

The most relevant issues within the context of the largest taxpayers are transfer pricing, abusive tax planning, erosion of the tax base in foreign trade operations, corporate restructuring operations and the use of tax benefits.

 2.5 Impact of Rules Concerning Cross-Border Exchanges of Information and Mutual Assistance Between Tax Authorities on Tax Audits

The global cross-border exchange of information between tax authorities, and the combat of cross-border tax avoidance might contribute for the increase of tax audit cases, especially in Brazilian tax residents’ offshore operations, and the local operations of foreigners.

Besides international tax co-operation and co-operation with other legal entities (such as financial institutions, brokers, accountants, official agents), Brazilian tax authorities of different spheres (federal, state and municipal) may co-operate in mutual exchange of information and assistance. The rules on co-operation and integrated actions between tax authorities facilitates tax audits in Brazil. At the firm, several cases of exchange between tax authorities have been faced, especially regarding tax authorities and ICMS.

 2.6 Strategic Points for Consideration During Tax Audits

Firstly, the tax audit shall occur according to certain procedural requirements. Thus, the understanding of these procedures may help the taxpayer to protect its rights (such as the requirement of presentation of notification letters and professional certificates).

Secondly, it is important to gather all information (relevant facts, legal grounds and the supporting items) with effective communication, and based on this information, the strategy for conducting the tax audit should be drawn up.

That said, it is important to filter what is worth clarifying in the request and what is not convenient to disclose – such as business secrets, professional advice, and privileged commercial information, although tax authorities have tax confidentiality duty. These materials might not only become the evidence used by the tax audit to support the conclusion on the subject, but may also become nuclear evidence at the following administrative appeal or judicial litigation phases.

It might be recommended that the taxpayer take proactive action to analyse the legal grounds in support of its tax position, summarising the relevant facts and legal grounds in the respective interactions with the tax authority.

Finally, it is important to analyse the formal aspects involved, such as the legal basis of the tax questioning, respect for legal deadlines and procedures, search for possible failures in the tax procedure.

 3. Administrative Litigation

 3.1 Administrative Claim Phase

With few exceptions, the current pattern in Brazil is that, as a rule, it is not necessary to adhere to the administrative claim phase before starting a judicial phase. However, once the judicial sphere is opted by the taxpayer, the administrative sphere can no longer be used to discuss the debt object of the assessment.

Within the scope of the tax administrative process, the taxpayer must submit their claim within the stipulated period, usually 30 days after notification of the assessment or penalty, to the responsible body. Once the complaint is submitted, the arguments presented shall be analysed and a decision will be made. If the taxpayer disagrees with the previous administrative decision, they can appeal to higher courts.

 3.2 Deadline for Administrative Claims

Tax legislation sets deadlines for the tax authorities to judge administrative proceedings, which vary depending on the competent bodies. In the federal sphere, the law establishes a deadline of 360 days for the tax authorities to decide on the administrative appeal submitted by the taxpayer. If the tax authorities fail to meet this deadline, the taxpayer can take legal action (writ of mandamus) to obtain a response in the administrative process.

Nevertheless, it is common to see many cases without decision after the respective applicable legal deadline and generally there are no further consequences, such as debt cancellation, statute of limitations period applied during the administrative discussion or a penalty applicable (disciplinary warning, suspension or fine) to the tax authority/judge in charge of the decision.

 4. Judicial Litigation: First Instance

 4.1 Initiation of Judicial Tax Litigation

Judicial tax litigation can be initiated by the tax authorities or the taxpayer. Regarding jurisdiction, tax claims should be filed to the court where the tax authority in charge of the debt is located.

When the tax authorities initiate a process, it involves the collection of a tax that has been properly declared in the respective tax returns but not paid by the taxpayer or a tax that has already been assessed – either because the taxpayer did not challenge it, or because the administrative council’s decision was favourable to the tax authorities (judicial tax enforcement).

On the other hand, if the final administrative decision was not favourable to the taxpayer, the latter has the option to provoke the judicial court and file a lawsuit claiming for the case to be reviewed. It is important to reemphasise that if the litigation process is brought by the taxpayer and the administrative phase is still not fully evolved, administrative instances will no longer be used for the respective discussion (waiver of the right to an administrative dispute).

Moreover, taxpayers may initiate tax litigation to avoid future tax assessments on a specific subject (to obtain a judicial declaration of non-existence of a specific tax liability or even a judicial command that protects the taxpayer of future tax assessments).

 4.2 Procedure for Judicial Tax Litigation

The procedures differ if the taxpayer lodges the tax claim, or the tax representatives lodge the judicial tax enforcement.

For the first scenario, after the taxpayer files the formal complaint, the judge will analyse whether the formal complaint requirements have been met (qualification of the parties, jurisdiction, the value of the case, and request).

At this stage, the judge may also provisionally grant a request made by the taxpayer to suspend the tax liability and thus to allow the issuance of a certificate of tax regularity, enabling taxpayer to contract and receive amounts from the Public Authorities, obtain credit from financial institutions and participate in projects with tax incentives. This request may be granted when the taxpayer’s probable right and delay in judgment are proven or through deposit of the amount charged by the Tax Authorities.

Secondly, the judge will summon the tax authority to contest, within thirty working days. Then, the judge will summon the taxpayer to reply.

Thirdly, the judge will inform whether the parties have any further evidence to be produced. If so, the parties attach all lawful evidence. If not, the judge will analyse the issue and decide. The parties may lodge an appeal to the second-instance court.

Besides the two ordinary instances of jurisdiction, there are two higher courts that can analyse the case in specific situations. The Superior Court of Justice (STJ) analyses Brazilian laws and judges legal issues (federal law and treaties violation), And the Supreme Federal Court (STF) judges the constitutional issues, requiring general social, political, juridical, or economic repercussion of the appeal.

For the judicial tax enforcement, the judge will summon the taxpayer to pay de debt within 5 days or to present a defense within 15 days. In the last case, the taxpayer needs to provide a guarantee to present a defence. If it is a matter of public order and no further investigation or proof is required, the judge might waive guarantee (case of the use of pre-execution exception by the taxpayer).

 4.3 Relevance of Evidence in Judicial Tax Litigation

Comprehensive defense is fully guaranteed in tax, administrative or judicial proceedings. The importance of the proof, however, will depend on the type of discussion involved.

In Brazil, a relevant part of tax disputes involves solely the interpretation of complex tax legislation to find out, for example, whether a tax can serve as a calculation basis for charging another tax; to find out if whether the Federal Government can charge income tax on tax exemptions granted by the States, etc.

In these cases, the discussion practically does not involve factual issues, and, therefore, the evidence becomes secondary. This characteristic, in fact, authorises this type of discussion to be conveyed by a specific type of judicial process initiated by the taxpayer, called “writ of mandamus”, which has a faster procedure precisely because it does not depend on the production of evidence.

As for demands regarding the amounts involved in charges made by the Tax Authorities, the production of evidence plays an essential role in the success of the taxpayer’s demand, due to the principle of “presumption of truth” of tax authorities’ acts.

In this type of process, the most common evidence is documentary and expert evidence, carried out by accounting experts.

 4.4 Burden of Proof in Judicial Tax Litigation

Generally, the burden of proof lies on who asserts the claim. However, the burden of proof bears on taxpayers to corroborate facts and arguments that can jeopardise the alleged taxation right. This occurs because tax authorities have a presumption of legitimacy/validity of their allegations and veracity of their actions. In other words, it is up to the taxpayer to prove that the tax authorities’ actions did not observe legitimacy, validity or veracity.

Considering the burden of proof on taxpayers’ side, expert proof may be requested by the taxpayers so that the expert can attest their arguments and evidence, as well as to confirm accounting, regulatory and financial aspects.

On the other hand, in case of criminal tax proceedings, it is up to the Prosecution to prove their allegations of the tax criminal qualification. Public Prosecutors should present charges against parties supposedly responsible for tax evasion if they understand that it has all elements required for such, that is, materiality of the supposed crimes.

 4.5 Strategic Options in Judicial Tax Litigation

Regarding the deadline for producing evidence, the civil code only provides a specific deadline (15 days) for presenting the list of witnesses. The court can determine a deadline for producing evidence. Generally, the deadline is 15 days.

During litigation, the tax enforceability may be suspended through judicial decision. However, if the provisional decision is reverted, taxpayer has a deadline to pay the debt without penalties. After the deadline, penalties shall apply. Other possibility is the use of judicial deposit; in that case, if the decision is favourable, taxpayer shall get retrieve the money without waiting for the writs of payments expedition (court order to pay the money back to the taxpayer).

The plaintiff can apply for submission of expert opinion to facilitate the court in better understanding a technical issue. If approved by the judge, the respective fees must be paid in advance to the expert. The expert can be chosen by the parties, jointly, or determined ex officio by the judge. In complex matters, an expert report is necessary to assist the court.

At the second and third levels of judicial courts (more than one judge), taxpayers can distribute briefs to the judges and present their defences orally and clarify aspects that might influence the judgment, especially on trials. At the first level of judicial courts (one judge only), taxpayers can also present orally their arguments to judge (although there is not properly a specific moment to do that).

Finally, a Procedural Convention may be agreed with Public Attorneys regarding guarantee offers, deadlines, requests, and other procedures.

 4.6 Relevance of Jurisprudence and Guidelines to Judicial Tax Litigation

The Federal Constitution and procedural legislation provide some types of decisions especially handed down by the STJ and the STF that must be followed by other judges.

Decisions handed down by the Supreme Court in concentrated control of constitutionality or those that have recognised general repercussions must be compulsorily observed by the STJ and other lower courts. Considering that the Constitution is very detailed and analytical in tax matters, defining what can be taxed, the taxpayer, who can tax, exceptions to taxation, most of the most relevant tax issues end up being decided by the STF in the last instance.

Decisions made by the STJ in repetitive cases must also be compulsorily observed by lower courts and judges.

In case of non-compliance with its decisions, and after observing a procedure set out in the Code of Civil Procedure, it is possible to file a “complaint” directly to the STJ or STF.

Decisions by the STJ and STF that do not have this binding quality serve as persuasion to lower judges and indicate the final solution that the process will possibly have.

In relation to international guidelines and precedents, although Brazil has actively engaged itself in international tax discussions and global tax standards, its case law on international tax issues remains limited. While STF and STJ have handled only a few dozens of cases related to treaty and double taxation issues (such as treaty override, dividend remittance taxation and non-discrimination, CFC rules and cross-border technical services taxation), they do not often expressly refer to foreign case law and foreign doctrine but rather to the domestic framework of Brazilian tax law. International guidelines may be referred, but more to contextualise discussions rather than to properly fundament decisions.

Doctrine is used to support judicial decisions, but its strength is incomparably inferior to that of a precedent.

 5. Judicial Litigation: Appeals

 5.1 System for Appealing Judicial Tax Litigation

The courts are segregated by the jurisdiction of the taxing entity and by values.

In the case of state or municipal taxes, the appeal is directed to the State Court of Justice. In the case of Federal Government taxes, appeals are directed to the Federal Regional Courts, whose jurisdiction is determined from the state of origin of the demand (eg, if the decision was handed down by a federal judge in São Paulo, the appeal will be directed to the TRF of the 2nd Region; if it was handed down by a federal judge of the judicial section of Pernambuco, it will be directed to the TRF of the 5th region; Bahia, TRF of the 1st Region…).

In certain cases involving limited values (up to 60 minimum wages), the case is judged by small claim courts, called “Special Courts” with possibility of an appeal to a second level and rarely to superior courts.

There are also types of appeals depending on the nature of the decision. A decision that partially decides the merits is subject to an interlocutory appeal. A sentence may be appealed; after a sentence, three appeal judges judge the case and issue a new decision. There are also specific motions for reconsiderations.

Special appeals (STJ) shall be used whenever a treaty or federal law is applied supposedly incorrectly and extraordinary appeals (STF) whenever there is a constitutional issue.

 5.2 Stages in the Tax Appeal Procedure

Firstly, a judge designated by the court analyses whether the appeal was timely submitted, and if the respective cost of the appeal was paid to the court. If not, the appeal will not be considered by the court. Appeals must be made in writing. The attorneys responsible for the public entity’s defence will have a 30-days period to respond the appeal, and then the subject will be judged by the panel.

After the appeal, a special appeal may be submitted to STJ or an extraordinary appeal to STF, as already mentioned.

It is important to mention that appeals on interlocutory decisions can also be submitted to the second-instance court.

Thus, if the dispute undergoes all instances, at least four decisions and appeals will be issued, disregarding here the appeals filed against interlocutory decisions and motion for clarification, which would increase this number to more than a dozen.

 5.3 Judges and Decisions in Tax Appeals

In the first instance, the case is judged by just one judge, by a judge who takes office through a public competition. If the parties are not satisfied with the decision, they can appeal to the second instance.

In second instance, although each State Court of Justice has a specific composition , generally the case will be judged by three appealing judges (who are part of a panel).

The judges of the State Court of Justice and the Federal Regional Courts are first degree graduates, rising by seniority or merit, or are representatives of lawyers or the Public Prosecutor’s Office. The rotation of positions and criteria for promotion are set out in the Constitution.

One of them will be the case rapporteur and will analyse the facts and the law. On the day of the trial, the lawyer may sustain arguments orally to change the judge’s opinion. Then, the vote will be read and analysed by the other two appeal judges, who can follow the vote or not.

The Superior Courts of Justice (STJ), in charge of special appeals involving federal law and treaties violation, has at least 33 judges (actual number) assigned, but tax disputes are ruled by two panels of the first section, each of which is composed of five justices. Finally, the Supreme Federal Court (STF) in charge of constitutional discussions has 11 judges and the votes are taken by majority of votes or 2/3 of the votes, depending on the subject of the appeal.

 6. Alternative Dispute Resolution (ADR) Mechanisms

 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction

As mentioned, Convention Procedures may be agreed with Public Attorneys regarding guarantee offers, deadlines, requests, and other procedures.

Moreover, as of 2020, with the enactment of Law 13,988/20, there are tax settlements that can be negotiated by taxpayers and tax authorities, by means of an individual request or by adhesion. Settlement agreements can provide for debt reduction, discounts on interest and fines, special payment deadlines, the use of tax losses to write off amounts, the use of judicial credits to amortise the debt, among other benefits.

Moreover, Brazil has 36 bilateral tax treaties in force. Under those treaties, taxpayers may request a Mutual Agreement Procedure (MAP) if taxation has occurred (or is likely to occur) that is not in accordance with the relevant treaty. In addition to Brazil’s tax treaties, Brazil’s domestic tax law also provides for MAPs (Normative Instruction 1,846/18).

Finally, Law 14,596/23, which changed the Brazilian transfer pricing regulations, included a change to the dynamics of the audit process for transfer pricing by creating the possibility of a settlement in the auditing proceedings (APA).

 6.2 Settlement of Tax Disputes by Means of ADR

Procedure conventions may be agreed with Public Attorneys regarding guarantee offers, deadlines, requests, and other procedures. Article 190 of the Brazilian Civil Procedure Code allows the parties to modify matters related to the proceedings so that these can be adjusted to the specific nature of the underlying dispute and to agree on each party’s onuses, obligations, faculties and powers in the context of litigation, whether in advance of the dispute or while it is already pending. In one tax case, the agreement involved National Treasury Attorney’s Office and the respective taxpayer, on waiving defences and appeals against ex officio credit offset procedures promoted by the Federal Revenue. Credit offsetting is the procedure by which the Federal Revenue retains funds that would be reimbursed to the taxpayer, due to the acceptance of refund requests, if the existence of debts of such taxpayer is verified at the time of fund restitution. In return for the taxpayer’s resignation, the Federal Revenue accepted that the amounts of the refund requests would be used to pay off other tax debts required through judicial tax enforcement (instead of other debts not object of judicial tax enforcement). Therefore, administrative credit offset challenge and judicial tax enforcement procedures were both closed.

Concerning MAPs, Brazilian Federal Revenue published a manual on MAP setting out the process through which taxpayers can request assistance from the Federal Revenue, including the contents of the MAP application (such as beneficial ownership of income, assessment of capital gains tax, tax residency, permanent establishment and classification of payments). MAP does not suspend tax enforceability and can coexist with domestic judicial or administrative litigation.

Concerning transfer pricing, APA, as mentioned, does not have its regulation by tax authorities yet.

 6.3 Agreements to Reduce Tax Assessments, Interest or Penalties

There is no mediation or arbitration for tax purposes in Brazil.

However, as above mentioned, with the enactment of Law 13,988/20, there are three types of tax settlement that can be negotiated by taxpayers and tax authorities: by means of an individual request or by adhesion, when relating to tax liabilities enrolled in the federal debt roster (overdue tax liability); by adhesion when related to specific tax litigation subjects and by adhesion when related to a dispute involving an amount of up to 60 minimum wages, once certain requirements are met and limited to certain thresholds on the reduction that might be available for taxpayers. Settlement agreements can provide for debt reduction, discounts on interest and fines, special payment deadlines, the use of tax losses to write off amounts, the use of judicial credits to amortise the debt, among other benefits. The outcome of the settlement may be implemented only after the taxpayer withdraws an administrative defense or lawsuit and waives their right to discuss the tax involved in the settlement.

States and municipalities have been also approved laws to enable tax settlements.

 6.4 Avoiding Disputes by Means of Binding Advance Information and Ruling Requests

It is also possible for a taxpayer starting an administrative procedure to consult with the tax authorities regarding the application of the tax law in a concrete situation whenever there is an objective doubt concerning the interpretation of the law. The administrative answer (ruling) to the consultation will be binding for both the tax authorities and taxpayers at the administrative level, but taxpayers can challenge it at the judicial level in cases of disagreement.

 6.5 Further Particulars Concerning Tax ADR Mechanisms

There are no mediations and arbitrations foreseen in Brazilian tax rules.

 6.6 Use of ADR in Transfer Pricing and Cases of Indirect Determination of Tax

Concerning transfer pricing, APA (introduced by the recent transfer pricing Law 14,596/23) does not have its regulation by tax authorities yet.

 7. Administrative and Criminal Tax Offences

 7.1 Interaction of Tax Assessments With Tax Infringements

If a tax agent makes a tax assessment requesting payment of overdue tax, such a tax assessment does not imply an immediate administrative tax violation (there are not proper SAAR or GAAR rules in Brazil). This is because such an assessment is not final, given that the taxpayer is entitled to file an administrative appeal with the upper-level tax authority or to file a lawsuit, if the taxpayer believes the tax assessment is inconsistent.

However, in Brazil, a tax assessment may lead to the filing of criminal proceedings. But the mere occurrence of an additional tax assessment does not automatically imply criminal tax offences.

On one hand, as for criminal proceedings brought against the taxpayer for not having declared or paid the tax on time, this can occur if there is evidence of fraud or tax evasion, differing from tax avoidance or a mere administrative violation.

Brazilian tax agents have the obligation to report to Prosecution facts that they notice when assessing taxpayers that, although constituting a civil or administrative issue, can also characterise a criminal violation.

On the other hand, it is important to mention that tax authorities can only issue a Tax Report for Criminal Purposes reporting facts that may characterise tax crimes, after a final decision is reached within the administrative courts.

Finally, it must be emphasised that criminal qualification should be exclusively determined by criminal litigation, which is initiated by the respective public Prosecutor.

 7.2 Relationship Between Administrative and Criminal Processes

There is not proper binding relationship between the administrative process and the criminal process, once the criminal process can be disallowed even when the tax assessment is maintained – sustaining that there is not tax evasion, but rather tax avoidance, among other arguments.

However, Prosecution can only move forward with an alleged tax crime claim after a final decision on taxation is reached within the administrative courts. Nonetheless, other possible crimes – such as money laundering and criminal conspiracy – may not have their respective processes suspended.

There are precedents in the sense that even with the end of the tax administrative procedure, if the taxpayer files a lawsuit to cancel the debt and the judge suspends its enforceability through an interlocutory decision, it is recommended to suspend the ongoing criminal claim until definitive resolution of the civil claim in which the tax assessment is being discussed.

 7.3 Initiation of Administrative Processes and Criminal Cases

Concerning tax crimes, tax authorities can only issue a Tax Report for Criminal Purposes reporting facts that may characterise tax crimes and send to Prosecution, after a final decision is reached within the administrative courts.

The administrative process generally evolves into a criminal tax case when there is fraud and simulation (tax evasion), or omission on issuing tax invoices, tampering of documents and tax books, as well as tax misappropriation (especially ICMS-ST and social contribution for social security).

 7.4 Stages of Administrative Processes and Criminal Cases

Administrative tax cases are decided observing the administrative case process (which can vary, being local, state, or federal tax). The stages of an administrative tax procedure are: inspection (procedures carried out by the tax authorities based on their police powers), establishment of the credit/drafting the infraction notice, defense (beginning of the litigious phase), evidentiary instruction (possible specific diligences), judgment, appeal (exceptions may apply), judgment, appeal (in specific cases), and judgment.

As mentioned, the administrative sphere is not binding. The taxpayer can appeal to the judicial courts.

The judicial court which decides the legality of the corresponding tax adjustment/assessment might be the same one that decides the criminal qualification. However, there are often specialised judges and panels (specially on second-level courts) for criminal issues and civil matters.

That said, criminal tax offences follow the general criminal case process. It is up to the Public Prosecutor’s Office to file a criminal complaint. The judge assesses whether to initiate the criminal claim or not, which will be then developed with the structure of: Defence, Evidentiary and Judgment Hearing, Final Allegations, Sentence; Appeals and Execution.

 7.5 Possibility of Fine Reductions

If a federal infraction notice is issued (after tax assessment), the taxpayer has a 50% discount on penalties if the debt is paid within 30 days, and 40% if there is installment in the 30-days period. State and municipal taxes notification have different regulations on fine reductions.

 7.6 Possibility of Agreements to Prevent Trial

The effective payment of the claimed taxes, properly updated with penalties and interest could prevent any possible criminal implications related to the case. In case the payment is made after the criminal tax claim, there is the extinction of the capacity of criminal punishment (at any time, even after the final decision). If the debt is paid in installments, there is the suspension of the claim and the respective capacity of criminal punishment, and also suspension of the criminal statute of limitations. However, if there are other crimes being prosecuted – such as money laundering and criminal conspiracy – the payment does not extinguish the respective capacity of punishment.

 7.7 Appeals Against Criminal Tax Decisions

After a decision has been adopted by the court of first instance in the sense that there is as a criminal offence, the taxpayer can manifest its intention to appeal to the court of second instance (state or federal court, depending on the jurisdiction) within five days of the first-instance judgment and eight days to provide the respective reasons. The accused’s appeal should be made in writing and will be generally judged by three judges.

 7.8 Rules Challenging Transactions and Operations in This Jurisdiction

Brazil does not have a regulated GAAR. Despite provision of article 116 of Brazilian Tax Code (CTN), there is no proper regulation concerning the application of the guideline, although some legal concepts set forth in Brazilian Civil Code can be used. Nevertheless, authorities and courts have mostly relied on the substance-over-form principle and business purpose doctrines. Without prejudice of reference to specific anti-avoidance rules, such as transfer pricing, thin capitalisation and controlled foreign corporation rules, administrative courts usually consider tax planning transactions to be a fraud or simulation, combining substance-over-form and business purpose doctrines with provisions of the civil law code to legitimate an economic approach doctrine and disregard artificial transactions.

Finally, tax avoidance cases differ from tax evasion cases, which involve intentionally evading taxes and give rise to criminal liabilities. Although, there are cases of re-characterisation of a given transaction (not always a tax evasion) and the suggestion to Prosecution to implement criminal consequences. This occurs because there is no absolute consensus of what effectively distinguishes tax evasion from tax avoidance.

 8. Cross-Border Tax Disputes

 8.1 Mechanisms to Deal With Double Taxation

Both paths are possible. Taxpayers can either use domestic litigation against such administrative decisions or invoke mutual agreement procedures (MAP) to avoid double taxation.

Brazil has not signed the MLI.

 8.2 Application of GAAR/SAAR to Cross-Border Situations

Due to its lack of popularity among taxpayers and academics, the country has faced difficulties in formulating a GAAR. Brazil is implementing the minimum standard through the inclusion of the preamble statement and the PPT clause in some treaties (such as DTT with Argentina, Singapore and UEA). Authorities and courts have mostly relied on the substance over form principle to disregard artificial transactions.

 8.3 Challenges to International Transfer Pricing Adjustments

Normally, transfer pricing disputes in Brazil are judged by CARF (Administrative Council for Tax Appeals), a collegiate body made up of representatives of the state and society, which is responsible for judging tax and customs disputes at the second administrative instance.

Considering that a recent new Brazilian domestic transfer pricing regulation may change the actual case law scenario, the current position of CARF is that, even though the Brazilian approach may create room for abuse, transactions that meet the fixed margins foreseen in domestic legislation should be considered in compliance with Brazilian TP rules, regardless of the DTTs. Furthermore, it is worth mentioning that in several situations taxpayers tried to use the OECD transfer pricing guidelines in several cases, arguing that Brazilian rules could not replace a provision of the treaty (Article 9 of the Model Convention). The courts, however, have denied these attempts and the taxpayers have not been successful.

With regard to judicial litigation, there is not a consolidated jurisprudence on the subject yet.

 8.4 Unilateral/Bilateral Advance Pricing Agreements

The Advance Pricing Agreement (APA) was only introduced into Brazilian law in 2023, with Law 14,596/2023. The mechanism, however, is still in process of being structured and technically implemented by the tax authorities.

 8.5 Litigation Relating to Cross-Border Situations

The international situations that generate the most litigation in Brazil are Transfer Pricing, Withholding Tax and Double Taxation Treaties.

Regarding WHT, the most common discussion is on tax treaty qualification (such as the income paid for the provisions of technical and technical assistance services and the qualification as royalties in protocols). There is also discussion on the triggering event of WHT (accrual basis), and calculation basis of WHT and CIDE (Contribution of Intervention in the Economic Domain).

With regard to transfer pricing, there is litigation on the application of the methods (such as controversy on local production concept, related parties, and exclusion of ICMS/PIS/COFINS benefits on resale-minus method). There is also specific discussion on resale-minus method regulation by Federal Revenue.

Another case is the application of CFC rules and treaties. Tax law determines the automatic taxation of profits derived from direct and indirect subsidiaries located abroad, regardless of whether these subsidiaries are in low or high tax jurisdiction, or if these companies have active or passive income. That said, STJ has a favourable precedent for the taxpayers, concluding that Article 7 of the tax treaties prohibits the automatic taxation of income derived from foreign subsidiaries.

The cross-border situations that generate litigation are usually business and corporate situations, but the growing number of individual disputes, mainly over tax residence, cannot be ignored, such as the 12-months period interruption and the subjective intention to be a Brazilian resident.

In order to possibly mitigate such disputes, it would be ideal to sign additional international tax treaties and agreements, provide tax simplification on calculation basis and search for convergence with international best practices. The implementation of CONFIA (federal tax compliance programme) might be important to mitigate cross-border litigation.

 9. State Aid Disputes

 9.1 State Aid Disputes Involving Taxes

This is not applicable in Brazil.

 9.2 Procedures Used to Recover Unlawful/Incompatible Fiscal State Aid

This is not applicable in Brazil.

 9.3 Challenges by Taxpayers

This is not applicable in Brazil.

 9.4 Refunds Invoking Extra-Contractual Civil Liability

This is not applicable in Brazil.

 10. International Tax Arbitration Options and Procedures

 10.1 Application of Part VI of the Multilateral Instrument (MLI) to Covered Tax Agreements (CTAs)

Brazil has not yet opted for the mandatory binding arbitration provided for in Part VI of the 2017 Multilateral Instrument (MLI) or even the MLI itself. The tax administration justified its decision by considering that the multilateral treaty has peculiar characteristics that could result in prolonged debates in Congress, thus delaying the effective implementation of the measures at hand.

The mandatory binding arbitration is a highly controversial topic in Brazil. In brief, the National Treasury argues that tax treaty arbitration is incompatible with the Brazilian tax system, given the fact that the tax authorities may not dispose of the tax credit properly constituted in accordance with domestic tax laws. For this reason, Brazil has no arbitration clause in its tax treaties, although there are MAP clauses in Brazilian DTT.

 10.2 Types of Matters That Can Be Submitted to Arbitration

Brazil is not a signatory to the 2017 MLI and Brazil has no arbitration clause in its tax treaties.

 10.3 Application of the Baseball Arbitration or the Independent Opinion Procedure

This is not applicable in Brazil.

 10.4 Implementation of the EU Directive on Arbitration and/or the MLI

This is not applicable in Brazil.

 10.5 Existing Use of Recent International and EU Legal Instruments

This is not applicable in Brazil.

 10.6 New Procedures for New Developments Under Pillars One and Two

Pillar 1 implementation seems to be further at this moment, given that the various rules for the building blocks of Pillar One are still being developed. Pillar 2 might move forward faster. Although the Pillar Two Global Anti-Base Erosion Model Rules have been released, the timeframe within which Pillar Two may be legislated domestically and enacted in Brazil remains unknown. That said, it is not easy to foresee when, how and to what extent Pillars One and Two will be implemented in Brazil.

 10.7 Publication of Decisions

This is not applicable in Brazil.

 10.8 Most Common Legal Instruments to Settle Tax Disputes

Brazil has used MAP under the tax treaties (to analyse WHT on technical services and the nature of JCP (interest on net equity).

 10.9 Involvements of Lawyers, Barristers and Practitioners in International Tax Arbitration to Settle Tax Disputes

This is not applicable in Brazil.

 11. Costs/Fees

 11.1 Costs/Fees Relating to Administrative Litigation

At the administrative level, each part bears its own costs, there are no fees to be paid to tax authorities and there are no cash deposits or guarantees of assets required to enable administrative challenges, as the Supreme Court have already decided. The suspension of the enforceability of the assessed debt until final decision is also assured.

However, some entities include charges for their public attorneys when the debt is enrolled in the debt roster (overdue tax liability), but before the lawsuit is filed. There is controversy about whether or not these fees are due, but the current position is that the charge is due, and has a different nature of the defeated party’s fees.

 11.2 Judicial Court Fees

There are litigation fees in the first, second instance and superior courts. Generally, they are calculated based on the value of the claim. There is a minimum and a maximum amount that can be paid in costs. State tax judicial litigation is generally more expensive than federal tax judicial litigation, once the caps of the former are often significatively higher. The losing party is ordered to reimburse the fees costs properly updated.

Regarding the attorney’s fees, there are divided into two types. The contractual attorney’s fees and the legal attorney’s fees. The Brazilian Bar Association (OAB) disciplines some contractual fees; nevertheless, they are not mandatory, but a recommendation. Therefore, the contractual attorney’s fees can be calculated in several ways.

Moreover, on the closure of a judicial litigation, the judge (first instance) should condemn the defeated litigant to reimburse the other party of all anticipated court costs (with interests), and to pay judicial attorneys’ fees from 1% to 20% of the respective amount according to the progressive chart under Section 85 of the CPC (the higher is the value of the cause or economic benefit the lower will be the percentage applicable). These fees are mandatory (unless a writ of mandamus is proposed, besides a few other exceptions), and might represent exposure whenever significant amounts are discussed. Finally, if the party is only partially successful, the courts may order a different percentage of the amount under dispute to be paid to each attorney based on the parties’ relative success or failure in the lawsuit.

It is possible to request non-payment of the fees if the taxpayer is not able to pay them without compromising livelihood or if the legal entity proves incapacity to pay.

Tax authorities are exempt from anticipating legal fees but can be condemned to pay costs and the attorney’s fees if the taxpayer is successful at the end of the litigation.

In the event of appeals, each appeal made – either to the court, STJ or STF – requires payment of its respective fees. Payment of fees is a condition for the admissibility of the appeal. If payment is not made and the request for non-payment is not granted, the appeal will not be considered by the court.

 11.3 Indemnities

In the event that the tax authorities have decided that the tax assessed is invalid, taxpayers who have suffered damages can claim compensation. However, the criteria for awarding damages are not the same in all Brazilian courts, with the majority understanding that there must be proof of the damages, such as protests or denial of credit.

 11.4 Costs of ADR

Arbitration, mediation and other forms of alternative resolutions (except for the tax settlements and procedural conventions previously mentioned) are not allowed to resolve tax matters in Brazil. In the case of tax settlements, if there is already a lawsuit in progress, the taxpayer is responsible for the pending legal costs. However, the fees due to the public attorneys may be also object of discounts.

 12. Statistics

 12.1 Pending Tax Court Cases

There is no specific platform to disclose progress of pending tax cases at the moment. However, according to the latest report published by the National Council of Justice (CNJ), the number of federal judicial tax enforcement cases pending at first instance is 625,458, representing around 0.97%. At the state level, at first instance, the figure is 4,807,518, representing around 7.43%. In the second instance, the figure is 161,071 (0.92%).

 12.2 Cases Relating to Different Taxes

According to 2022 CNJ data and DATAJUD, the tax with the highest volume of cases is the IPTU (Urban Property Tax), which accounts for 62% (36,874,868 claims), followed by ISS (municipal tax on services) with 8,56%, (5,085,864 claims) and ICMS (state tax on circulation of goods and services) with 6,36% (3,777,377 claims). These statistics point out that municipal taxes lead the ranking, followed by federal taxes (constituting most of the taxes), while state taxes have a lower number of cases. It is worth emphasising that the method data is not 100% accurate, as per the methodology expressly indicated in the report.

 12.3 Parties Succeeding in Litigation

This data could be properly obtained. Unofficial statistics provided by a third-party database show that tax authorities have a higher success rate than taxpayers in administrative tax cases. According to the Federal Revenue data, taxpayers lost 103 billion reais in 2023, three times more than in 2022. One of the explanations given (not properly proven) is the return of the casting vote that had been extinguished – whenever a case results in a tie at the administrative level of review, it must be decided by a casting vote by the President, which must be a Federal Revenue representative.

Other available data is the number of judicial cases in which the merits were assessed: 51% for assessed and 49% for not assessed. Another interesting data is that 51.4% of the decisions of the first instance cases confirm the administrative decision, while 48.6% modify the result defined administratively.

 13. Strategies

 13.1 Strategic Guidelines in Tax Controversies

Strategies for dealing with tax disputes arise even before the tax disputes themselves, starting with proper tax compliance, sustainable and efficient tax planning and accurate legal and tax advice.

Taxpayers should answer tax agents’ questions, focusing on explanation of the business facts, logically and comprehensibly providing legal and accounting documents and arguing about the rationality of the interpretation used to sustain a specific tax position.

In a tax audit, the taxpayer may claim the right to a hearing or to receive a tax authority visit. In administrative tax litigation, the taxpayer may produce substantial evidence, considering that there are no legal costs involved at that sphere. In a judicial tax litigation, the taxpayer may consider how to provide a guarantee in an efficient way to optimise cash flow and may consider the use of Procedural Conventions regarding guarantee offers, deadlines, requests, and other procedures.

In the event of remote chances of success, the authors recommend that taxpayers seek out the tax settlements available. With these agreements, it is possible to reduce the debt, obtain discounts on interest and fines, special payment terms and other benefits. In case of urgent need for immediate tax clearance certificate and if the tax enforceability is not suspended by legal decision, the authors recommend the use of tax installments and judicial deposits.

Autor

Sérgio Papini, Ricardo Varejão e Rodrigo Accioly