Originally published on the march 19 edition of World Tax Daily (Copyrights Tax Analysts www.taxanalysts.com)
Brazilian Finance Minister Guido Mantega on March 14 presented to Supreme Court President Justice Elle Gracie two law projects the executive branch plans to send to Congress regarding changes to current tax collection procedures.
Before submitting the projects to the legislature, the executive branch wants a broad debate and review by business associations, the legal community, and the public because, according to executive branch sources, the law projects would revolutionize tax collection procedures. Among the entities that will review the law projects are the Brazilian Bar Association, the Federal Justice Council, and CONFAZ, a council made up of the treasury secretaries of Brazil’s 27 states.
Two of the most important proposed changes would allow the Federal Revenue Department to pledge taxpayers’ assets without a court order and would authorize the tax administration to negotiate agreements on unpaid taxes, waiving most of the penalties and interest.
According to the Federal Revenue Attorney General’s Office (Procuradoria Geralda Fazenda Nacional, or PGFN), the federal government has approximately BRL 600 billion (approximately US $285 billion) in unpaid taxes under judicial execution procedures, 90 percent of which have been in court for more than five years and are still pending. According to PGFN, the longer it takes for a tax collection case to end, the more difficult it is for the government to actually recover unpaid taxes (because of taxpayer maneuvers to hide or dispose of assets). In addition to judicial executions, the Federal Revenue Department has BRL 300 billion (approximately US $142.50 billion) in dispute before administrative tax courts.
One of the main reasons for the extended length of judicial tax executions is the strictness of the Tax Execution Act of 1980, which, according to PGFN, needs to be revised and updated to conform to current needs and technology. Also, a pledge (freeze) of a taxpayer’s assets located in a different state from the tax execution can take more than a year. Another obstacle is the significantly large number of small tax debts (of up to BRL 10,000) for which the PGFN usually does not file tax executions because the cost is too high.
The two law projects to be proposed by the executive branch aim to make the Tax Execution Act more effective and flexible and also to allow tax authorities to negotiate, on a case-by-case basis, waivers of interest and penalties accrued on unpaid tax debts, to expedite collection. The possibility of negotiating tax debts, if approved by Congress, would be revolutionary because current tax laws prohibit any type of tax-related waivers except when provided by law. And those laws usually are used to grant special tax payment schedules, such as those created in 2000 (REFIS), 2003 (PAES), and 2006 (REFIS 3).
Another proposal related to small tax debts would allow the federal government to outsource collection procedures to financial institutions. The idea is to use banks’ existing repossession and recovery structures to make collections of small amounts of unpaid taxes more effective. The outsourcing of tax collections would include powers for banks to sign agreements with taxpayers and create individual tax payment schedules, which might even include financing by those banks.
Regarding the pledging of assets, the projects provide that tax authorities and the PGFN would have powers to freeze and pledge taxpayers’ assets without a court order. That issue is sensitive, and since the beginning has faced fierce criticism and opposition from taxpayers, business associations, and especially the legal community. The president of the Brazilian Bar Association, Cezar Britto, said the proposal violates taxpayers’ constitutional right to due process. If it’s ever converted into law, it will certainly be challenged before the Supreme Court as unconstitutional.
David Roberto R. Soares da Silva