Originally published in the April 27 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s House of Representatives on April 4 received a law project that would establish taxpayer rights that tax administrators at federal, state, and local levels would have to respect; the measure would also cover social security taxes.
There is little consensus behind the law project, proposed by lawmaker Sandro Mabel, so it will likely face opposition from the many proponents of extending, rather than limiting, the powers granted to tax authorities.
Complementary law project 38/2007 is a complex piece of legislation containing more than 50 articles, many of which are already in place in several different statutes. The project would consolidate all existing taxpayer guarantees and rights and create many more, some of them controversial and extremely protective of taxpayers.
Tax Law Changes
Under the proposed Brazilian Taxpayers’ Bill of Rights:
- only a formal law, duly approved by Congress, could reduce tax payment terms, or make operational changes that are more burdensome to taxpayers regarding tax payment or tax calculation;
- only rates of import and export duties could be changed through provisional measures;
- for a tax change to be effective in the following calendar year, the official gazette (where such changes are officially published) would have to be effectively available to taxpayers by December 31 of the year preceding the change;
- taxing powers would be forbidden to publish tax laws in extra or special editions of the official gazette whenever they create or increase a tax or regulate any tax issue;
- tax laws, codes, and regulations would have to indicate the rules they revoke or change; and
- the tax administration would have to assure full access for taxpayers to the official interpretation of the tax laws.
Fair Treatment
The proposal would bar tax administrators from applying penalties or punitive charges that stem from a taxpayer filing a lawsuit to dispute a tax, unless a court of law determines otherwise. Use of political sanctions solely intended to collect a tax, including temporarily shutting down a business, prohibiting the taxpayers from conducting business with the administration and state- owned credit institutions, and administrative sanctions would be forbidden. The general principle behind these restrictions is that tax authorities would be prohibited from acting in any way that threatens the generation and maintenance of jobs, hinders economic development, or prevents or impedes investments and the free exercise of economic activities.
Disregard Doctrine
The controversial disregard doctrine, which president Luiz Inácio Lula da Silva recently vetoed upon promulgating the merger of the Federal Revenue Department, once again comes into play. Article 16 of the project provides that only the judiciary may disregard a legal entity, and then only if there is evidence of abuse, violation of corporate powers, or violation of the law or of the company’s articles or bylaws by the taxpayer’s representatives or equityholders. The disregarding may be also determined (by a court of law) in case of bankruptcy, insolvency, liquidation, or inactivity of the company resulting from wrongful management. The disregarding, however, may be determined only regarding third parties that control the disregarded company. Public servants, tax agents, public attorneys that carry on any disregarding act without a court order would be held liable for their acts.
Taxpayer Rights
The law project provides that a taxpayer’s good faith is presumed. No taxpayer could be compelled to make a deposition against itself, and any evidence obtained that way would be considered illegal. Taxpayers could not be required to provide, either administratively or judicially, a cash deposit, bond, guarantee, or pledge. The sole exception would be the need to secure tax executions, where guarantees must be presented. A taxpayer would be entitled to have access to any tax proceeding whose resolution may have a personal or financial impact, directly or indirectly, against the taxpayer.
No tax authority request for information could have a response term of less than five days. Taxpayers would not be required to provide a document if the tax administration already possesses the information it contains (for example, tax returns). A taxpayer would have the right to continue its business or professional activities during a tax audit, especially when it employs five or more employees. Taxpayers would enjoy the same defense, response, and appeal terms granted to taxing powers.
Unless a court order determines otherwise, a taxpayer would be free to dispose of its assets. A taxpayer could not be compelled to pay a tax until it receives the corresponding payment. For installment payments, tax payments will be determined accordingly. In general terms, this right would revoke the accrual basis regime and subject all taxpayers to the cash basis regime. Although this provision may benefit a large number of small businesses and individual taxpayers, it certainly needs to be amended for corporate taxpayers. Tax refunds would have to be paid within 180 days after the corresponding tax return has been filed.
The country’s overall tax burden would not be allowed to exceed 35 percent of gross domestic product, 65 percent of which would be destined to the federal government, 30 percent to states, and 5 percent to municipalities. This “right” appears to be overbroad, unrealistic, and difficult to accomplish.
Tax agents, along with the taxing power for which they work, would be held personally liable for any damages to taxpayers deemed to have been illegal, arbitrary, or against a valid court order, or against case law. For property tax purposes, valuation of property (by taxing powers) for a value clearly above market value would be considered excessive taxation and would result in criminal consequences to the public servant signing the corresponding appraisal report.
Taxpayers would be reimbursed for all costs of providing bonds and other guarantees to secure a tax dispute, if the taxpayer prevails in the dispute; this is a completely new provision that taxpayers would certainly use. The main drawback to this provision is that obtaining reimbursement from taxing powers is time-consuming and, depending on the costs involved, may not be worth pursuing.
Before an assessment is issued, taxpayers would be guaranteed the opportunity to present a preliminary defense to the tax agent. At the taxpayer’s election, any tax credit resulting from an administrative or judicial decision could be used to pay tax debts owed to the same tax administration.
Requests for Ruling
The proposal would require the tax administration to answer requests for rulings within 90 days. Failure to answer within this period would be considered a tacit acceptance by the tax administration of the taxpayer’s position as described in the request. While a ruling request is pending, tax authorities would be barred from issuing tax assessments on the same issue.
Tax Administration’s Obligations and Duties
The law project lists a series of obligations and duties to be followed by the tax administration, including how to deal with tax audit proceedings and formalities, installment tax payment schedules, how tax agents should treat taxpayers, general principles for the tax administration, and requirements for administrative decision involving tax proceedings. No criminal action or action to breach taxpayer bank secrecy could be filed before the end of the tax proceeding in which the tax administration prevails. A favorable administrative decision to the taxpayer with regarding a tax dispute would exclude any criminal charges related thereto. The filing of a tax collection order not in accordance with the law project’s provisions could result in indemnification and punitive damages in the taxpayer’s favor.
Taxpayer Defense Rights
Court charges and fees would not be allowed to exceed 0.5 percent of the amount under dispute; no such limitation currently exists. If the corporate taxpayer can demonstrate financial distress, court charges and fees may be paid in installments or at the end of the lawsuit, at the court’s discretion. Other taxpayer defense rights include the defense of taxpayers’ interests in class actions filed by associations, class entities, or public attorneys (for example, district and federal attorneys).
Conclusion
In his message to Congress, Mabel acknowledged that he drafted the law project with the assistance of business associations. The purpose of the proposal, he said, is to make the relationship between the tax administration and taxpayers more equal and just.
From the above description, the legislation appears to be somewhat unrealistic, as it imposes a series of restrictions to effective and efficient action by the tax administration. In an ideal world, the proposal might have worked perfectly, but anyone with any sense of Brazilian tax reality would agree that many aspects of the law project just will not fly. Abuse from taxpayers — or, more to the point, tax evaders — would make it practically impossible for the tax administration to pursue evaders and make them pay taxes they lawfully owe.
The project does, however, have unquestionable merits as it puts in a single piece of legislation many principles that are currently given short shrift by tax agents and the tax administration. If half of the project’s provisions are ever enacted, Brazil would certainly become a more fair country in terms of taxation.
David Roberto R. Soares da Silva