It was enacted on July 22nd, 2015, Provisional Measure n. 685 (PM 685/2015). This PM, on the same direction as others recently enacted, came into force with the objective of increasing tax revenue by the Federal Government. It was created the (i) PRORELIT (Programme for the Reduction of Tax Litigation) and a (ii) new tax return regarding legal transactions that lead to suppress, reduce or defer taxation.
In relation to item (i), PRORELIT allows that a taxpayer with tax debts overdue by June 30th, 2015 and under administrative or judicial litigation procedures either on Administrative Tax Courts or Judicial Courts, through filling a request, waive the right to proceed with the litigating procedures and use its tax losses of Corporate Income Tax (CIT) assessed until the December 31st, 2013 and declared on a tax return by June 2015 to off-set the related tax debts being litigated.
The PRORELIT allows also that the taxpayer use the tax losses of controlling and controlled entities (either through equity ownership or Shareholders Agreement) if it was used up its own tax losses. In both cases, the taxpayer could use its tax losses to off-set up to 57% (fifty seven percent) of litigated debt as long as it pays the remaining amount in kind.
It should be stressed, however, that the tax authorities preserve the right to evaluate the tax losses presented for off-setting. Hence, in case the tax authorities deny the right to use those tax losses, the taxpayer would have 30 days to pay the remaining amount.
Considering that the taxpayer who signs up for PRORELIT must confess the debts being litigated, it is paramount to conduct a previous analysis of the quality of the tax losses to be used so as to avoid that the signing up to PRORELIT triggers full payment of a debt which could be still under litigating procedures.
In relation to item (ii), the new tax return about legal transactions that could lead to suppression, reduction of postponement of taxation will be due only when further regulated by the federal tax authorities.
Having filled this new tax return, the tax authorities may determine that it does not allow the legal acts or transactions conducted and will notify the taxpayer to pay the full amount it understands to be due in 30 days. Moreover, in case a tax planning is detected afterwards and it was not informed to the tax authorities, according to the PM, the taxpayer will be considered to have committed fraud (for purpose of setting the corresponding fine).
Therefore, according to the PM, it is possible that the taxpayer is mandated to pay a fine in excess of 150% of the taxes that the tax authorities understand to be due.
Even though such innovation goes in the direction of the Governments intent to increase tax revenue and, thus, inhibit the use of legal transactions that results in a reduced amount of tax payment, it clearly raises some questions.
Firstly, as per the PM, any transaction should be informed when the acts or legal transactions conducted do not hold any relevant reason other than tax reduction or the adopted form is not usual, or even if it conducts an indirect legal transaction or it contains clause that compensates, even partially, the effects of a typical contract.
As one can see, the PM adopts extremely vague definitions and criteria that even currently have not been fully defined either by the tax authorities and or the courts.
Secondly, as per current precedents (administrative and judicial), the burden of proof for fraud lies with the tax authorities. In other words, it must be proven.
Surely, these and other issues will be subject to relevant debate, especially after further regulation by the tax authorities.
Raphael de Campos Martins was an associate and partner at Pacheco Neto Sanden Teisseire Law Firm.
Allander Batista was lawyer in tax area at Pacheco Neto Sanden Teisseire Law Firm.
Daniel Miotto was Partner at Pacheco Neto Sanden Teisseire Law Firm.
