The journey of tax reform

Finally, we approved the tax reform, aiming to overcome old problems that affect our economic growth. We will move from an old system to a new one, starting the regulation and implementation of the general measures of Constitutional Amendment 132. The time has come to begin our journey — scheduled for ten years — towards the promised land in search of GDP growth, tax equity, neutrality fiscal, simplification, transparency, de-bureaucratization, modernization of taxes, redistribution of revenue between federative entities, reduction of tax evasion, collection at destination, changes in income tax, end of the cascade effect.

We begin a long journey, and the old and the new will coexist in the transition.

On this journey there will be a debate on dozens of complementary laws, detailing more than 70 points that must be regulated through government proposals to Parliament.

The definition of tax rates; who will pay and to whom; exceptions with lower rates; what will be the administration of the system and the interaction between the federative entities; the collection, inspection and distribution of taxes by the Management Committee that will be created; compensation mechanisms between states and municipalities; procedural standards and definition of selective tax are some of the important topics that will spark many disputes and generate great movement throughout society, with in-depth technical discussions in the legal, auditing and accounting sectors.

We will face the divergence between those who rightly defend the necessary balance of public accounts and those who do not agree with spending cuts, creating a conflict that will affect the size of the tax burden.

In the corporate environment, there will be conflicts between productive sectors to define which activities will be more or less burdened and how the criteria for the incidence of the Selective Tax will be established. And we still have to guarantee taxpayers' rights, reduce trillion-dollar tax litigation, combat tax evasion and the growth of the illegal market, issues that must necessarily be directly included in these debates.

Faced with so many matters that must be scrutinized, and knowing that “God or the devil are in the details”, the time has come to decide whether we will take advantage of or lose this historic opportunity to finally improve our tax system.

It certainly won't be a smooth crossing. We will have to part seas, face bad advisors and deep conflicts of interest, accept structural changes and so, without Moses to guide us, we have to move forward.

Get out of speech and take action. Our destiny depends on us getting the right direction and overcoming archaic structures that hinder our economic and social development. In truth, we need to move away from what Roberto Campos said: “Brazil does not miss the opportunity to miss an opportunity.”


Stubborn debtor: lack of specific law maintains practice without punishment

Brazilian law does not have a definition on what is a persistent debtor. Therefore, the fight against criminal tax evaders it always comes up against the ability to impose sanctions on those who adopt the practice systematically in order to have competitive advantages. The sectors in which there are more regular debtors - who purposely fail to pay taxes - are fuels, cigarettes and beverages, highly regulated by the State.

Two bills in progress in Congress contain these definitions of the figure of the debtor who is a debtor: the PLS 284/2017 and the bill 1646/2019.

For specialists heard by the JOT, defining clearly what characterizes a persistent debtor is fundamental. “The regular debtor takes advantage of himself to hide behind a lot of legal questions,” says Guilherme Barranco, a partner at Barranco Sociedade de Advogados and a former adviser to Carf. "The less precise the criteria are, the more he can object in court to say that he is not a regular debtor."

PLS 284/2017 defines a persistent debtor as one who acts in the field of illicit acts, "he is a criminal, and not a businessman, who organizes himself in order not to pay taxes and thereby obtain a competitive advantage".

The executive president of the Brazilian Institute of Ethics in Competition (ETCO), Edson Vismona, considers PLS 284/2017 to be the best project to combat the persistent debtor. “It brings the difference between what is a debtor and a possible debtor and gives legal certainty for the use of the term 'debtor',” he explains. “Legal certainty is fundamental and the law is exactly in that sense. The bill is ready, but stopped, that's the problem ”.

The most recent opinion, of 2018, made by the ex-senator Ricardo Ferraço (PSDB-ES), establishes measures to combat the debtor contumazado in the federal, state and municipal spheres. As examples of possible sanctions against offenders, the opinion cites: suspension or cancellation of tax registration; loss of registration for operation; interdiction of the establishment; application of special inspection and collection regimes. Currently, the project rapporteur is Senator Rodrigo Pacheco (DEM-MG).

“The law is a good step, because today the environment is without definitions, cloudy. And everything that is foggy in this high tax environment these regular debtors use for their benefit ”, highlights Luciano Godoy, partner at LUC Advogados, arbitrator and lawyer specialized in litigation.

PL 1646 / 2019

Another bill, PL 1646/2019, which has a smaller amplitude in relation to the Senate text. “1646 is being called a debtor's project. But there are four articles that talk about the debtor and the rest of the project talks about the modernization of the collection of the active debt of the Union ”, says the tax lawyer Guilherme Barranco.

The bill defines a frequent debtor as “one whose performance goes beyond the limits of default and is located in the field of illegality, with serious damage to the whole society”. The text also establishes that the “substantial and repeated” default of taxes will be configured when it is found that there are debts of an amount equal to or greater than R $ 15 million for one year, on behalf of the debtor himself or of a member of the economic or family group. . “In the tax sphere, especially with larger companies, it is very easy to have debts above R $ 15 million”, points out Barranco.


Last year, the plenary of the Federal Supreme Court, by seven votes to three, defined the thesis that the taxpayer who fails to collect the ICMS commits a crime as long as there is fraud. On that occasion, the Court judged the RHC 163.334 filed by clothing store owners in Santa Catarina denounced for not collecting ICMS between 2008 and 2010.

The established thesis was that “the taxpayer who consistently and with the intent of appropriation fails to collect the ICMS charged to the buyer of goods or services is subject to the penal type of Article 2, item II of Law 8137/1990”. This law defines crimes against the tax order. The aforementioned item says that it is a crime "to fail to collect, within the legal term, value of tax or social contribution, discounted or charged, as a taxable person of obligation and that should collect public coffers".

The head of the Legal Department of the Federation of Industries of the State of São Paulo (Fiesp), Hélcio Honda, warns that caution is needed in the definition of a debtor. “The figure of the stubborn debtor is pernicious, but she must have a cautious definition. You need to have another element besides default, ”he says. “And what is the other element? It is the willful figure of not paying the tax, the desire to harm the market. The subjective question of deceit is very important ”.

How a frequent debtor acts

The debtor often uses the slowness to have debts executed and the possibility of questioning tax collections to save time and obtain high rates of return. "The company establishes itself and is already structured to not pay tax, because it will have an illegal competitive advantage, a very high profit margin and will inhibit fair competition", says Edson Vismona, ETCO's CEO. "It is what happens in the most charged sectors, fuel, cigarettes, beverages."

The lawyer Luciano Godoy also explains that these products are more difficult to be inspected: “They [the regular debtors] go for products that are fast to consume. Cigarette and fuel, for example, you used it and there is no trace of the crime. Nobody is going to be a regular debtor, for example, making a refrigerator and a television ”.

With installments of taxes and questioning of collections, a company is able to operate smoothly for up to five years. “An installment discussion can take three, four years. In court, it will depend. There are thesis discussions that can take up to four or five years ”, says Gustavo Amaral, partner responsible for the tax area at Paulo Cesar Pinheiro Carneiro Advogados Associados. "And this is not necessarily linear, because an installment program may appear and break this sequence."

Special content: The fight against the persistent tax debtor

In the fuel sector, the figure of the heavy debtor is concentrated on the sale of ethanol, which has divided taxation on refining and distribution, which facilitates fraud.

"The beginning of all this is front companies, with the discourse of a good Christian, telling the ANP that they are starting with minimal capital ”, explains Carlo Faccio, director of Instituto Combustível Legal. “In parallel, they begin to make sales with interstate transactions and to accumulate debts. Except that until the [State's] Treasury identifies the non-payment, there is a delay of two to three years. ”

After that period, when the debtor is characterized as a regular debtor, the Finance departments are unable to exercise the right to collect from companies, which usually do not have equity and are registered with minimum capital.

This happens a lot with distributors, who depend on little capital to operate. "The debt is not charged, so everything that the company failed to collect over time becomes a profit to the detriment of the tax authorities and competitors," says lawyer Gustavo Amaral.

To continue in the activity, other companies are opened to do the same, only with a new name and registration. “There comes a time when the IRS takes action, suspends activity. But he [contumazante debtor] has, in parallel, created another CNPJ, and simply jumps from a company that he is going to abandon, moves on to another and follows his business ”, explains Edson Vismona, from ETCO.

The negative effects of the frequent debtor are contracted by the State, which earns less, and by the market in the sector in question.

“The effect on competition is a disruption of what would be the natural competition in that market,” says Eduardo Frade, partner at VMCA and former superintendent of Cade. "It generates a disincentive to the entry of new competitors, in addition to a series of exits, with a greater concentration of the market", he says. "There is also an adverse selection effect, an effect in which the agents who act against the rules are rewarded and those who act according to the rules are punished."

In the case of fuels, the final price of gasoline is up to R $ 0,90 per liter at stations that sell products derived from irregular chains. In ethanol, the variation reaches up to R $ 0,51, according to a study by the consulting firm Boston Consulting Group (BCG).

Article published on 31/08/2020 on the Jota Portal, in the Jota Discute session, which has the support of ETCO.


Pandemic Explorers

We were hit hard. The health tragedy has demanded that public administrators, parliamentarians and companies have total concentration in combating the new virus and in the search for alternatives that besides saving lives - essential - can maintain the minimum conditions so that our country does not go bankrupt.

In addressing the consequences of the pandemic, several initiatives are being taken to reduce the effects on both public health and the economy.

At the National Congress, one of the proposals was presented to the Federal Chamber through Bill 1397/2020 which aims to institute emergency measures aimed at preventing the crisis and promoting, on a transitional basis, changes to the provisions of the law that deals with judicial, extrajudicial and bankruptcy recovery of the entrepreneur and the company.

Within its scope, among other measures, in accordance with article 11 of the text presented, the obligations provided for in the judicial or extrajudicial reorganization plans already approved, regardless of the resolution of the general meeting of creditors, will not be required from the debtor for a period of 120 ( one hundred and twenty). Article 12 of the said project allows the presentation of a new judicial or extrajudicial recovery plan, whether or not the original plan was ratified in court.

Later on (article 15), PL1397 / 20 allows the suspension of administrative acts of revocation, revocation, impediment of registration, registration, code or number of taxpayer, regardless of its type, mode or fiscal quality, subject to any entity of the federation that is under judicial discussion, within the scope of judicial reorganization.

The Brazilian Institute of Ethics in Competition (ETCO) understands that in this moment of pandemic, legislative initiatives that aim to rebalance the economic conditions of individuals and legal entities are welcome and necessary.

However, so that not only exceptional conditions are dealt with, but also that the general and comprehensive framework of legal certainty and competitive ethics is maintained, it is desirable that adjustments be made to the text of that bill.

With regard to the aforementioned articles, it should be noted that it is not by chance that there are general meetings of creditors and recovery plans approved in court. These are instruments that establish priorities and bring legal certainty to judicial and extrajudicial recovery processes. Otherwise, if these provisions were ignored, there would be a risk that the entire process would fall into an unknown legal limbo, leading to the growth of an already exorbitant judicial litigation.

The suspension of sanctions, however, does not meet the need to preserve economic activity, but rather allows companies that have been seeking to circumvent applicable legislation and that, for this reason, have suffered administrative sanctions, to be benefited, enabling and facilitating structured tax evasion and recurrent of those already known debtors who organize their business model to never pay taxes using it as a competitive advantage to increase their profits, gain market share and harm competitors.

In this sense, we suggest that articles 11 and 12 obey the principle of legal certainty, and that article 15 be deleted, not only because it is totally foreign to the merit expressed in PL 1397/20, but also to avoid distortions, benefiting even more. companies that violated the principles of competition.

Yes, we must support companies in difficulty. Now, stimulating those who have already had undue acts of evasion recognized, as a business model, no! Even more now in this moment of the pandemic in which we have seen the growth of opportunists on duty always trying to take advantage and take advantage of the ill-fated “jeitinho” to somehow benefit from any initiative or breach of the law, distorting good purposes of the legislator.


* Edson Vismona - Lawyer, president of the Brazilian Institute of Ethics in Competition - ETCO, was Secretary of Justice and Defense of Citizenship of the State of São Paulo (2000/2002)

Moment of ethics and union

We are at a time when social contact with people is not recommended. We cannot hug, kiss, hold hands. However, more than ever, it is necessary to be supportive and understand the importance of unity in order to make the best of this period of social confinement that aims to control the pandemic of the new coronavirus. People and companies need to have this attitude. It is not the time to collect fines for those who cannot travel, to increase prices without justification, to take advantage of high demand or to have any other attitude that runs away from ethics, solidarity and gestures of humanity. In fact, individually and corporately, we need to assume our responsibilities were for the collective and, especially, the most vulnerable.

We will expand the positive initiatives of industry, commerce and services, which are maintaining the employment of their employees, supporting the efforts of governments, assisting in social projects - such as donations from private companies in the expansion of hospital beds in São Paulo or companies that produced and donated alcohol gel and supplies to hospitals and health institutions. Without forgetting the countless initiatives of groups of volunteers collecting and distributing food to the poorest population.

Solidarity actions make us “more” human and must infect everyone. These examples, at the time of a war effort, should guide us in the future by strengthening our coexistence.

But, all this will pass and the question remains: how will we react later? What will be left? How will we be able to resume the economy? There are many uncertainties that afflict us at that moment.

Difficult decisions are being made, many unpopular. May this courageous stance encourage us and, once this tragedy is overcome, awaken in our leaders the effective commitment to carry out structural reforms, so that Brazil faces and overcomes its historic challenges.

We have to stop thinking about the next election, but about the fate of our society. This is the path we must follow. The moment calls for calm, yes, but urgency in the humanitarian aspects, in the convergence of purposes and a lot of discernment to make the country react as quickly as possible and can continue with the necessary changes.

Edson Vismona is a lawyer, president of  (ETCO), was Secretary of Justice and Defense of Citizenship of the State of São Paulo (2000/2002).

ETHICS as a tool to combat COVID-19

ETCO is a Civil Society Organization, which acts with the purpose of promoting integrity in the business environment. We believe in the practice of fair competition as one of the main foundations of economic development and the construction of a stronger and more just nation.

With the pandemic of COVID19, we live in an unprecedented moment in world history, with devastating effects on the global and Brazilian economy. The OECD estimates that each month of confinement will take 2 points of GDP from major economies and the World Trade Organization (WTO) predicts that global trade will decline by up to 32% this year.

In order to combat the harmful effects on the economy and on the public health system, we have witnessed an enormous effort by the executive (in all its spheres), the legislature, the judiciary and civil society, in order to alleviate the effects of the crisis mainly with vulnerable populations and groups at risk. And it is mainly at times like this, that the ethical behavior of companies and civil society can make all the difference.

ETCO advocates social isolation, as the most effective way to fight the epidemic, respecting the guidelines of health authorities and municipal and state governments. It is a moment that demands the full exercise of citizenship, respect for the laws and for others.

It is not the time to raise prices or make unnecessary stocks. This is no time for layoffs, which will result in immediate and unnecessary costs. It is necessary to seek dialogue, to negotiate fairly and loyally with suppliers, employees, employees and customers.

ETCO remains firm and supportive of all actions that strengthen the fight against COVID-19 and help preserve lives.

Support too. The way you can, how you can.



Tax policy must be based on the concept of a broad moratorium

The very exceptional circumstance that humanity is experiencing is an obstacle to reflections that allow us to understand the present time and produce some type of contribution. Our ignorance, impotence, anguish and fear prevail.

Apparently eating a wild animal infected by a virus was able to stop the world and cause suffering on a global scale. The real expression of an allegory of the Butterfly Effect, extracted from Chaos Theory, has never been so painful: “a butterfly flaps its wings in Beijing and produces an earthquake in San Francisco”.

Exploring the origins and spread of Covid-19 should only serve to understand the pandemic and support the development of prevention theories. Blaming people or governments is completely useless, if not a symptom of mental alienation. It would also promote unforgivable injustices.

The pandemic has complex and probably unverifiable causality, in the light of current science. The virus has no nationality. The problem is with humanity.

This picture brings out the intrinsically contradictory human nature, in which the selfishness associated with the survival instinct and solidarity, generosity and opportunism - often, delinquent - coexist, good and evil coexist. The hope is that the spirits of people of good will prevail.

I participated actively in the face of serious international and domestic economic crises, in the FHC Government. I know how much serenity, determination and creativity were required to overcome them. Well, none of them even touches the intensity, scope, unpredictability and persistence of the crisis arising from Covid-19.

From this confrontation, I extracted some lessons that can be of some use, even though punctual and modest in the face of a cyclopic crisis.

I risk, by imposition of solidarity, humbly subjecting them to debate. I do not intend to be right, but help in the limit of my knowledge and experience.

We are facing a catastrophe with equivalent consequences, mutatis mutandis, collision with an asteroid, a natural disaster on a planetary scale or a nuclear accident. It is not reasonable to deny the scale of the catastrophe. What is needed is to hope for the best, but prepare for the worst.

The suggestions are limited to the tax field, which, in the context, is merely subsidiary, since what counts as a priority, at the moment, is to save people, especially the sick, the vulnerable and the poor.

The first lesson to be observed is the flexibility of recommendation, creativity and collaboration.

I collect Charles Darwin's praise for flexibility in nature, translated into the ability to adapt, and which, at least in circumstances of extreme crisis, also applies to public management, including taxation: “It is not the strongest that survives, not the most intelligent, but the one that best adapts to changes ”.

Those responsible for tax policy cannot become prisoners of manuals, of no use in crisis situations. It is necessary to use creativity at the limit.

It would be tedious and useless to enumerate the creativity exercises practiced in crisis coping experiences that I lived. What was done was often unprecedented, not even raised in literature.

In the current crisis, the need for creativity is much higher. Dialogue, discuss problems thoroughly and do not stick to pre-existing models. It is the advice I can give to those on the front lines.

Collaboration is also an indispensable ingredient. Not only among federal entities, it is necessary to reach out to private tax professionals and taxpayers.

The second lesson concerns the imperative need to segregate the initiatives to face the crisis from those that will be adopted in the post-crisis. Trying to articulate these two classes of initiatives is to flirt with crucial mistakes.

Although it seems unsubstantiated, from the perspective of physics, the crisis has paralyzed time. This is fundamental evidence. It is as if there is only the present. Nothing more is known about the future.

Anyone who projects the future is wrong, based on pre-existing knowledge about interest rates, foreign exchange, GDP, fiscal balance, asset values, prices, etc.

What if an effective vaccine or treatment comes along? What if, in a scenario of greater misfortune, new waves of the virus or its mutation appear?

Since there is a minimum of civilization, humanity has never been compelled to social isolation for a period that no one can estimate.

When we leave these caves, as are we, physically and psychically? How will the world be? Will we renegotiate relations with the environment worldwide, including in terms of urban occupation and prevention of natural disasters? Will we come to understand that tackling poverty requires everyone's competition, regardless of the jurisdictions of the states? Will severe health barriers be put in place for the transit of people and goods, to the detriment of globalization? Will the current consumption patterns yield to the essentiality thesis? Will limits on growth be imposed, as the Club of Rome has been advocating since 1972? Will there be a digital revolution in work and service provision, with repercussions on urban mobility, international transport, entertainment, tourism? How will the public health policies?

There are many questions, the answers of which, however, no one knows. Most likely, we have a new normal.

In how long and for how long, however, will the new normal prevail, considering the atavistic tendency of the human being to erase from memory everything that is pain and interdiction of pleasure?

The only certainty we have is that these are times of complete uncertainty. In this context, absolute caution is the only rational option.

In a wise lesson, John Maynard Keynes pointed out, in the “Treaty on Monetary Reform” (1923): “The long term is a misleading guide to current affairs. In the long run, we will all be dead. Economists put themselves in a comfort zone, totally useless, if in stormy seasons they can only say that when the storm passes, the ocean will calm down again ”.

It is, therefore, imperative to concentrate all efforts to overcome the crisis at the present time, removing deviations in concentration resulting from speculations about the future.

If the demand for flexibility, creativity and collaboration prevails and if there is a conviction for mindfulness in the present, tax policy must be based on the concept of a broad moratorium, provided for in our legal system.

The National Tax Code (CTN), arts. 151-155, provides the moratorium hypothesis, with ample operational flexibility: general or individual, specification or not taxes or sectors, federal or national scope, applicability or not to certain regions, etc.

Anyway, it is a proper instrument for calamity situations, whose flexibility, however, does not exclude the imposition of penalties for cases of fraud or simulation, in its own favor or that of third parties.

The choice of terms, sectors or taxes includes discretionary acts based on tax morality, which requires firmness and discernment.

The moratorium establishes the rule of law, as opposed to a scenario, not unfeasible, of civil disobedience.

The moratorium must, however, go further to achieve processes and procedures as well. For them, time also stopped.

Should be suspended, while the pandemic lasts, administrative judgments, official releases, losses (except for cases of contraband or practices that tend to make sanitary policies unfeasible), collection of active debt, requirement of accessory obligations, procedural deadlines, etc. Negative certificates must be extended for an equal period.

The Union must set an example and call for the adoption of measures by all federal entities. In this movement there can be no concession to bureaucratic mentalities, which do not see the scale of the catastrophe.

Ordinance No. 543, dated 20.03.2020, of the Federal Revenue of Brazil partially accepts the recommendations regarding the procedural and procedural moratorium. However, more boldness is needed, including regarding the moratorium on taxes. Also, remove the pretension of launches regarding the controversial prevention of decay and the presumption of fraudulent interposition of people.

It is not the time for controversy. Nor is it the time to harass taxpayers in the midst of economic debate. At least, for humanitarian reasons. It is now up to us to fight for survival.

ETCO presents its 2019 Activity Report

ETCO launched on March 20 its 2019 Activity Report. The publication summarizes the projects carried out by the Institute last year to contribute to the promotion of competitive ethics and the strengthening of the business environment in the country.

In 2019, ETCO acted intensively in debates related to the tax theme. “The time is right,” explains the Institute's executive president, Edson Vismona, in the letter introducing the Report. "After the approval of the pension reform, the focus is on other fundamental issues to unlock the economy, attract investments and boost the country's development. Tax reform is one of the most discussed initiatives."

In June, the Institute held a seminar on tax legal security, which was coordinated by the chairman of its Advisory Board, Everardo Maciel, and was attended by big names in tax law. The following month, he supported a seminar on tax reform held by the newspaper Valor Econômico.

ETCO also sponsored a study by the EY consultancy on Brazilian tax litigation, which was presented at an event followed by a debate with experts.

Another important topic was the defense of the legal market. In partnership with the newspaper People's Gazette, from Paraná, the Institute carried out the project #Dentro da Lei, which lasted seven months. The work included a forum for debates, in-depth reports and other journalistic actions on the damage of practices such as smuggling, piracy and counterfeiting of products.

The 2019 Activity Report also shows how ETCO expanded its participation in international events, with its presence at the Fifth Meeting of the Latin American Anti-Smuggling Alliance (ALAC), in Costa Rica, at the 13th Parliamentary Forum on Intelligence and Security, in Paraguay, and at the meeting of the Organization for Economic Cooperation and Development (OECD) Task Force to Combat Illicit Market, in France.

The publication can be read on the internet or in PDF format from this link.

Brazilian tax litigation exceeds 50% of GDP

The Brazilian Institute of Ethical Competition, ETCO and EY, presented, on 28/11, in São Paulo, the study “The Challenges of Tax Litigation in Brazil”, a mapping of the main challenges of this practice in Brazil and potential mitigating measures. The survey considers some relevant aspects of litigation compared to other countries: Germany, Australia, United States, India, Mexico and Portugal.

See the main conclusions of the study

During the event to present the study, the book “Legal Security and Taxation” was also launched, by journalists and writers, Oscar Pilagallo and Fernando Mello. The material was based on the analysis of renowned tax experts, Gustavo Brigagão, Hamilton Dias de Souza, Heleno Torres, Humberto Ávila and Roberto Quiroga Mosquera. On the occasion, EY's technical tax team detailed the main results of the study, which were discussed by tax experts Roberto Quiroga and Breno Vasconcelos, together with Edson Vismona, president of ETCO and Érica Perin, partner of EY for the tax area.

“For Brazil to attract investments, grow and provide public services to the population, it is necessary for the State to collect the taxes due to it and for companies to be secure in relation to current tax rules. Today, the country faces difficulties in both directions, which compromises business development ”, says Edson Vismona, president of ETCO.

Also according to the executive, the relationship between the Brazilian tax authorities and the taxpayer needs to change. “The government cannot regard taxpayers in good and bad faith in the same way. Today, mechanisms are already in place to identify so-called debtors, and there must be a differentiation in the treatment of cases, adds Vismona. 

For EY partner Érica Perin, understanding Brazil's tax litigation is important for both taxpayers and the government. "The high stock of tax credits, the delay in resolving disputes and the inspection strategies for the efficiency of assessments have an impact on the budget of federal entities, on business activity and, in general, on the lives of taxpayers," he said.

The study “The Challenges of Tax Litigation in Brazil” revealed important points related to legal tax security, such as:

Union tax litigation already exceeds half of GDP

The Union's contentious tax credit stock, composed of tax credit from the Federal Revenue of Brazil (RFB) and the Attorney General's Office of the National Treasury (PGFN), reached R $ 3,4 trillion in 2018, according to data from the General Balance Sheet of the Union. This value is higher than the revenues made by the Union and reached 50,5% of GDP in 2018. If collected, it would make the net worth of the Union positive (since 2015, it has been negative).

Tax lawsuits last almost 20 years

The completion of a tax litigation process in Brazil takes an average of 18 years and 11 months, when the administrative and judicial stages are added. The time was calculated based on data from the (i) 2017 Annual Activity Report of the RFB; (ii) report on judgments of the Administrative Council for Tax Appeals (CARF), made available by the agency in 2015 at the time of Operation Zelotes; and (iii) the 2017 and 2018 Justice in Numbers Report of the National Council of Justice (CNJ).

Complexity leads to increased litigation

Among the factors that contribute to the high degree of litigation in the Brazilian tax system, the following stand out: complexity of the legislation; the amount of ancillary obligations; the extension of the country's territory and borders; the high tax burden; and aspects related to penalties, tax debt correction and tax regularization programs that end up making litigation an alternative for business financing.

Tax authorities increase focus on large taxpayers

In recent years, the IRS has increased its focus on inspection

large taxpayers, who represented 68,62% of the assessments in 2016 and increased to 82,05% in 2018. On the one hand, this strategy has an impact on tax collection. In 2018, the investigation of 1.882 collection distortions related to the largest contributors generated revenue of R $ 27,52 billion to Revenue - a record amount for this specific group.

On the other hand, it contributes to the increase in litigation and its weight in the companies' balance sheet. The financial statements of publicly traded corporations show a high representation of tax litigation in this group of companies. In some cases, it even exceeds the company's market value.

Good practices that work in other countries

The experience and practices adopted in other countries point to paths that

they can guide a reform to provide more legal certainty and reduce the generation of litigation in our tax system. The study analyzed six countries better positioned than Brazil (80th place) in the World Economic Forum's 2017/2018 Global Competitiveness Report ranking: United States (2nd), Germany (5th), Australia (21st), India (40th) ), Portugal (42nd) and Mexico (51st), chosen for presenting different models of conflict solutions or for their direct influence (Portugal) or economic similarities with Brazil (Mexico). India was included for also demonstrating a high level of litigation between tax authorities and taxpayers and for not tackling this problem in the deep tax reform carried out in 2017.

Access the main conclusions of the study here: