Originally published in the April 19 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com )
Brazil’s Ministry of Finance is finalizing a draft law project that would empower tax authorities to negotiate tax issues with taxpayers. The project is expected to be submitted to Congress by May. The topic is unprecedented in Brazilian tax history because the country’s legal system limits tax authorities’ ability to waive taxes and penalties without a law to that effect.
The project, currently referred to as the General Law of Mutual Agreement and Alternative Solutions for Tax Controversies, establishes nine types of authorized negotiations, including one for companies under economic distress.
According to the Federal Revenue Attorney General’s Office (Procuradoria Geralda Fazenda Nacional, or PGFN), one of the purposes of the law project is to make tax administration and collection more effective and efficient, as well as to reduce the 16-year average for completion (administrative and judicial) of a tax case.
The law project has been presented to industry and commerce federations for comment before a final draft is submitted to Congress.
One of the main types of mutual agreement proposed is similar to the U.S. chapter 11 (reorganization) but is tax-related in that the taxpayer can show evidence of economic distress and provide tax authorities with a payment plan for its unpaid taxes. The tax authorities would then review the taxpayer’s situation and decide whether to accept the proposed payment plan.
In another type of proposed mutual agreement, the taxpayer and the administration may try to settle a tax dispute at any time during a tax case brought before an administrative or judicial court. The initiative may come from the taxpayer or the tax administration, but it applies only to taxes owed. Taxes that the taxpayer seeks to recover are not subject to the mutual agreement procedure under the proposal. This type of mutual agreement may include a waiver of penalties, which in some cases may reach as high as 100 percent of the taxes owed. Up to 70 percent of the interest may be waived.
A third type of mutual agreement includes more participation by the tax administration in bankruptcy cases. Brazil’s Bankruptcy Act prevents the tax administration from actively participating in reorganization or liquidation cases. With the law project, the tax administration could reach a mutual agreement either with the company under reorganization or with its creditors and could include unpaid tax debts in a payment schedule mutually agreed on by the interested parties.
In another type of mutual agreement, a dispute between the taxpayer and the administration would be brought before a panel of arbiters for resolution.
The draft law project also includes a mutual agreement for tax- related crimes that limits any term of imprisonment to three years. Under a mutual agreement with prosecutors, a sentence of imprisonment could be revoked and replaced with an order to perform community service and fully pay the tax due.
Other mutual agreement situations under the draft law project include:
- a preventive mutual agreement, in which the administration may propose, with the taxpayers’ participation, a mutual agreement in case of uncertainty related to tax issues;
- a mutual agreement by accession, in which the tax administration proposes a mutual agreement for recurring situations; and
- an anti-tax-avoidance mutual agreement, in which the taxpayer submits a proposed tax strategy for approval.
If the law project is approved by Congress, it will be a significant step forward, making Brazil’s tax system comparable to those of many other countries where negotiation between the taxpayer and the administration is not only possible and legal but also commonplace.
David Roberto R. Soares da Silva