Article: The precariousness of the rule of law

The Constitution proclaims, in its art. 1, that Brazil is a democratic state of law, which assumes the submission of all to the law and the popular will.

Stability and clarity are minimum requirements for law enforcement. This is not what you see in Brazil. Standards are changed frequently, often with deplorable technical quality. The interpretation given to the norms also changes continuously, without plausible justification.

Evidence of this normative degradation, to the detriment of legal certainty and the rule of law, abounds in the media. Constitutional amendments are approved on the spot. Judicial decisions of great relevance are taken in virtual plenary. I present below some examples of this degradation.

Constitutional Amendment No. 87, of 2015, which deals with the taxation of ICMS on non-face-to-face interstate transactions, establishes, in art. 2, that its effects would occur from 2015, while, in art. 3, fixed 2016. This primary error went completely unnoticed.

The Constitution provides that the taxation of fuels and lubricants by ICMS should, among other requirements, have a uniform rate throughout the national territory.

Complementary Law No. 192, of 2022, met the constitutional requirement of specification of those products for the establishment of the uniform rate, however it invaded the competence of the States to establish criteria for its establishment. That's not what the Constitution says. The States challenged that rule, including in the allegations that the uniform is not identical. That's not what the dictionary says.

A recent court decision established the non-levy of income tax on alimony received, using, among other reasons, that it would be a case of double taxation. It is not what is in the arts. 4 and 8 of Law No. 9.250, of 1995, which provides for the deductibility of alimony paid. On the contrary, a hypothesis of double non-taxation was generated. If a couple separates, the tax will not apply to who pays or who receives. An invitation to simulation, especially for the rich.

Since the institution of the ICM, in 1967, it was understood that that tax and the ICMS, its successor, were levied on interstate transactions, whether or not there was a transfer of ownership. A court decision in 2021 reformulated this understanding, considering the incidence without transfer of ownership unconstitutional. Have we spent more than half a century living with this unconstitutionality without anyone realizing it?


Being legal in Brazil cannot be an option

Individuals and legal entities, in Brazil, experience daily difficulties arising from non-compliance with laws. This theme is directly linked to one of the fundamentals of the country's own development, legal security.

Public authorities have a duty to respect and ensure that the Federal Constitution is respected. No one is above your principles. The attraction of investments, with the generation of jobs and income, depends on the certainty that all market agents will respect the same rules, that the rights and contracts will be respected. The State should, on the one hand, facilitate the lives of those who want to act correctly and, on the other hand, combat those who break the law. Obvious concepts, however, the way to guarantee this normal reality in a Republic is not simple.

The necessary compliance with laws, decrees, regulations in any area can be a real pain. The hardships of those who want to start a business are evident, getting a mere living in a house, obtaining operating licenses from a store, following the overflowing tax legislation or the fluctuating interpretations of the courts.

In parallel, we have the advance of illegal practices in the market: smuggling, piracy, counterfeiting, fraud, under-invoicing, non-compliance with technical regulations, evasion, acts that distort competition and pervert the business environment.

This picture is worrying. Companies that fulfill their obligations have to compete with those who seek illicit advantages, which are structured to circumvent all rules and thus conquer the market, raising their profit margins in a totally irregular way, at the expense of the whole society.

The results are impressive. The illegal market (fifteen productive sectors), according to data from the FNCP - National Forum Against Piracy and Illegality -, generated R $ 2019 billion in 291,4. Regular debtors, which are structured with the objective of not paying taxes, accumulate more than R $ 60 billion in debt.

However, these billionaire losses are much greater, reach intangible values, as they erode the belief that crime does not pay, discourage new investments and erode ethical principles.

To change this situation, impunity must be faced; and compliance with laws, valued. Some suggestions:

Laws that discipline conduct with clarity and objectivity. And that they are applied effectively, reducing the space, not for the legitimate exercise of broad defense, but for merely postponing attitudes, which benefit those who wish to save time and, thus, continue to gain advantages and profits;

The initiatives of the productive sectors to denounce illegal practices in the market must be considered by the public agents as an important support for the necessary corrective actions, which must be seen as relevant and not as an interference in the normal work rhythm;

Encourage cooperation and integration between public administration entities, with the participation of civil society, which can assist with information that facilitates and streamlines the work to contain illegality;

Fight corruption without respite, punishing those who dishonor the public service. It is true that this is the only “tax” paid by lawbreakers;

Simplification of administrative procedures and legislation, especially taxation, so that it is easier to comply with the law than to ignore it;

These proposals are known, but there is resistance. Combating illegality is not as natural as it should be.

An example of this hostile behavior was given by the Senate's public consultation on bills. The proposal to punish TV signal piracy was rejected by 95% of the demonstrations.

This brief overview exposes some of the obstacles of the so-called “doing business” presented by the World Bank (from 190 countries Brazil is in 124th position) and which, for a long time, have been debated, however, every year we postpone the necessary measures and this delay hinders our development.

In fact, being legal in Brazil cannot be an option; it is a duty to stop being the “country of the future” that never arrives.

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)

Enough tax litigation

Tax reform discussions often focus on changes in the types of taxes and how to share the burden and distribute resources across society. But they usually leave aside an extremely relevant aspect for the development of the country: the legal security of the tax system.

Brazil is one of the world champions in conflicts between tax authorities and taxpayers. Experts estimate that, in all administrative and judicial instances in which these differences are discussed, the amounts involved already reach R $ 3,3 trillion, which represents about half of the country's GDP. And the trend is for growth.

To contribute to this discussion and the search for solutions to the problem, ETCO held in June, in São Paulo, the Taxation and Legal Security seminar. The event brought together great lawyers in the search for solutions to the problem.

Heleno Torres, professor at the Faculty of Law of the University of São Paulo (USP), spoke about the points that should guide the improvement of the Brazilian tax system, including the solution of conflicts in tax processes.

Roberto Quiroga, lawyer and professor at USP's law school and Fundação Getúlio Vargas of São Paulo (FGV Direito SP), gave a lecture on the interpretation of the legal standard.

Humberto Ávila, also a professor at USP, dealt with the principles of legal tax security and its relationship with economic development.

Hamilton Dias de Souza, lawyer and counselor at ETCO, presented a critical view of the tax reform proposal under discussion in the National Congress (PEC 45).

Gustavo Brigagão, professor of law and president of the Brazilian Association of Financial Law (ABDF), addressed the international tax challenges in the face of technological innovations of the XNUMXst century.

The seminar was coordinated by the president of the ETCO Advisory Council and former secretary of the Federal Revenue (FHC government), Everardo Maciel, who highlighted the importance of the theme: “It is the most relevant for the country in terms of investment, especially in the tax field . ”

At the opening, the Institute's executive president, Edson Vismona, drew attention to the two extremes of the problem: on the one hand, taxpayers who seek to do everything within the law, but suffer from the complexity of the system, the tax authorities' arbitrariness and constant changes in the norms or in their interpretations - and they often end up paying taxes that they should not while awaiting final decisions of Justice; and on the other hand, regular tax debtors, who do not pay due taxes, use the complexity and delay in decisions to make money illicitly. “The motto of the first is: 'I must not, I deny, but I pay'; the second is ´devo, I don´t deny it and I don´t pay´ ”, summarized Vismona.

In the links below, we present a summary of the main points addressed by each speaker. The full content, including video and transcript of the lectures, is available HERE and will also be converted into a book. The objective, as explained by the chairman of the ETCO Board of Directors, Victório De Marchi, at the end of the seminar, is “that these ideas, these suggestions, these proposals be taken to our legislators to see if we can get a tax system compatible with international needs ”.

The event was supported by ABDF, Ajufe (Association of Federal Judges of Brazil) and CESA (Center for the Study of Law Firms).

The videos of the lectures and their transcript can be accessed  HERE




“The tax authorities cannot collect even 1% of the active debt”

The head professor of the Department of Economic, Financial and Tax Law at the Faculty of Law of the University of São Paulo (USP), Heleno Torres, spoke in his lecture on the conflicts between taxpayers and the tax authorities, the administrative and judicial process and tax reform . He regretted that the projects under discussion are too focused on the creation of the value added tax, without paying due attention to issues related to legal certainty. In his opinion, Brazil needs a system that brings more predictability to economic activity, allowing “people to know exactly what are the taxes they must pay and what are the obligations they must fulfill in relation to the taxes that are due and, at the same time, at the same time, constitute a state of security, a state of normality, where the business environment can favor new investments and the breadth of business expansion in Brazil ”.

He argued that changing the current system respects five principles:

    1. Actual non-cumulative taxation, with a tax incidence that allows universal credits to be taken, that is, financial credits in all operations.
    2. Single rate throughout the circulation process.
    3. Reduction of exception regimes, such as tax substitution.
    4. Revision of the tax benefits model.
    5. Simplification of ancillary obligations.

Heleno Torres drew attention to the need to control excesses of the tax authorities. "The National Tax Code, for example, lacks a chapter on the inspection process and procedure, which gives taxpayers more candid rights over the limits of inspection and the action of the tax authorities in administrative relations," he said.

The tax attorney told the case of a client who, after being warned twice by the inspection that his business should be classified as a financial institution, decided to change his corporate name to fit into this category. During this process, he was surprised by CARF's decision against the change, claiming that the company did not meet the requirements of a financial institution. "The tax system cannot lead taxpayers to such a contradiction," he warned. “These contradictions aggravate the business environment, heavily aggravate taxpayers with the sum of fines, interest, charges, lawyers' payments and so many other repercussions and, in fact, this is not what is expected from a tax system with legal certainty. "

Reform consultation system

Heleno highlighted the urgency of a reform of the consultation system to make it effective in resolving taxpayers' doubts and reducing conflicts. “We need to reformulate the consultation system very urgently, to take advantage of this opportunity so that, from the moment of the presentation of the notice of infraction, or even the launch, there is the possibility for the taxpayer to start his challenge, so that this is speedy, to the extent where the market also needs quick tax decisions, ”he said.

He talked about the need for greater uniformity of understanding in the judgment of tax lawsuits, to avoid that equal cases have different results in different instances. And he recalled that the current situation is also of no interest to the State, which does not receive tax debts, nor to society. “There is not a single state, a single municipality in the country where the active debt has a collection higher than 1% of the accumulated volume. In other words, the conflict does not matter to the tax authorities, ”he said. “The tax that does not enter the public coffers spontaneously is missing from the public budget. And, when there is a lack of two in the public budget: either we have tax increases or we have contingencies until that revenue enters the public accounts and that budget can meet these expenses. Either way, society loses. ”

At the end of the lecture, in a brief conversation with tax attorney Everardo Maciel, the event's coordinator, he answered a question about the integration of the administrative and judicial stages of tax processes. "If this is to simplify, to reduce litigation, it is urgent that we simplify the processes in this universe so complex that it is the administrative and judicial litigation", he concluded.

Legal certainty against state discretion

The lawyer and professor Roberto Quiroga, from the University of São Paulo and from the FGV Law School of São Paulo, dealt with the legal uncertainty in the interpretation of the tax rule. “Today, we have a tax dispute that has already reached R $ 3,3 trillion: half of a Brazilian GDP. So, two ways: either the taxpayer is misinterpreting the legal norm or the State is exaggerating the application of the legal norm ”, he said.

Quiroga recalled that the relationship of forces between the State, which has the prerogative of self-protection, and taxpayers is uneven. “We are not talking about a private relationship between A and B where I have to seek the State of Judge to resolve a conflict. The State launches the tax, the State has the right to self-protection, ”he said.

He criticized the instrument for modulating the effects of decisions of the higher courts, whose purpose of promoting legal certainty was being submitted to the convenience of public accounts. "It is the institute that I least believe in, because decisions can be made by nose," he said. “If modulation is an idea to provide security, it also gives insecurity. It creates such a condition that I don't know what the interpretation I am going to give and when it will be valid. Whether for the future, the past or the present. ”

Quiroga defended the so-called “guarantor” of the Brazilian Constitution. “Of course, we have to look at the state side. But the legal security we are talking about is the security that the constitutional text gives to the taxpayer. Against agency, against state authority ”, he justified.

Ten different votes from the STF

The tax attorney also criticized the lack of conceptual basis for decisions made by the different judging bodies, including the CARF (Administrative Council for Tax Appeals) and the Supreme Federal Court, mentioning issues in which there is great confusion in the jurisprudence. He cited, as an example, the taxation of profits abroad, appreciated by the plenary of the STF. “He decided nothing. He just confused everyone, ”he said. “Ten different votes. Today, I don't know how to tell my client how to tax profits abroad. ”

After the lecture, Quiroga answered the question from the seminar coordinator, tax attorney Everardo Maciel, about the consultation services offered by the tax authorities to taxpayers. He criticized the lack of preparation of the professionals who carry out this work and the risk of acting in part due to the fact that they work within the collection agency. “If I have a predetermined consultant to say no, the institute is worthless. Perhaps there should be a competition for consultants ”, he suggested as a means of making consultations more effective and impartial.

"Understandable, stable and predictable right"

Full professor of Tax Law at the University of São Paulo Humberto Ávila is one of the greatest Brazilian scholars on the subject of tax security. With an academic trajectory that includes doctorate and postdoctoral studies in Germany and postdoctoral studies at Harvard, in the United States, he is the author of the book Theory of Legal Security, with 744 pages, a “true treatise on the subject”, in the words of the chairman of the ETCO Advisory Board, Everardo Maciel.

In a lecture at the Taxation and Legal Security seminar, Ávila addressed three aspects that she considers essential for tax legal security. "There is security only when the law is understandable, stable and predictable," he said, attributing these factors to the relationship with time.

Understanding concerns the present: "The right to be followed must be at least well understood".

Stability, with the passage from the past to the present. “The taxpayer who trusts the law yesterday cannot be betrayed by the law today. For this reason, the right protects the acquired right, the perfect legal act, the res judicata, the protection of trust, the consolidated situations, the preclusions, prescriptions and decadences ”, he exemplified.

Predictability refers to the transition from the present to the future. "The taxpayer, when he acts, needs to minimally predict what are the consequences that will fall in the future on the acts he practices in the present," he said.

Didacticism of the courts

Then, he pointed out the main problems that exist today in Brazil in these three dimensions. He criticized the practice, common in the country, of not looking for the precise meaning of words and thus allowing for very elastic possibilities of interpretation. "There is no country in the world that is developed and in which words have no meaning," he warned.

Citing a recent decision by the United States Supreme Court, which instructed the courts of that country to declare laws that were badly formulated by Congress instead of trying to correct them, argued that a large part of the problems of legal insecurity seen in Brazil today are due to the lack of determination of the Judiciary to demand more quality in Legislative decisions.

“Do you know why in Brazil the legislation is bad? Because the Federal Supreme Court does not declare the laws unconstitutional because they are bad, ”he said. “We have to recover the didactic role of the courts and start declaring the unconstitutionality of rules that are contradictory, that are too vague, too ambiguous. Because the taxpayer has to guide himself or his behavior based on some direction. ”

Ávila condemned the practice of federated entities of instituting or increasing taxes through regulations, not laws, as required by the Constitution. He also criticized changes in orientation in jurisprudence that produce retroactive effects, violating taxpayers' rights.

At the end of the lecture, in conversation with Everardo Maciel, he drew attention to the risk that the country is taking with the institution of modulating the effects of judicial decisions to protect the state's finances. According to Ávila, this instrument encourages the State to disregard the Constitution, which ends up benefiting financially from unconstitutional laws. “The right has many effects, one of which is to define what is right and what is wrong. Now, if right is equal to wrong, I wonder what kind of citizenship there will be in Brazil and what kind of exercise of public power there will be in Brazil ”, he pondered.

"Should reforms be disruptive or timely?"

Hamilton Dias de Souza, a member of the ETCO Advisory Council, spoke about the principles he believes should guide tax reform and criticized the proposed project in the Chamber of Deputies (PEC 45). He recalled that the country is faced with two possibilities: making a comprehensive reform, which he called “disruptive”, involving profound changes in the federal pact and in the Constitution; or make specific changes to correct the problems already identified in the current model. He defended the second alternative. “I don't think that a tax reform should abolish concepts that are already established. Especially because these concepts often take twenty, thirty years to settle, ”he said.

Citing divergences that still persist in the current system, such as the return of amounts charged excessively in the tax substitution regime, the collection of ISS on leasing operations and the creation of federal contributions by ordinary laws, warned of the risk that a radical reform introduce new points of legal uncertainty without solving the old ones. “When there is a disruptive tax reform, changing all concepts, we can all imagine what will happen. How long will it take for all these things to settle, and how businessmen, taxpayers, how we can all organize our lives, ”he said.

In relation to the proposal, inserted in PEC 45, for the creation of a national tax, the IBS (Goods and Services Tax), replacing federal, state and municipal taxes, Hamilton expressed his understanding that the change violates the constitutional clause of the Constitution , which prevents “amendment to abolish the federation”. “There is a jurisprudence in the Supreme Court that says: when you weaken, when the federation weakens, there is a tendency to abolish it. Therefore, "tending to" is "diminishing power", "weakening autonomy" ", he argued. In his assessment, by reducing the autonomy of states and municipalities to institute and freely change their taxes, IBS fits this definition.

Double complexity

Hamilton also questioned the argument that tax unification would bring about the necessary tax simplification, noting that it provides for a ten-year transition period with the overlap of the two systems. “We will have the coexistence of IBS with all other taxes replaced: ICMS, IPI, PIS, Cofins, Service Tax. Therefore, with compliance costs for both tax systems and inspections for both taxes. I would say that the poor taxpayer will surely suffer a lot ”, he said.

Other changes foreseen in the proposal, according to Hamilton, may cause new points of legal uncertainty, such as the migration of taxation to the destination of products and services, the application of IPI to primary products and the creation of a new tax on “special consumption”. “And what will special consumption be? Whatever the legislator of the future wants. It starts as a selective tax, and then the selective tax starts to reach even reasonably essential products ”, he warned.

The tax attorney warned of the extraordinary increase that PEC 45 proposes for the taxation of the service sector, in comparison with what is currently practiced. "The maximum tax burden, which is 5%, the next day would become 25%, and we would have a 500% increase on services," he said.

Hamilton also dealt with issues that he considers problematic in the current system, such as the distortion of the use of funds collected through fees, the excess of freedom to impose taxes by provisional measure and the increase in taxes for acts of the Executive.

Then, he listed some principles that the tax reform should obey to improve the business environment and bring more legal security to the country: simplification, harmony of the rules of the administrative / tax process, transparency and neutrality.

At the end of his lecture, the event coordinator, Everardo Maciel, asked him if the IBS proposed in PEC 45 could be compared with Simples, in order to respect the constitutional principle of the federation. Hamilton showed the distinction between the two tributes. “Simples does not absolutely prevent the existence of a normal institution of taxes by the Union, states and municipalities - not least because it is optional”, he replied. And he reaffirmed his view on the unconstitutionality of IBS.