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Brazil’s Best Counsel 2020 – Chapter Opening: Tax Litigation

In the last edition of this publica­tion, we provided an overview of the Brazilian tax litigation system. The message conveyed was that a resilient approach to tax litigation is expected from companies operating in Brazil due its complex tax system marked by a high degree of uncertainty. Ne­vertheless, due to country’s gigantic consumer market and countless in­vestment opportunities, betting on Brazil also pays off.

In 2019, a new president and a new intake of congressmen took office with some urgent structural reforms expected to take place, especially the pension and tax reforms, in order to tackle the fiscal imbalance which country is facing. As the tax reform seems to be gaining momentum, the focus of this article is the Brazilian constitutional litigation system. Gi­ven that a tax reform requires changes in many articles of the Constitution and pieces of legislation, the reform is likely to be challenged before the Brazilian Supreme Court (STF).

If approved, the draft bill of the constitutional amendment under dis­cussion (PEC 45/2019) will create a new consumption tax system. The Federal Excise Tax (IPI), the Contri­bution for Social Integration Program (PIS) and the Contribution for So­cial Security Funding (COFINS), the State-VAT (ICMS) and the Municipal Tax on Services (ISS) will be unified under one VAT (to be called IBS), fully non-cumulative and paid at the destination. A Managing Committee comprised of representatives from the three levels of the federation will be responsible for distributing revenue between the relevant tax authorities and tax credits to taxpayers. Moreo­ver, the granting of tax benefits by states will be prohibited. States com­monly granted unlawful benefits to taxpayers, in a kind of race to the bot­tom competition for investment (the so-called “tax war” and “ports war”).

Despite the simplifications which the proposed system may bring, critics say that the draft bill offends fede­rative principles. Furthermore, some states fear the loss of revenue and certain sec­tors – especially the ser­vices sector – fear an in­creased tax burden and are sabre-rattling when faced with the possi­bility of the draft bill’s approval. Seeking to challenge the proposed bill, members of the legisla­tive body may file writs of mandamus before the STF requesting the stalling of discussions over the draft bill’s constitutional amendments, under the allegation that it risks abolishing the federative model of state governance.

If such lawsuits fail and the bill is approved, two types of suits could be filed before the STF. The first is a Direct Action of Unconstitutiona­lity (ADI) which aims at expurga­ting norms deemed unconstitutional. Conversely, the second is the Decla­ratory Action of Constitutionality (ADC) which declares certain norms constitutional. ADCs are rarer whilst the filing of ADIs is a much more common proceeding. Reliefs might be granted, either temporally sus­pending or upholding the contested legislation. Differently from cases in which the STF declares the uncons­titutionality of a norm when judging Extraordinary Appeals in single cases and senate subsequently suspends the law, decisions delivered via ADIs and ACDs are automatically binding for all, not only for the involved par­ties. Those lawsuits may be filed by (a) the president of the Republic; (b) the Direc­ting Board of the Federal Se­nate; (c) the Di­recting Board of the Chamber of Deputies; (d) the Directing Board of a State Legislative Assembly or of the Federal District Legislative Chamber; (e) a state governor or the Federal District governor; (f) the at­torney-general of the Republic; (g) the Federal Council of the Brazilian Bar Association; (h) a political party re­presented in National Congress; and (i) a confederation of labour unions or a professional association of na­tional nature. In our opinion, the approval of the proposed tax reform, if upheld by the STF, will ameliorate the business environment and boost Brazil’s competitiveness.