Brazilian Tax Amnesty Program Temporarily Mitigates Unfavorable Change to Tax Proceedings
A publication jointly authored by the lawyers of Jones Day and Tozzini Freire.
The Background: Most Brazilian companies face tax underpayment assessments in light of a complicated tax regime. The Lula government is planning to significantly expand government expenditures and thus needs to quickly find new revenue sources.
The Result: Brazil is changing the administrative tax procedure so that tie votes at the panel deciding appeals no longer redound in favor of the taxpayer. At the same time, Brazil has offered taxpayers with pending administrative procedures challenging tax underpayment amounts a tax amnesty providing a discount of up to 100% of the interest and penalties, which usually represent the vast majority of the tax debt.
Looking Ahead: Companies with pending tax administrative procedures should consider applying for the amnesty by the March 31, 2023, deadline. They should also note that the costs associated with tax proceedings will increase, given that a successful result at the administrative level has become more difficult.
Tax liabilities, along with labor contingencies, are often the bane of those doing business in Brazil. Recent changes in the tax administrative dispute process, along with a tax amnesty promulgated by the new administration of President Lula da Silva that expires at the end of March 2023, have added a new calculus of how to deal with tax liabilities. The tax amnesty program allows for the forgiveness of interest and penalties on tax debts being challenged through the administrative tax process. Such penalties and interest usually far surpass the original amount of alleged underpayment.
MP 1160 and Alteration of Decision-Making by CARF
When the Brazilian Receita Federal ("RF") or tax authority issues a tax assessment, taxpayers usually choose to challenge it at the administrative level as opposed to starting a judicial proceeding that usually requires posting of a guarantee of the tax debt. Victory for the RF at the first stage of the administrative proceeding is considered by most Brazilian tax practitioners as preordained since a body of the RF itself makes the decision. Any decision in favor of the RF can then be appealed to the Conselho Administrativo de Recursos Fiscais ("CARF"), where only half the deciding panel is appointed by the RF and the rest is appointed by representatives of taxpayers. Until the recent issuance of Medida Provisória 1160 of 2023, any tie within CARF redounded in favor of the taxpayer pursuant to Law 13,988 of 2020. MP 1160 changes the presumption to favor the RF, giving the RF representatives a "qualified vote;" but to continue to have validity, a presidential decree such as MP 1160 must be approved by the Congress within 60 days of promulgation (which can be extended by another 60 days). Governors of 20 Brazilian states have advocated that the Congress take such action. On the other hand, some courts have granted injunctions in specific cases preventing MP 1160's mandate of granting a qualified vote to the RF's representatives in CARF from taking effect.
Given the potential that MP 1160 will take permanent effect and that appealing an adverse ruling by CARF at the end of the administrative level in the courts will likely require making a deposit or the posting of a bond or other guarantee equal to the value of the tax liability being appealed, many taxpayers are likely to be driven to take advantage of the new Tax Litigation Reduction Program launched by means of Portaria Conjunta RFB/PGFN No. 1 dated January 12, 2023. Such tax amnesty has not been available in the past to tax assessments being challenged at the administrative level, but the Lula administration is eager to provide incentives to increase tax revenues to fund its spending needs.
Tax Litigation Reduction Program
The program contemplates a reduction of up to 100% of penalties and fines applied on tax debts of taxpayers that are in the midst of administrative proceedings who choose to adhere to the program. Those debts that are assessed as being not recoverable or difficult to recover would be entitled to a maximum reduction in penalties and interest, subject to certain caps on the maximum overall reduction. Those caps are based on the time frame in which the payment is made and whether tax losses are used to pay the credits. Regarding those debts considered not recoverable or difficult to recover, at least 30% of their total value (after the discount) must be paid in cash. Regarding those tax debts that are assessed by the RF to be of medium or high prospect for recovery, at least 48% of their total value must be paid in cash. In such cases of medium or high prospect for recovery, there is no discount on the tax debt itself; the only benefit available is the use of tax losses to make payment. Further conditions apply depending on what time period for payment is elected and whether tax losses are used. The RF has been mailing letters to taxpayers with pending administrative tax proceedings with the authority's assessment on each such taxpayer's ability to pay, which should give taxpayers an idea of whether the tax authorities will grant a discount in the payment of interest and penalties in the case.
Experience of taxpayers so far suggests that a decision by the RF would be rendered within a matter of weeks after submitting an application. In any case, the RF's decision will be final unless the taxpayer chooses to take the dispute to courts, but given the discretion that is granted to the tax authorities, it is unlikely that any court would review the assessment. Brazilian jurisprudence has recently indicated that any forgiveness under a tax amnesty program is deemed a taxable gain, but in connection with the new tax amnesty, the government has clarified that the interest and penalties forgiven would not be treated as a taxable gain.
As noted above, there are two options for making the payment, either entirely in cash or part using accumulated tax losses until December 31, 2021.
Payment entirely in cash
Under this option, the taxpayer must make a down payment of an amount equal to 4% of the total debt before any discount (the "Down Payment"). The Down Payment is payable in up to four monthly successive installments and is a prerequisite for the taxpayer to apply for the amnesty program. If the taxpayer chooses to make the Down Payment in more than one installment, the first installment will be due at the time of application for the program, and the second installment would be due within one month thereafter and so forth.
After making the Down Payment, the taxpayer can enjoy a reduction of up to 100% of the total amount of interest and penalties based on the tax authority's evaluation of the taxpayer's ability to pay and the tax authority's likelihood of success, provided that:
- If the taxpayer opts to pay the remainder of the debt in two monthly and successive installments, then the total amount of the original debt cannot be reduced by more than 65%; and
- If the taxpayer opts to pay the debt in eight monthly and successive installments, then the total amount of the original debt cannot be reduced by more than 50%.
The maturity date of the first four installments referring to the Down Payment will not coincide with any of the remainder installments. The first installment of the remainder payment will be due within one month after the last installment of the Down Payment.
Payment using accumulated tax losses
The new program also contemplates the possibility of taxpayers using tax losses accumulated until December 31, 2021, to offset part of the tax debt in lieu of paying the debt entirely in cash. The use of tax credits is without prejudice to the taxpayer enjoying a reduction of up to 100% of penalties and fines, provided that the total amount of the debt is not reduced by more than 65%.
If the taxpayer elects to adhere to what is offered by the RF, the debt under this option would be payable in nine monthly successive installments, subject to the following:
- If the debt is classified as not recoverable or difficult to recover, then at least 30% of the debt (after the discount) must be paid in cash, and the remainder is paid with the use of the tax losses; and
- If the debt is classified as having a medium or high prospect of recovery, then no discount is available and at least 48% of the debt must be paid in cash, and the remainder is paid with the use of the tax losses.
There are also limits on the percentage of existing tax losses that can be used as part of the amnesty. After the RF and the taxpayer reach an agreement, the RF has a five-year term to review the amount of the tax losses that a taxpayer claimed to have, and the RF may decide within that five-year period to charge the taxpayer any additional amount if its calculation of tax losses differs from that of the taxpayer. There is some doubt on whether a company with pending tax liabilities that avails itself of the tax amnesty using accumulated tax losses would be able to dissolve before the end of such five-year term, but the prevalent view is that unless the RF has affirmatively taken action to challenge use of the tax losses, the relevant tax clearance certificates that one must present as part of any dissolution would be issued.
Urgent Consultation with Brazilian Tax Lawyers
Given the deadline of March 31, 2023, companies with operations in Brazil that have administrative cases before the RF should quickly consult with Brazilian tax advisors of the convenience of adhering to this most recent tax amnesty. Even taxpayers with well-grounded challenges with a prospect for a favorable outcome might find it beneficial to apply and adhere to the new tax amnesty proposal, given how long it takes to litigate tax disputes in Brazil and the uncertainties that may arise from the aggressive posture of a government eager to raise revenue to fund increased expenditures.
Three Key Takeaways
- Administratively challenging Brazilian tax assessments is becoming more difficult. A tie in a decision at CARF, which is composed of an equal number of government and taxpayer representatives, no longer redounds to the benefit to the taxpayer, but rather the vote of the government representatives prevails as a "qualified vote." Appeals to the judicial courts usually require a guarantee to be posted in the amount of the dispute and can take years to resolve.
- The RF or Federal Revenue Service is offering a discount of up to 100% of penalties and interest if a taxpayer applies for the amnesty by March 31, 2023, with respect to pending challenges of tax assessments at the administrative level. Penalties and interest accumulate quickly and usually represent the vast majority of the underpayment. The level of discount is based on the Federal Revenue Service's assessment of its ability to recover such amounts, including its assessment of the taxpayer's ability to pay. In the past, amnesty programs were not geared toward tax debts that were being challenged in an administrative proceeding.
- Companies with operations in Brazil should urgently consult with their tax advisors to determine if adhering to the tax amnesty will provide benefits. The Federal Revenue Service has been sending notices to taxpayers eligible for the amnesty, which include a statement of its assessment of how much the taxpayer can pay that will help in that determination.
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