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.