Originally published in the December 26 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
For many years, Brazil’s 0.38 percent bank transactions tax (CPMF) not only has increased federal tax revenue, but it has also helped the Federal Revenue Department detect evidence of tax evasion. In most cases, inconsistencies between a taxpayer’s CPMF payments and his tax return triggered tax audits, often resulting in tax assessments.
The expiration of the CPMF on December 31 will make it more difficult to fight tax evasion and the use of undeclared funds, said Federal Revenue Department Subcommissioner Paulo Ricardo Cardoso. He said the Federal Revenue Department is therefore seeking legal alternatives to compensate for the loss of such an important tool.
Specifically, the Federal Revenue Department is considering creating a new tax return similar to the one created in 2003 to report credit card transactions. The new tax return would be used by financial institutions to report their clients’ financial transactions.
Tax assessments against corporate and individual taxpayers arising from CPMF cross-checking over the past five years amount to an estimated BRL 41 billion (approximately $22.7 billion). Of that amount, approximately BRL 15 billion has come from individuals, and approximately BRL 26 billion from corporate taxpayers.
That is tax revenue that the government does not want to lose, even though most of the assessments are challenged in court and the proceedings last for years, delaying the receipt of the disputed tax revenue.
In its consideration of alternative tools to prevent the loss of such tax revenue, the government has turned to Complementary Law 105 of January 11, 2001. One of the law’s most relevant provisions states that under certain conditions, financial institutions’ disclosure of the financial information of citizens and entities to some governmental agencies does not violate bank secrecy laws. Financial information encompasses information about deposits in banking and savings accounts, payments in cash or by check, credit orders, loans, purchases and sales of fixed and variable income investments, investments in mutual funds, purchases of foreign currency, transfers of currency to and from Brazil, and credit card transactions.
Article 5 of Complementary Law 105 states that the executive branch may regulate the criteria for and timing of amounts that financial institutions report to federal tax authorities with regard to the financial transactions of their clients.
However, the effectiveness of a special tax return for financial institutions, if ever created, will depend on how the judiciary views its constitutionality. Some observers argue that the provisions of Complementary Law 105 violate individuals’ right to data privacy, as provided in article 5, Item XII of the Brazilian Constitution.
David Roberto R. Soares da Silva