Originally published on the March 23 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil on March 19 published Law 11,457/2007, which merges the Social Security Revenue Service with the Federal Revenue Department. The new department will concentrate on audits and the collection of federal taxes and all social security taxes, including employers’ payroll tax.
One of the most controversial issues in the law – which required a decision from a labor court for revenue agents to be able to recharacterize a service agreement as employment and to assess the corresponding social security taxes on payroll — was vetoed by President Luiz Inácio Lula da Silva. In his veto message, Lula da Silva argued that tax and social security laws must apply whenever a taxable event is deemed to occur, and to require that the application of the laws depends on a court order would violate the constitutional principle of separation of powers.
Just after the veto, Finance Minister Guido Mantega said the executive branch plans to send a bill to Congress regulating the powers granted to tax auditors in that regard. Congress now is threatening to revoke the veto.
Law 11,457/2007 makes several important changes to the way the Federal Revenue Department will carry on its audit and collection activities. It also includes many provisions dealing with career structures for tax agents and tax auditors. Among the most significant changes made by Law 11,457/2007 are the following:
- all social security obligations in the Social Security Act (Law 8,212/1991) will now be performed by the Federal Revenue Department;
- social security tax proceedings, including those arising from tax assessments, and social security tax filings have been transferred to the Federal Revenue Department;
- the National Institute of Social Security will continue to issue social security-related tax clearing certificates, manage social security funds collected by the Federal Revenue Department, and calculate, review, and grant social security benefits;
- social security tax debts will become federal tax debts to be collected and executed by the Federal Revenue Attorney’s Office;
taxpayers will not be able to request a tax setoff of social security tax credits against federal tax debits (that possibility originally was announced as one of the main advantages of the revenue service merger, but Law 11,457/2007 now expressly prohibits such setoffs); - the Second Taxpayers’ Council (a body within the Ministry of Finance) will have jurisdiction to review administrative appeals arising from social security tax assessments (previously, those cases were under the appeal jurisdiction of the Social Security Appeals Council, which has been now abolished);
- tax assessments and appeals must be reviewed and a decision rendered within 360 days of their filing (although the law does not provide for a consequence if tax authorities do not comply); and
- the law provides for a comprehensive special tax payment schedule for social security tax debts owed by states and municipalities; payments can be made in as many as 240 monthly installments (over 20 years), provided that certain requirements are met.
Jorge Rachid, chief commissioner of the Federal Revenue Department, said the new law will make tax administration more efficient, simplify the agency’s internal processes and procedures, and strengthen the fight against social security tax evasion and fraud.
It remains to be seen whether the merger does indeed improve efficiency or rather, creates a “super” tax collection structure feared by taxpayers that has access to all taxpayer tax and financial information. With the new powers granted to the agency’s auditors to audit and assess social security taxes, tax assessments will be greater and more complex from now on, as they will cover a broader range of taxes.
David Roberto R. Soares da Silva