Originally published at the Feb 26 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s House Approves Revenue Service Merger
Brazil’s House of Representatives has approved a law project that merges the Social Security Revenue Service with the Federal Revenue Department.
Brazil’s House of Representatives on February 13 approved Law Project 6,272/2005, 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, such as employers’ payroll tax. The law project now will be submitted to President Luiz Inácio Lula da Silva for his signature.
The merger of the revenue services originally was proposed by the executive branch in Provisional Measure 258 of 2005. However, that measure was not put to a vote by Congress within the required 120 days, and therefore expired. That turn of events required the executive branch to send the law project to Congress. The law project was previously approved by the House and Senate, but because of changes introduced by the Senate, it had to be submitted for a new vote by the House.
The most controversial change proposed by the Senate — and approved by the House on February 13 — requires a decision from a labor court for revenue agents to recharacterize a service agreement as employment and to assess the corresponding social security taxes on payroll. The government opposed the restriction, arguing that personal service companies have been used to bypass employment relationships and avoid the payment of social security taxes (on compensation and payroll). Tax agents should have the power to disregard service contracts if elements of an employment relationship are deemed to exist and to assess not only social security taxes on payroll but also withholding income tax on compensation, the government argued.
Before the merger, social security tax agents generally disregarded contracts with personal service companies, assessing significant amounts of social security taxes dating back as far as 10 years.1 Corporate taxpayers argued that the practice was unconstitutional because according to Brazil’s constitution, only a labor court can determine if a given relationship is, in effect, an employment relationship.
The Senate amendment, which was ratified by the House, expressly removes tax agents’ power to disregard service contracts under the new merged Federal Revenue Department. That is good news for taxpayers, as their contractual arrangements with personal service companies — many of which are not disguised employment relationships — will be subject to fewer challenges.
Unions representing the tax agents and some allied parties in Congress likely will try to get the restriction vetoed, but many observers maintain that a presidential veto is unlikely.
David Roberto R. Soares da Silva
FOOTNOTE
The statute of limitations for social security taxes such as payroll taxes is 10 years, as opposed to 5 years of other general taxes.
END OF FOOTNOTES