The Tax Disputes and Litigation Review

The Tax Disputes and Litigation ReviewReproduced with permission from Law Business Research Ltd.

This article was first published in The Tax Disputes and Litigation Review- Edition 4(published in February 2016 – editor Simon Whitehead)

For further information please emailNick.Barette@lbresearch.com

The TaxDisputes and

LitigationReview

Law Business Research

Fourth Edition

Editor

Simon Whitehead

The Tax Disputes and Litigation Review

The Tax Disputes and Litigation ReviewReproduced with permission from Law Business Research Ltd.

This article was first published in The Tax Disputes and Litigation Review- Edition 4(published in February 2016 – editor Simon Whitehead)

For further information please emailNick.Barette@lbresearch.com

The Tax Disputes and

Litigation Review

Fourth Edition

EditorSimon Whitehead

Law Business Research Ltd

PUBLISHER Gideon Roberton

SENIOR BUSINESS DEVELOPMENT MANAGER Nick Barette

SENIOR ACCOUNT MANAGERS Thomas Lee, Felicity Bown, Joel Woods

ACCOUNT MANAGER Jessica Parsons

MARKETING ASSISTANT Rebecca Mogridge

EDITORIAL ASSISTANT Sophie Arkell

HEAD OF PRODUCTION Adam Myers

PRODUCTION EDITOR Anna Andreoli

SUBEDITOR Janina Godowska

CHIEF EXECUTIVE OFFICER Paul Howarth

Published in the United Kingdom by Law Business Research Ltd, London

87 Lancaster Road, London, W11 1QQ, UK© 2016 Law Business Research Ltd

www.TheLawReviews.co.uk No photocopying: copyright licences do not apply.

The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors’ firms or their clients.

Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of February 2016,

be advised that this is a developing area.Enquiries concerning reproduction should be sent to Law Business Research, at the

address above. Enquiries concerning editorial content should be directed to the Publisher – gideon.roberton@lbresearch.com

ISBN 978-1-909830-84-4

Printed in Great Britain by Encompass Print Solutions, Derbyshire

Tel: 0844 2480 112

THE MERGERS AND ACQUISITIONS REVIEW

THE RESTRUCTURING REVIEW

THE PRIVATE COMPETITION ENFORCEMENT REVIEW

THE DISPUTE RESOLUTION REVIEW

THE EMPLOYMENT LAW REVIEW

THE PUBLIC COMPETITION ENFORCEMENT REVIEW

THE BANKING REGULATION REVIEW

THE INTERNATIONAL ARBITRATION REVIEW

THE MERGER CONTROL REVIEW

THE TECHNOLOGY, MEDIA AND TELECOMMUNICATIONS REVIEW

THE INWARD INVESTMENT AND INTERNATIONAL TAXATION REVIEW

THE CORPORATE GOVERNANCE REVIEW

THE CORPORATE IMMIGRATION REVIEW

THE INTERNATIONAL INVESTIGATIONS REVIEW

THE PROJECTS AND CONSTRUCTION REVIEW

THE INTERNATIONAL CAPITAL MARKETS REVIEW

THE REAL ESTATE LAW REVIEW

THE PRIVATE EQUITY REVIEW

THE ENERGY REGULATION AND MARKETS REVIEW

THE INTELLECTUAL PROPERTY REVIEW

THE ASSET MANAGEMENT REVIEW

THE PRIVATE WEALTH AND PRIVATE CLIENT REVIEW

THE MINING LAW REVIEW

THE LAW REVIEWS

www.TheLawReviews.co.uk

THE EXECUTIVE REMUNERATION REVIEW

THE ANTI-BRIBERY AND ANTI-CORRUPTION REVIEW

THE CARTELS AND LENIENCY REVIEW

THE TAX DISPUTES AND LITIGATION REVIEW

THE LIFE SCIENCES LAW REVIEW

THE INSURANCE AND REINSURANCE LAW REVIEW

THE GOVERNMENT PROCUREMENT REVIEW

THE DOMINANCE AND MONOPOLIES REVIEW

THE AVIATION LAW REVIEW

THE FOREIGN INVESTMENT REGULATION REVIEW

THE ASSET TRACING AND RECOVERY REVIEW

THE INTERNATIONAL INSOLVENCY REVIEW

THE OIL AND GAS LAW REVIEW

THE FRANCHISE LAW REVIEW

THE PRODUCT REGULATION AND LIABILITY REVIEW

THE SHIPPING LAW REVIEW

THE ACQUISITION AND LEVERAGED FINANCE REVIEW

THE PRIVACY, DATA PROTECTION AND CYBERSECURITY LAW REVIEW

THE PUBLIC-PRIVATE PARTNERSHIP LAW REVIEW

THE TRANSPORT FINANCE LAW REVIEW

THE SECURITIES LITIGATION REVIEW

THE LENDING AND SECURED FINANCE REVIEW

THE INTERNATIONAL TRADE LAW REVIEW

THE SPORTS LAW REVIEW

i

The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:

ACKNOWLEDGEMENTS

BOWMAN GILFILLAN

CHEVEZ RUIZ ZAMARRIPA Y CIA, SC

CUATRECASAS, GONÇALVES PEREIRA

DANNY DARUSSALAM TAX CENTER

DLA PIPER

FLICK GOCKE SCHAUMBURG

GREENWOODS & HERBERT SMITH FREEHILLS

GUZMÁN ARIZA, ATTORNEYS AT LAW

HERBERT SMITH FREEHILLS

HOCHE SOCIÉTÉ D’AVOCATS

HUASHUI & PARTNERS LAW FIRM

JOSEPH HAGE AARONSON LLP

KYRIAKIDES GEORGOPOULOS LAW FIRM

LENZ & STAEHELIN

LOYENS & LOEFF

MAISTO E ASSOCIATI

MASON HAYES & CURRAN

MORRISON & FOERSTER LLP

Acknowledgements

ii

MPC LEGAL, SOLICITORS & ADVOCATES

NORTON ROSE FULBRIGHT CANADA LLP

PÉREZ BUSTAMANTE & PONCE, ABOGADOS

PHILIPPI PRIETOCARRIZOSA & URÍA

PINHEIRO NETO ADVOGADOS

PWC LEGAL

ROSCHIER, ATTORNEYS LTD

SELE FROMMELT & PARTNER ATTORNEYS AT LAW LTD

SYCIP SALAZAR HERNANDEZ & GATMAITAN

WARDYŃSKI & PARTNERS

WITHERS KHATTARWONG

iii

Editor’s Preface ..................................................................................................vii Simon Whitehead

Chapter 1 TAX APPEALS TO THE EUROPEAN COURT OF JUSTICE ........................................ 1

Paul Farmer

Chapter 2 AUSTRALIA ............................................................................ 12Tony Frost and Cameron Hanson

Chapter 3 AUSTRIA ................................................................................. 23Franz Althuber and Marco Thorbauer

Chapter 4 BELGIUM ............................................................................... 36Caroline P Docclo

Chapter 5 BRAZIL.................................................................................... 52Tércio Chiavassa and Diego Caldas Rivas de Simone

Chapter 6 CANADA ................................................................................. 64Dominic C Belley

Chapter 7 CHILE ..................................................................................... 77Patricio Silva-Riesco Ojeda and Arturo Selman Nahum

Chapter 8 CHINA .................................................................................... 89Liu Tianyong

Chapter 9 DOMINICAN REPUBLIC ................................................... 103Christoph Sieger and Fabio J Guzmán-Ariza

CONTENTS

iv

Contents

Chapter 10 ECUADOR ............................................................................ 110Juan Gabriel Reyes-Varea and Alejandro Páez-Vallejo

Chapter 11 FINLAND.............................................................................. 121Mika Ohtonen

Chapter 12 FRANCE ................................................................................ 131Eric Ginter and Julien Bellet

Chapter 13 GERMANY ............................................................................ 147Michael Hendricks

Chapter 14 GREECE ................................................................................ 162Panagiotis Pothos and Nina Kakali

Chapter 15 INDIA .................................................................................... 173Aseem Chawla

Chapter 16 INDONESIA ......................................................................... 187David Hamzah Damian

Chapter 17 IRELAND .............................................................................. 198John Gulliver and Robert Henson

Chapter 18 ITALY ..................................................................................... 210Guglielmo Maisto

Chapter 19 LIECHTENSTEIN ................................................................ 225Heinz Frommelt and Angelo Trebo

Chapter 20 MEXICO ............................................................................... 238Manuel Sáinz Orantes and Claudio F Cárdenas Salomon

Chapter 21 PHILIPPINES ........................................................................ 248Carina C Laforteza and Mark Xavier D Oyales

v

Contents

Chapter 22 POLAND ............................................................................... 260Dariusz Wasylkowski

Chapter 23 RUSSIA .................................................................................. 272Yana Proskurina and Maria Mikhaylova

Chapter 24 SINGAPORE ......................................................................... 292Joanna Yap

Chapter 25 SOUTH AFRICA .................................................................. 305Aneria Bouwer

Chapter 26 SPAIN .................................................................................... 317Miró Ayats Vergés and Jaume Bonet León

Chapter 27 SWITZERLAND ................................................................... 335Jean-Blaise Eckert and Charlotte Rossat

Chapter 28 UNITED KINGDOM .......................................................... 346Simon Whitehead

Chapter 29 UNITED STATES ................................................................. 378Edward L Froelich

Appendix 1 ABOUT THE AUTHORS .................................................... 411

Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS .... 427

vii

EDITOR’S PREFACE

The objective of this book is to provide tax professionals involved in disputes with revenue authorities in multiple jurisdictions with an outline of the principal issues arising in those jurisdictions. In this, the fourth edition, we have continued to concentrate on the key jurisdictions where disputes are likely to occur for multinational businesses.

Each chapter provides an overview of the procedural rules that govern tax appeals and highlights the pitfalls of which taxpayers need to be most aware. Aspects that are particularly relevant to multinationals, such as transfer pricing, are also considered. In particular, we have asked the authors to address an area where we have always found worrying and subtle variations in approach between courts in different jurisdictions, namely the differing ways in which double tax conventions can be interpreted and applied.

The idea behind this book commenced in 2013 with the general increase in litigation as tax authorities in a number of jurisdictions took a more aggressive approach to the collection of tax; in response, no doubt, to political pressure to address tax avoidance. In the UK alone we have seen the tax authority vested with broad new powers not only of disclosure but even to require tax to be paid in advance of any determination by a court that it is due. The provisions empower the revenue authority, an administrative body, to compel payment of a sum, the subject of a genuine dispute, without any form of judicial control or appeal. Over the past year the focus on perceived cross-border abuses has continued with action by the European Commission on past tax rulings in Ireland, Luxembourg and Belgium and the BEPS reaching a crescendo in the announcement of a ‘diverted profits tax’ to impose an additional tax in the UK when it is felt that a multinational is subject to too little corporation tax even in an EU context. As we go to press the UK has introduced another measure imposing a ring-fenced super tax to strip away half of any interest received with the refund of overpaid tax where the refund is, in practice, the result of the enforcement of EU rights.

Editor’s Preface

viii

These are, perhaps, extreme examples, reflective of the parliamentary cycle, yet a general toughening of stance seems to be felt. In that light, this book provides an overview of each jurisdiction’s anti-avoidance rules and any alternative mechanisms for resolving tax disputes, such as mediation, arbitration or restitution claims.

We have attempted to give readers a flavour of the tax litigation landscape in each jurisdiction. The authors have looked to the future and have summarised the policies and approaches of the revenue authorities regarding contentious matters, addressing important questions such as how long cases take and situations in which some form of settlement might be available.

We have been lucky to obtain contributions from the leading tax litigation practitioners in their jurisdictions. Many of the authors are members of the EU Tax Group, a collection of independent law firms, of which we are a member, involved particularly in challenges to the compatibility of national tax laws with EU and EEA rights. We hope that you will find this book informative and useful.

Finally, I would like to acknowledge the hard work of my colleague Peter Stewart in the editing and compilation of this book.

Simon WhiteheadJoseph Hage Aaronson LLPLondonFebruary 2016

52

Chapter 5

BRAZIL

Tércio Chiavassa and Diego Caldas Rivas de Simone1

I INTRODUCTION

In Brazil, the litigation culture is deeply ingrained in the tax dispute resolution environment. There are two major reasons for that. The first lies in the volume of tax legislation that is churned out at a brisk pace, which often makes taxpayers uncertain about the interpretation that should be given to tax rules and invariably translates into a large volume of delinquency notices (infraction notices) against them; and in some cases, to escape this vicious cycle, the taxpayers themselves look to the courts for advance protection.

The second reason is that tax settlements are not prescribed by Brazilian law. The state cannot waive or settle a taxpayer’s tax liabilities, save in the extremely rare event of a settlement reached directly by the Attorney General of the federal government. As a consequence, there is no informal tax resolution mechanism in Brazil.

Within this scenario, it is not uncommon to see Brazilian companies saddled with a vast number of tax disputes in the administrative and judicial spheres.

Tax disputes take approximately two to four years on average in the administrative sphere; and five to eight years in the judicial sphere.

1 Tércio Chiavassa is a partner and Diego Caldas Rivas de Simone is a senior associate at Pinheiro Neto Advogados.

Brazil

53

II COMMENCING DISPUTES

The Brazilian tax authorities periodically check whether taxpayers are fulfilling their principal and ancillary tax obligations. As a general rule, the tax authorities have five years to claim amounts purportedly due (except in case of simulation, fraud or wilful misconduct, where a six-year limitation period applies).2

If any delinquent or deficient tax obligation is found, the tax authorities issue a tax infraction notice to collect the corresponding debt (comprising principal, interest and penalties).

Once an infraction notice is issued, there are three options: a paying the debt within 30 days, usually at a discount on the penalty;3 b filing a defence to the infraction notice, stating the reasons why the notice should

be cancelled and then officially commencing the litigation in the tax administrative sphere; or

c taking the dispute directly to court by filing an ordinary action or a motion for writ of mandamus.

i Tax litigation in the administrative sphere

Instead of paying the debt (in a lump sum, in installments, or else under a tax relief scheme), the taxpayer can challenge the tax infraction notice before administrative judgment authorities in the federal, state or municipal sphere,4 which is composed of technical and expert administrative judgment panels. Such administrative authorities are knowledgeable and skilled in the specific tax issues under dispute.

In the federal sphere, a company has 30 days from service of an infraction notice to present its defence (termed ‘opposition’). This opposition and respective case records are sent over to the Federal Revenue Judgment Unit (DRJ), which is in charge

2 Such extended limitation period also applies when there has been no ‘principle of payment of taxes’ by the taxpayer. This rule is not envisaged in the National Tax Code (CTN) or in specific tax regulations, but the Superior Court of Justice (STJ) reached a well-settled stand that such interpretation should be binding on administrative and judicial courts alike.

3 In the federal sphere, the discount usually comes to 50 per cent of the penalty. Besides, the taxpayer may also move for payment in up to 120 installments, which stays enforcement of the debt. In this case, however, there is no reduction of penalties or interest even if the taxpayer intends to pay the debt within 30 days from service of the infraction notice. Apart from these options, the federal government grants tax amnesties from time to time, by which taxpayers may pay their tax liabilities usually at a significant discount on fines/penalties, default interest and statutory charges.

4 Under the Federal Constitution, the federal, state or municipal governments are competent to legislate, collect and litigate on taxes, depending on their type. For instance, the federal government is competent to collect income tax; the states are competent to collect tax on goods (similar to VAT); and municipalities are competent to collect tax on services.

Brazil

54

of deliberating on the case and issuing a first-instance decision, generally upholding the infraction notice (save when there is any material breach that would render such notice void).

The taxpayer may then lodge an appeal (voluntary appeal) at the Administrative Tax Appeals Board (CARF), the second instance within the federal administrative sphere (as further explained below). Each CARF judgment chamber is made up of members designated by both taxpayers and tax authorities. A tie is construed favourably to the tax authorities.

A third administrative level – the Higher Tax Appeals Chamber (CSRF) – is only called upon to arbitrate if the taxpayer or the tax authority, as applicable, shows that the same or distinct CARF judgment chambers rendered conflicting decisions on the same subject.

Therefore, if a taxpayer is defeated but finds a conflicting CARF decision on the same subject, it may lodge a special appeal at CSRF. The contrary also holds true: the defeated tax authorities can also file a special appeal at CRSF under those same circumstances. Also at CSRF level, a tie is construed favourably to the tax authorities.

A similar three-tier structure is replicated at state level, and even some municipalities (e.g., the City of São Paulo) have administrative tax courts to review infraction notices issued by the tax authorities. However, small municipalities usually lack human or financial resources to put this complex dispute resolution structure in place and, for this reason, disputes over a local infraction notice are usually much less formal.

It usually takes two to four years on average for a final ruling on tax disputes in the administrative sphere. The SELIC benchmark interest rate accrues on the overall tax debt throughout the litigation period. No bond need be posted.

A taxpayer cannot litigate simultaneously in the administrative and judicial spheres with regard to the same tax issue. On practical terms, the judicial sphere is always an open option for the taxpayer, whereas the administrative sphere is only to entertain a case that has not yet been taken to the judiciary.

If the final administrative decision is favourable to the taxpayer, the tax authorities cannot take the case to the judiciary, except under very special circumstances. By contrast, a final administrative decision that is unfavourable to the taxpayer can be disputed in court under the same or different line of reasoning.

ii Tax litigation in the judicial sphere

If the final administrative decision is unfavourable to the taxpayer (or if the latter has waived its right to challenge the tax infraction notice in the administrative sphere), the taxpayer may even so take this issue to the judiciary (via ordinary action or motion for writ of mandamus) or else await until enforcement occurs and then bring a motion to stay enforcement.5

5 In this case, the taxpayer must post bond in advance, as follows (according to Law 6,830 of 1980): (1) bank deposit in cash; (2) letter of guarantee or surety bond; (3) properties, assets

Brazil

55

The judiciary is also organised as a three-tier structure: the trial court; the appeals courts; and the Superior Court of Justice (STJ) and the Federal Supreme Court (STF).

The trial judge is the first to entertain and rule on the case. The trial court decision may be appealed to the appeals court, which is composed of a three-judge panel. The defeated litigant may still appeal to the STJ and to the STF, as applicable.

While the STJ can be called upon to review a decision that has allegedly breached a rule of law, the STF will only do so if the case is of general constitutional interest to the country and society.

It usually takes five to eight years for a final ruling on a tax dispute in the judicial sphere.

The tax liability is stayed as the dispute develops at administrative level, and the taxpayer can litigate without posting bond or other security with regard to the disputed amount. By contrast, if an unfavourable decision is handed down at any stage in the judicial sphere or an existing injunction is cancelled, the taxpayer must either (1) make a deposit in court, or (2) post bond at the full disputed value, otherwise the tax authorities may enforce the respective sums.

III THE COURTS AND TRIBUNALS

i CARF

The CARFThe CARF is the highest-ranking and most important administrative court for federal tax litigation in Brazil.

The CARF has taken centre stage by ruling on leading tax issues in years. Until recently, CARF members were praised for being very knowledgeable and well trained in complex tax issues, especially in the context of mergers and acquisitions and tax planning structures. Discussions were more technical and detailed there than at the judiciary, which historically turned the CARF into the best venue for complex litigation.

Composition and organisation of the court The CARF comprises three sections, composed of four chambers, each specialising in some areas of tax practice. The CSRF is composed of three chambers, and a full bench.

Each CARF judgment chamber is made up of eight members, four designated by the tax authorities and four by taxpayers (trade, industry and service associations representing them). Each CSRF chamber is composed of 10 members, five designated by the tax authorities and five by the taxpayers. Such members are the chief justices and deputy chief justices of each CARF chamber.

or goods eligible for attachment; or (4) a listing of properties, assets or goods offered by third parties for attachment, although this last option is not normally accepted by the government (Public Treasury).

Brazil

56

The ‘Zealots’ operationAs extensively aired in the media, the CARF has been under investigation by the Brazilian federal police on corruption charges involving some of its judging members, who were purportedly being bribed to vote in favour of some taxpayers.

As a result of the federal police investigation, all trials were put on hold from April to November 2015; the CARF structure changed substantially; those involved in potential wrongdoing were dismissed or resigned; and new admission rules were adopted.

As a result of such changes, each trial chamber is now made up of four (instead of three) judging members designated by the tax authorities and four others designated by taxpayers. In addition, the judging members designated by taxpayers are now expressly prohibited from practising law while they are involved in the CARF.

Even some judging members not involved in any wrongdoing resigned from the CARF, and the Brazilian government has since engaged in substantial recruiting efforts to designate new members for all trial chambers. Those chambers are now complete, and the CARF resumed its activities in December 2015.

The future of the CARFDoubts remain over whether the new CARF members are experienced, independent and skillful enough to cope with complex matters or, considering the recent events, would even have the courage to cancel a tax assessment when controversial issues are involved (such as the deductibility of premium amortisation expenses).

At any rate, it is also hoped that, as the first trials take place and the new members get more acquainted with the judgment environment, the CARF will resume its prominent position in the tax resolution landscape.

ii Federal Supreme Court

The Court Considering that the Brazilian Constitution is analytical and expansive, including in relation to tax matters, almost every relevant discussion involving tax issues might entail a potential offence to constitutional precepts and, as such, be actionable before the Federal Supreme Court (STF).

As stated above, the deeply rooted litigation culture in Brazil is marked by a plethora of lawsuits, appeals and pleas, each having a specific purpose and suitability or admissibility criteria. There is also a culture of exhausting all possible appeals until a final decision is rendered, even when the courts have already reached a well-settled stand with regard to the matter at dispute. This helps to explain why the STF is burdened with an overwhelming caseload, albeit its seniority and mission to rule on essentially constitutional matters.

Composition and organisation of the Court The STF is composed of 11 justices, who are nominated by the President of the Republic and confirmed by a majority of the Federal Senate. There is a trend in the Federal Senate to confirm presidential nominations. Although the STF findings unavoidably convey the ideological and political views of its members, and most of those currently in office were

Brazil

57

nominated by the last two administrations run by the same incumbent political party, the STF justices tend to be independent and their decisions have in many cases been contrary to the interests of what the nominating presidents first expected.

The STF bodies comprise the full bench, and the first and second panels. Each panel is formed of five justices (current membership in the first panel: Rosa Weber, Marco Aurélio, Luiz Fux, Roberto Barroso and Edson Fachin; in the second panel: Dias Toffoli, Celso de Mello, Gilmar Mendes, Carmen Lúcia and Teori Zavascki); the STF Chief Justice (currently, Ricardo Lewandowski) serves only in the full bench.

The full bench has the final word on any matter under discussion, and its determinations are thus non-appealable. Therefore, a Full Bench finding for or against the constitutionality of a given law or act should purportedly be followed by the STF panels as well as by appellate and trial courts.

Background of the CourtThe role of STF panels has expanded considerably in recent years to reach certain appeals that were once entertained by the full bench only. This change has expedited the processing of lawsuits – but the downside is that STF panels tend to just apply court precedents to existing tax cases, hardly judging new merits of discussions.

In an effort to rid itself of those numerous appeals that ranged from sheer irrelevance to an embarrassing lack of political, economic or social repercussions, the STF devised a new system that has enabled it to focus on important judgments that are expected to have a significant impact on the country as a whole.

To that end, constitutional amendment 45 of 2004 introduced the binding precedent system (termed ‘general repercussion’), which primarily aims (1) to standardise those precedents from the STF itself and from other judiciary bodies, which in turn translates into greater legal certainty, and (2) to reduce the number of disputes taken to the STF, thus dispensing this court from examining several identical cases gravitating around the same constitutional matters. The STF determination on a leading case automatically applies to all other cases revolving around the same issue.

Political and financial aspectsThe STF rulings cannot fully escape the political views of its members and, especially in tax matters (which might involve hefty amounts), they are also financially oriented, often taking in account the impact of such judgments on government policies, society and public funds. Therefore, the STF also considers the implications of its decisions for the public treasury – and the resulting impact on its public image as well.

iii Superior Court of Justice

The CourtThe Superior Court of Justice (STJ) is in charge of harmonising the interpretation and enforcement of federal laws throughout Brazil. Thus, it is incumbent on the STJ to offer a definitive resolution for those tax cases not involving constitutional issues.

Brazil

58

Composition and organisation of the CourtThe STJ is composed of 33 justices, each of whom is appointed by the President of the Republic out of a three-name list submitted by the STJ itself. The nominee is also interviewed and confirmed by the Federal Senate. According to the Constitution, one-third of the STJ associate justices must be chosen from among federal appellate judges; one-third from among state appellate judges; and one-third from among practising lawyers and public attorneys.

The STJ comprises: the full bench (composed of all STJ associate justices, dealing with in-house administrative matters only); the special court (composed of the 15 most senior associate justices by order of appointment, which is in charge, among other things, of adjudicating on appeals when STJ specialised bodies are split with regard to the matter at issue), sections (each being composed of 10 associate justices) and panels (each being composed of five associate justices) specialising in some areas of practice. The first section (comprising the first and second panels) is responsible for entertaining and judging on tax disputes.

Background of the CourtConsidering again the ingrained litigation culture in Brazil and regardless of the STF’s role and recent activities, the vast majority of tax disputes end up in the lap of STJ associate justices as well. Despite the high volatility of its rulings over the years, the STJ has been instrumental in offering a final resolution for several tax issues. For instance, the STJ has recently ruled on the applicability and preemption of international treaties favourably to taxpayers.

As yet another effort to trim down the massive caseload and expedite its management process, the leading case status and resulting binding precedent conditions were also adopted by the STJ for disputes revolving around statutory law issues.

Article 543-C of the Brazilian Civil Procedure Code (CPC) reads that, faced with a set of special appeals dealing with the same matter, the STJ may cherry-pick and adjudicate on the ones that would most adequately represent the matter in controversy (thus naming this leading case status ‘repetitive appeal’). Therefore, the leading case status (or ‘repetitive appeal’ status) epitomises the group of special appeals that rely on the same arguments and matters of law.

Under civil procedure law, it is incumbent on the chief justice (or deputy chief justice) of a court a quo to formally accept for judgment one or more appeals that would best represent a repetitive matter of law, and then send them over to the STJ for a decision that will ultimately apply to the other cases in abeyance at the courts a quo (appeals courts and regional federal courts). As a result, the STJ rules on a single leading case and the resulting decision reaches all other cases dealing with the same matter.

IV PENALTIES AND REMEDIES

For federal taxes, an infraction notice usually envisages a default penalty set at 75 per cent or 150 per cent. The 75 per cent penalty applies to most cases, where the tax authorities

Brazil

59

have reasons to believe that tax delinquency or deficiency has not been on purpose. The 150 per cent aggravated fine, in turn, is imposed when the taxpayer is charged with wilful misconduct, fraud or simulation (sham).

As for state and municipal taxes, penalties vary according to the type of offence and place of occurrence.

If the tax authorities accuse the taxpayer of sham or fraud, it could also face (besides the tax penalties stated above) criminal charges (termed ‘criminal tax complaint’) also reaching its managers.

The STF has already held that criminal prosecution is only possible if the tax assessment is ultimately confirmed in the administrative sphere; the amounts in controversy are actually due; and the taxpayer is guilty of sham or fraud.

V TAX CLAIMS

i Recovering overpaid tax

The taxpayer may claim a refund of undue or overpaid taxes within five years from the respective payment date. To apply for a tentative refund, the taxpayer must submit a request for offsetting or refund, in the administrative or judicial sphere.

Administrative claimThe procedure for refund and offsetting of federal tax credits is currently governed by Normative Ruling 1,300 of 2012. To that end, the taxpayer can claim its right to refund and/or offsetting via application for refund, redress or reimbursement and statement of offsetting (PER/DCOMP).

Refund requestIf a refund request is accepted without restrictions, the corresponding credits are deposited directly in the taxpayer’s banking account. The upside of a refund request is that, if tax authorities deny it, the taxpayer is not charged or fined for underpayment. Nevertheless, there is no specific or estimated time for the tax authorities to analyse a request for refund.

Offset requestAside the refund request, taxpayers can apply for offsetting of existing credits against tax obligations administered by the Brazilian Federal Revenue Office (RFB). The tax authorities have five years to approve or deny this request. After this period, offsetting is tacitly approved.

Offsetting can be denied by the tax authorities for several reasons. But, in this case, the taxpayer is liable for payment of the sum it meant to offset.

Judicial claimTaxpayers could also bring suit to have the judiciary acknowledge a tax overpayment, for refund or offset purposes.

Brazil

60

RefundIf the courts ultimately find for the taxpayer, actual refund by the federal government is made through a special writ of payment called precatório. These precatórios can be honoured at a rate of 10 per cent per year, thus taking as many as 10 years for a full tax refund.

OffsetAccording to major court precedents in Brazil, the judiciary has no power to arrange for offsetting of tax credits and debts of a given taxpayer. Instead, the judiciary may only declare that all or a portion of the tax paid by a certain taxpayer was undue. Thus, if a final favourable decision is so rendered by the Brazilian courts, the taxpayer must then file an administrative claim (1) to validate the overpaid tax value, and (2) to arrange for the respective offsetting. This offsetting procedure (backed by court order) cannot be denied by the administrative authorities.

ii Challenging administrative decisions

The tax authorities may reject an offset request (via a ‘non-confirmation order’) on grounds of the origin or value of the purported credit, then enforcing the debts unpaid on account of such rejected offsetting, plus default penalty at 20 per cent and default interest accruing at the SELIC benchmark rate.

In addition, a one-off penalty may be imposed (through an infraction notice) for non-confirmation of the offset request. The penalty generally amounts to 50 per ceny of the credit covered by the offset, but could escalate to 150 per cent of the unduly offset debt value in case of fraud (or to 225 per cent, if the taxpayer does not provide information as requested by the tax authorities).

Taxpayers have 30 days from issuance of a non-confirmation order to present their respective opposition showing that the credit is valid and moving for cancellation of the respective tax assessment.

This opposition is heard by the Federal Revenue Judgment Unit (DRJ), and an unfavourable decision may be appealed first to the CARF, and then to the CSRF, following the standard procedures for federal administrative litigation (see above).

iii Claimants

Despite the general right to claim for refund of undue or overpaid taxes, a taxpayer wishing to recover or offset the amounts unduly paid as indirect taxes (ICMS and IPI, similar to VAT taxes) must prove that such burden has not been passed on in the production chain (that is, to the price of goods). In short, it must prove that there was no crediting with regard to the unduly paid tax for which a refund is being sought.

VI COSTS

The defeated litigant bears all court costs and loss-of-suit fees (meaning the defence fees and court costs incurred by the prevailing litigant). This happens in the judicial sphere only. Costs incurred at administrative level are not recoverable.

Brazil

61

VII ALTERNATIVE DISPUTE RESOLUTION

The tax settlement mechanism is non-existent in Brazil. Under the National Tax Code (CTN), a waiver or settlement with regard to tax liabilities is limited to very specific circumstances (e.g., tax exemptions or tax amnesty or relief programmes). But even in those cases, the tax authorities have very narrow leeway or discretion to compromise on tax liabilities.

In a tax amnesty or relief scheme, for instance, taxpayers may enjoy a reduction in the fine and interest due, or pay the debt in several installments. But the tax authorities and the taxpayer cannot wrangle over the tax liability value or method of payment, as these aspects are expressly prescribed by law.

VIII ANTI-AVOIDANCE

A sole paragraph was added to article 116 of CTN authorising the tax authorities to consider the economic purpose of a taxpayer’s businesses and transactions, regardless of their form.

In theory, the economic substance doctrine could be applied whenever there are reasons to believe a taxpayer is acting in a ‘dissimulating’ way. But, in the very words of that sole paragraph, it is not self-enforceable and must be further regulated by ordinary law – which has not occurred to date.

Nevertheless, Brazilian experience shows that tax infraction notices applying the substance over form doctrine have relied on the old civil-law concepts of simulation and abuse of law. In general terms, however, if a taxpayer can prove that the structure potentially resulting in tax savings had actual corporate and economic reasons and business purposes (regardless of possible tax savings), the structure should be deemed legitimate for Brazilian tax purposes.

IX DOUBLE TAXATION TREATIES

i Profits abroad (CFC rules)

Since 1997, Brazil has adopted the worldwide taxation of profits, capital gains and income earned abroad (the CFC rules). Starting in 2001, based on Article 74 of Provisional Measure 2,158 of that same year (MP 2,158), profits earned by controlled foreign corporations are taxed at year-end, regardless of actual distribution.

There were two strong arguments against taxation of foreign profits under Article 74 of MP 2,158: (1) taxing profits earned abroad by a foreign company before their availability to the Brazilian company is unconstitutional; and (2) article 7 of the double taxation treaties (tax treaties) entered into by Brazil establishes that profits earned by a foreign company are taxed in its own country only.

In April 2013, the STF held that (1) Article 74 of MP 2,158 is unconstitutional with regard to affiliates located in non-tax haven jurisdictions; (2) Article 74 of MP 2,158 is constitutional in relation to controlled companies located in tax haven jurisdictions, or to companies over which the Brazilian company has no corporate or tax control; and (3) the law cannot apply retrospectively to any company, whether established in tax

Brazil

62

haven jurisdictions or elsewhere. The STF justices then noted that discussions over the applicability of tax treaties could not be immediately handled by the STF, as the many specific elements involved should be previously examined by the lower courts.

The STJ was thus charged with examining Article 7 of the double taxation treaties. Said article expressly sets forth that the profits of a company of the signatory state may only be levied in the country of origin (domicile), unless there is any permanent establishment in the state where the paying source is located. Hence, the authority to tax is exclusively granted to the country where the company is domiciled.

Only when such profits are actually distributed as dividends will Brazil have powers to tax them, based on Article 10 of the double taxation treaties and also under Brazilian rules. Besides, some tax treaties (such as those signed with Argentina and Austria) also state that profits distributed as dividends are also tax-exempt.

The STJ thus concluded that the profit taxation system envisaged in Article 74 of MP 2,158 (where the profits earned by the controlled company are added to the profits posted by the Brazilian controlling company) violates the existing tax treaties as well as the principle of good faith of international relations. This was a landmark victory in terms of international law issues.

ii Services paid abroad

As for service income, the heart of the dispute is whether offshore remittances in payment for services provided by foreign-based residents to Brazilian companies are taxed at source, or else covered by Article 7 of the tax treaties (thus being taxed only in the country of residence of foreign service providers).

Therefore, the gist is whether offshore remittance of payments for services should be subject to Brazilian withholding tax at a rate of 25 per cent, in light of the Brazilian tax rules expressly providing for tax withholding upon payment, credit, delivery, use or remittance of sums to Brazilian non-residents in consideration for services (Article 685, II(a) of the 1999 Income Tax Regulations).

The Brazilian tax authorities advocate that service income should be classified as ‘other income’ or ‘income not expressly mentioned’, as usually defined in Article 21 or 22 of tax treaties, which gives cumulative taxation authority to both the source and residence states. If services involved technology transfer, then service income should be subject to withholding tax (as it happens with royalties).

Analysing some recent cases on the matter, STJ concluded that offshore remittances arising from services not involving technology transfer by companies domiciled in countries that have signed taxation treaties with Brazil should be classified as ‘business profits’ under Article 7 (not as ‘other income’ under Articles 21 or 22) of those tax treaties. As a result, the source country has no authority to impose taxation on such income, as it must be taxed only in the country of residence of the service provider. Therefore, the existing tax treaties were once again respected, and the courts held that they should prevail over Brazilian internal rules.

Brazil

63

X AREAS OF FOCUS

Prompted by the country’s current economic and political turmoil, the tax authorities have intensified the number of tax inspections and spared no effort to boost tax revenues at all costs. The judicial and administrative courts, for their part, have been extremely careful in ruling out tax liabilities.

As a result, several tax issues are now on the radar: goodwill amortisation expenses; some aspects of PIS/COFINS taxation (a contribution on revenues); some issues related to the recent fiscal adjustment package; corporate restructuring and tax planning; and the CFC rules; to name a few.

XI OUTLOOK AND CONCLUSIONS

The litigation culture is still a vivid reality in Brazil, and is fuelled up by the federal revenue authorities (via tax audits and resulting tax infraction notices) or by the taxpayers themselves (as a preventive measure).

Therefore, it is not uncommon to see taxpayers mired in dozens (or even hundreds) of tax disputes. The number of tax disputes is invariably proportional to the size of a taxpayer.

Resolving a tax dispute at federal, state and municipal administrative levels is more advantageous, for the simple reason that administrative judges are usually more knowledgeable and skilled in tax matters – which translates into a more sophisticated decision at a faster rate.

Although the Brazilian judiciary is not equipped with judges specialising in tax matters only (as a comprehensive knowledge of law is required for admission) and not all Brazilian states have special courts or panels focusing on tax disputes, taking a tax dispute to court is also a valid and important choice, which usually takes longer (five to eight years) than its administrative counterpart.

In terms of time, the outlook is more promising on account of the procedural developments in recent (the leading case and binding precedent mechanisms adopted by the STF and STJ have surely come in handy). And some tax disputes have even been resolved within a three-year span, even at court level.

Last but not least, the existing tax amnesty and relief schemes enable taxpayers to settle their tax liabilities under administrative or judicial dispute at a substantial discount in the value of fines and interest, which has helped companies to manage their tax liabilities over the past two decades.

It is worth noting that the SELIC benchmark rate accrues on the tax liability value throughout the tax dispute. The SELIC benchmark rate, which is published by the Central Bank of Brazil, is currently set at approximately 15 per cent per year.

411

Appendix 1

ABOUT THE AUTHORS

TÉRCIO CHIAVASSAPinheiro Neto AdvogadosTércio Chiavassa is a partner in the tax area of Pinheiro Neto Advogados office in São Paulo. He holds an LLB degree from the University of São Paulo (1995); specialisation in procedural law from the Università Degli Studi in Milan (1996–1997), and an LLM degree from the University of São Paulo (2003).

DIEGO CALDAS RIVAS DE SIMONEPinheiro Neto AdvogadosDiego Caldas Rivas de Simone is a senior associate in the tax area of Pinheiro Neto Advogados office in São Paulo. He holds an LLB degree from Pontifícia Universidade Católica de São Paulo (2003); a specialisation in tax law – Pontifícia Universidade Católica de São Paulo (2005); an LLM in tax law – Pontifícia Universidade Católica de São Paulo (2008); an LLM in corporate law – Universitat de Barcelona, Spain (2010); and a PhD degree in financial and tax law – Universitat de Barcelona, Spain (ongoing).

PINHEIRO NETO ADVOGADOSRua Hungria, 110001455-906 São PauloBrazilTel: +55 11 3247 8648 / +55 11 3247 8759Fax: +55 11 3247 8600 / +55 11 3247 8600tchiavassa@pn.com.brdcaldas@ pn.com.brwww.pinheironeto.com.br