Overview
Brazil is a country known for having a complex tax system. This occurs not only because of the extensive body of tax statutes in the three different government levels (local, state and federal), demanding companies to keep a significant number of workforce allocated to tax compliance matters, but also because of legal intricacies involved in tax litigation in both administrative and judicial level.
Different from other countries, in Brazil there is no provision allowing taxpayers and tax authorities to settle in case of divergences on the application of the tax laws. Once a tax assessment is issued, it is basically an all or nothing situation and the court will have grant, in full or in part, or deny the defense filed by the taxpayer.
Given the importance of tax litigation in Brazil and relative lack of materials about the subject, the present article, which will be developed in two parts, aims to present an overview on the main features of the federal administrative tax procedure in Brazil, its pitfalls and opportunities. In a second article to come we will deal about tax disputes before the Judiciary branch.In order to provide guidance to the reader, this article is divided into four sections: (i) preparation of the tax dispute; (ii) dispute at he Lower Federal Tax Panel; (iii) dispute at the Taxpayers Council; and (iv) post tax litigation issues in the administrative level. The first part of this article will address items I and II.
I - Preparation of tax disputes in the administrative level
Prior to the issuance of a tax assessment, the Brazilian Tax Authority (hereinafter "RFB") conducts a thorough audit of the taxpayer. This audit can be made onsite or by virtual means by simply reviewing tax documents (tax returns, offsetting returns, import returns, etc.) filed by the taxpayer and available in the RFB's records.
Once the taxpayer is notified about the beginning of the audit there is no more space for filing of a voluntary disclosure for the payment of unpaid taxes. Nevertheless, within the twenty (20) days immediately after the receipt of the notification, the taxpayer is entitled to pay with no additional fines any taxes already reported to the RFB, but not paid. Thus, during the first twenty days of the audit, the taxpayer can make payments in conditions similar to the ones applicable to the voluntary disclosure. In case there is no payment within this initial period, the audit will continue and the taxpayer is prevented to make any payment in relation to the taxes under audit (already reported or not) without the incidence of penalties.
The audit is mostly a one-way process. The taxpayer is merely asked to support the auditor with documents and clarifications as requested, and there is limited space to oral discussions about the taxpayer's practices. Although not very common, tax auditors can rely on documents and information provided from other sources, such as news from the press and documents/information from the taxpayer's clients or suppliers under audit to build the case against the taxpayer.
There is no specific term for the conclusion of the audit. In general, audit's notifications provide an initial 60-day term for the conclusion of the audit, but this period can be renewed multiple times. In practice, almost all tax audits are concluded within a period of one to six months after the issuance of the first notification.
Under certain circumstances the taxpayer can refuse to disclose certain documents, specially in cases in which the disclosure may cause a breach of confidentiality obligations. In case the auditor decides to push the taxpayer for such kind of documents and threats with the application of aggravated penalties, the taxpayer is entitled to seek for judicial remedy to avoid the disclosure and to be penalized for not providing such kind of evidences to the tax auditor.
On the other hand, should the taxpayer decides to not cooperate with the tax auditor on unreasonable basis, the tax auditor is entitled to increase in 50% the value of the penalty in case a tax assessment is issued. Thus the denial to disclose must be carefully considered.The potential penalties applied in a tax assessment can range from 75% (most of the cases) to 225% (very limited situations) over the amount of tax charged, in addition to the interest applicable.
Once the tax audit is concluded and the tax assessment is issued, the taxpayer has three options: (i) to challenge the tax assessment; (ii) to pay the tax assessment within 30-days with a 50% discount on the penalty portion; or (iii) to pay the tax assessment in up to sixty (60) installments with a 40% discount over the penalty portion.
II - Tax Dispute At the Federal Lower Administrative Tax Court
In case the taxpayer decides to challenge the tax assessment, a defense shall be filed within 30 days from the date the notification is received. There is no need to post any collateral in order to exercise the right to file a defense and as long as the defense is filed within the deadline the enforceability of the tax debt is suspended.
With the suspension of the tax debt, the taxpayer is entitled to renew his tax clearance certificate. Many governmental bodies and financial institutions require the certificate for taxpayers to participate in public bids, to obtain financial loans, and to benefit from tax incentives.
In its defense the taxpayer is entitled to present all kinds of evidences to support its allegations. Nevertheless, the hearing of witnesses about the facts under dispute is very unlikely to occur in a dispute at the administrative court, although there is no legal prohibition to request it.
All the allegations and documents to sustain the position of the taxpayer must be presented together with the initial defense. However, different from the procedure at the Judiciary branch, the procedural rules in the administrative court tend to be much more informal and flexible. Thus, in practice the presentation additional documents, specially technical experts reports, its not uncommon after the filing of the defense. In order to avoid any opposition to the presentation of new documents, the defense shall include a special request for such action and provide the due necessary clarifications for the reasons the evidences were not exhibited since the beginning of the dispute.
Once the defense is filed the case is remitted for review by a panel formed by three judges, formed exclusively by members of the RFB. This panel is a body of the RFB and is called "Delegacia Regional de Julgamento - DRJ" and serves as a Federal Lower Administrative Tax Court.After the receipt of the defense, the panel can request additional clarifications from the tax auditor responsible for the draft of the tax assessment. In this case, after given clarifications, the taxpayer is notified to present additional defense regarding the issues added or clarified by the tax auditor.
The sessions conducted by the three-judge panel are private and made without the presence of the taxpayer. Currently, there are some attempts by the Brazilian Bar Association to make these sessions public, but to this date the measures have had limited effect.
Considering that exclusive members of the RFB form the DRJ, most of the taxpayer's defenses filed are dismissed. Exceptions to this standard occur in cases of clear violation against the statute of limitations, material mistakes in tax assessment, evident mistakes in the interpretation of the applicable regulations or presence of a cause that determines the tax assessment to be considered null and void because of breaches to its legal requirements (violation to the due process of law, for instance).
In average, a regular case takes up one to two years to be reviewed by the DRJ. Once notification about the decision is formalized, the taxpayer has 30 days to file a voluntary appeal to be reviewed by the Taxpayers Council ("CARF") or to pay the debt with 30% over the penalty maintained by the DRJ's decision. There is no need to post any collateral to file an appeal to the CARF or to pay any court fees. In addition, there is no need for the taxpayer to be represented by an attorney, even in virtually all cases the taxpayers choose to be represented by one.As of 2011 the RFB started the implementation of the electronic process ("e-processo"). Therefore, the cases are remitted to the CARF much faster than used, obliging the taxpayer to be more attentive to the definition of the strategies to be adopted at CARF even before the case is assigned to one of the judges that will act as rapporteur of the case. In part II of the article we will address the main characteristics of the CARF and the duties and rights of the litigators at that administrative tax court.