Federal tax administrative litigation: diagnosis and perspectives
SPECIAL ARTICLE: José Barroso Tostes Neto, Secretary of the Federal Revenue of Brazil
The tax administrative process is constitutionally based, since the Federal Constitution guarantees all citizens the right to due process and to the adversarial process and to ample defense, both in the judicial and administrative proceedings.
Its usefulness ranges from enabling the Tax Administration to review its administrative acts, such as the assessment, to providing the taxable person with a specialized and widely accessible instrument for resolving tax disputes. It also serves as a filter for the Judiciary, since issues resolved in favor of the taxpayer, as a rule, cannot be judicialized.
However, as the only way out of tax disputes and with a legal framework, in essence, for more than half a century, the current model of the administrative tax process does not present the same effectiveness observed in the past to solve the problems that arise in the tax litigation .
In this scenario, the following is a diagnosis of the current situation of administrative tax litigation, its causes and alternatives for improving the system.
Diagnosis of the current model
The procedural rite for resolving tax disputes is regulated by Decree nº 70.235 / 72, being composed of three collegiate judging bodies.
In the first instance, under the jurisdiction of the Brazilian Federal Revenue Service (DRJ), there were, in February this year, about 267 thousand cases awaiting analysis, with an average length of stay in litigation of 948 days. When it comes to priority cases (taxpayers over 60 years of age or with serious illness or disability; over R $ 15 million; with tax representation for criminal purposes, among others), the average duration is around 111 days.
The amounts involved in the lawsuits at litigation at the first administrative level are equivalent to approximately R $ 155 billion, between tax credit processes and requests for refunds, reimbursement or compensation of taxes. As a comparison, in February 2019, the stock of cases in the DRJ was around 261.000 cases, with an average stay of 969 days.
The analysis of DRJ stock reveals that the vast majority of processes involve low values. There are almost 70% of the lawsuits with values below R $ 60 thousand, corresponding to less than 2% of the total amount in dispute. The graph below reflects the February situation
The situation within the scope of the Administrative Council for Tax Appeals (Carf), responsible for second instance and special instance judgments, does not differ. In approximate numbers, there are R $ 628 billion distributed in 116.400 cases in February 2020, against R $ 567 billion in 121.100 cases in February 20191.
Small value processes also represent the biggest challenge for Carf. About 61% of the current inventory is from lawsuits below R $ 120 thousand.
In February 2019, Carf estimated the time for judging the stock of Extraordinary Classes, which judge processes worth up to 60 minimum wages, in about 6 years, against about 1 year in the Superior Chamber of Tax Appeals and 3 years in the Ordinary Classes2.
In short, considering only the administrative judging bodies, the amount in dispute amounts to R $ 783 billion. That means 11% of 2019 GDP, equivalent to R $ 7,257 trillion3.
The current model of tax administrative litigation is exhausted and requires reformulation. The use of technological tools to automate the judgment of cases, the centralization of the management of the collection of cases awaiting judgment at the national level, the end of the territorial jurisdiction of the DRJs (currently, all judge cases throughout the country, respecting the jurisdiction for matters) and other management measures implemented were not sufficient to give concrete effect to the constitutional principle of reasonable duration of the process4.
The data cited demonstrate the high degree of litigation in the tax area, which is not exclusive to administrative litigation. Tax foreclosures have been identified as the main factor in the delay of the Judiciary. Tax enforcement proceedings represent approximately 39% of the total pending cases and 73% of executions pending in the Judiciary, with a congestion rate of 90% in 2018. That is, of every hundred tax enforcement proceedings that have been processed in the year 2018, only 10 were solved5.
Causes of a high degree of administrative litigation
The intense tax litigation is a complex, multifaceted phenomenon, even associated with cultural issues. The complexity of tax legislation is the most prominent cause, especially because it is linked to a series of ancillary obligations arising from it and the lack of predictability of administrative and judicial decisions.
Alongside this, the tax administrative process can also be used as a means of financing the tax debt, which ends up encouraging litigation. Its long duration makes it possible for the taxpayer to enter into numerous tax regularization programs, the so-called “Refis”, to split debts in a benefited way.
In fact, the repeated practice of instituting special installment payment programs has been a factor in encouraging spontaneous non-compliance with tax obligations, the growth of litigation and certainly an important cause of the dizzying increase in administrative and judicial tax litigation.
Despite assuming exceptionalities for its institutions, over the past 20 years, 76 special installment programs have been created, all of them with significant reductions in the values of fines, interest and legal charges, excessively long terms for payment and, without exception, with low effective results in reducing tax liabilities.
The tax administrative process is still a free process, whose debts, adjusted by simple interest, remain with suspended liability throughout their course, allowing the issuance of a certificate with negative effect. In the event of possible repercussions in the criminal sphere, criminal prosecution is awaiting the final decision in the tax administrative proceeding, according to the Binding Precedent No. 24 of the Supreme Federal Court.
The final administrative decision in favor of the taxpayer is, as a rule, irreversible in the judicial sphere. On the other hand, if the decision is favorable to the Treasury, the dispute can be taken to the Judiciary, without any integration or harmonization between the administrative and judicial processes, causing enormous waste of time, labor and costs.
If all these aspects were not enough to stimulate litigation, the absence of alternative methods of resolving disputes overloads tax processes.
Finally, it is a model without precedent in the world when compared to other countries with greater global competitiveness, which brings losses both to the State and to the immense majority of taxpayers.
Prospects for improving tax litigation
Improving tax litigation involves two main areas of action: preventing the formation of new disputes and implementing measures aimed at speeding up the resolution of disputes that arise.
Undoubtedly, a tax reform that implements a simpler, fair and uniform tax system plays a major role in preventing litigation. However, for extrapolating the procedural area and its complexity, for the time being this subject will not be explored further.
While the tax reform is not taking place, the Federal Revenue Service has sought to consolidate and systematize tax legislation and provide greater flexibility in its interpretation. In this sense, several normative acts were edited consolidating the tax legislation and revoking previous acts, as exemplified by the 2018 Income Tax Regulation and IN RFB in 1.700 / 2017, 1.911 / 2019 and 1.928 / 2020, having been revoked more than a hundred normative instructions that were no longer effective. The average length of stay for consultation solutions, in turn, was reduced from 261 days in 2018 to 210 days in 2019.
Another relevant initiative is the promotion of tax compliance, aiming at increasing the degree of compliance. The Federal Revenue aims to encourage and facilitate the fulfillment of tax obligations, principal or accessory. Two actions are complementary to achieve that objective: self-regulation and simplification of ancillary obligations.
Self-regulation seeks spontaneous compliance with the tax obligation, with the issuance of letters and alerts and the holding of compliance meetings, so that the taxpayer, before the start of the tax procedure, can regularize pending and inconsistencies.
The best known example is that of the Individual Income Tax (IRPF) tax system, which results in thousands of self-regulations, avoiding the establishment of subsequent tax procedures and litigation. The table below shows the high number of self-regulations related to the IRPF and the low number of assessments compared to self-regulation.
The Federal Revenue Service also instituted the Simplification of Accessory Obligations Project, which contemplates the approximation with the States seeking to map and eliminate accessory obligations. There is also the objective of standardizing the layouts of some modules of the Public Digital Bookkeeping System (Sped). As a result, several States have waived accessory tax obligations due to the use of the ICMS and IPI Digital Tax Bookkeeping.
Implementation of measures to speed up the resolution of disputes
In view of the fact that administrative tax litigation has not undergone substantial reform for years, there are countless possibilities for progress in this field, such as: implementation of alternative methods of resolving disputes; tax arbitration as an optional alternative to the judgment made by the administrative body; adoption of differentiated and simplified rites according to the nature of the process; harmonization and / or integration with the judicial process; standardization of the regulatory framework that links administrative bodies; and an increasingly intensive use of information technology, including artificial intelligence, for the formation and judgment of thematic lots and aid in the preparation of decisions. The experience of other countries, adapted to our reality, must be used.
In this context, Provisional Measure (MP) No. 899/2019 was recently approved by the Federal Senate, converted into Law No. 13.988 of April 14, 2020, establishing the requirements and conditions for the Union and debtors or adverse parties to carry out resolving litigation transaction, pursuant to art. 171 of the National Tax Code.
Said Law provides for the tax transaction in the collection of the Union's active debt and in the administrative tax litigation; as for the latter, it contemplates the transaction with respect to litigation involving relevant and widespread legal controversy and low value litigation. The model adopted is parallel to the Offer in Compromise, used by the Internal Revenue Service of the United States of America. It is expected, therefore, greater effectiveness in the collection and the reduction of excessive litigation, relieving the judging bodies.
The sanctioned text also provides for a differentiated rite for small-value administrative tax litigation, thus considered one whose tax entry or controversy does not exceed 60 minimum wages. The judgment will ultimately be carried out by the Judgment Stations, linked to Carf's understandings and subsidiary application of Decree nº 70.235 / 72.
Thus, similarly to what already occurs in the federal special courts, low-value cases will have a simplified and faster rite and Carf will have a reduction in the influx of this type of process, which constitutes the majority of litigations.
There was also a change in the casting vote (§ 9 of article 25 of Decree nº 70.235, of March 6, 1972), with the insertion by amendment to the text of MP 899/2019 of a provision defining that, in the event of a tie in the judgment of the process, the resolution will be favorable to the taxpayer. This measure will certainly have a great impact on administrative litigation and, due to the wide aspects involved, it justifies the subject of another article.
The examination of the nuances of the national tax litigation shows the slowness in resolving disputes and the accumulation of lawsuits and tax credits, with enormous damage to the State and society. Such a situation is common to administrative and judicial disputes, given the excessive degree of litigation in tax matters.
Despite the efforts made to improve management and increase the productivity of the judging bodies, have produced extremely significant results, the current model of the administrative tax process, by itself, has not been able to resolve tax disputes with agility.
Thus, measures must be expanded to speed up the resolution of disputes and, above all, to prevent their formation. In addition to a tax reform that moves towards tax simplification and a reduction in litigation, deeper measures are needed in the procedural field. Among others, the adoption of alternative methods of resolving disputes, tax arbitration as an optional alternative to the judgment made by the administrative body, the implementation of different procedural rites and the harmonization of the administrative process with the judicial one.
In this sense, the recent approval of the possibility of a tax transaction and the institution of a simplified procedural rite for small-value cases, within the scope of Law No. 13.988 / 2020, is encouraging.
1. http://idg.carf.fazenda.gov.br/dados-abertos/relatorios-gerências/2020/dados-abertos.pdf. Accessed on 27/03/2020.
2. http://idg.carf.fazenda.gov.br/noticias/situacao-do-atual-estoque-do-carf. Accessed on 27/03/2020.
3. https://agenciadenoticias.ibge.gov.br/agencia-noticias/2012-agencia-de-noticias/noticias/27007-pib-cresce-1-1-e-fecha-2019-em-r-7-3-trilhoes. Acesso em 27/03/2020.
4. Art. 24 of Law No. 11.457 / 2007 established a maximum term of 360 days for administrative decisions to be rendered.
5. https://www.cnj.jus.br/wp-content/uploads/conteudo/arquivo/2019/08/justica_em_numeros20190919.pdf. Accessed on 27/03/2020.