Originally published in the January 18 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s Democrats Party (formerly the Liberal Front Party, or PFL) on January 7 and 8 filed two direct actions of unconstitutionality (ADins) before the Brazilian Supreme Court, challenging a recent increase in the rate of the financial transactions tax (IOF) and, for financial institutions, a pending increase in the social contribution on net income (CSL).
The tax increases were introduced by means of Presidential Decree 6,339/2008 and Provisional Measure 413, respectively, to offset expected revenue losses from the expiration of the 0.38 percent bank transactions tax (CPMF).
In ADin 4002, regarding the IOF, the Democrats Party argues that Presidential Decree 6,339 introduced two different tax measures. It not only increased the existing IOF rates, they say, it also created a new IOF surtax equal to the expired 0.38 percent CPMF for several transactions. The party is challenging the new surtax on constitutional grounds, saying that it must be created by way of a formal complementary law, and not just a presidential decree.
The Democrats also contend that the IOF surtax, as a new tax, is unconstitutional because it imposes double taxation on several transactions for which the increased IOF and the IOF surtax apply simultaneously.
Furthermore, as a new tax, the IOF surtax can be levied only from the calendar year following the year that the relevant legislation is published in the official gazette (in this case, starting in 2009). ADin 4002 also states that the IOF increase is unconstitutional in some cases because it violates the equality principle established in the constitution: In some credit transactions, the ADin says, the new IOF rate is higher for individuals than for corporate borrowers.
As for the CSL, the main argument in ADin 4003 is that the tax increase violates the constitutional principle of equality because it discriminates against some taxpayers based on their business activities (financial and insurance). Article 150, II of the constitution expressly prohibits discriminatory tax treatment among taxpayers based on professional or business activities.
Supreme Court President Ellen Gracie determined that ADin 4003 will follow an expedited procedure for judgment. Under that procedure, Brazilian President Luiz Inácio Lula da Silva will have 10 days to respond to the ADin. After that, attorneys representing the government will have five days to present their arguments, and an equal amount of time will be given to the federal attorney-general.
The Supreme Court will then deliver its decision, hopefully before the new CSL rate becomes effective on May 1. The IOF increase took effect on January 3.
David Roberto R. Soares da Silva