Tax Controversy 2022 Comparisons

Brazilian tax controversies mainly arise from tax authorities’ or taxpayers’ initiatives.

Tax Authorities

From the tax authorities’ standpoint, tax controversies usually arise as a result of tax audits or mismatches involving ancillary obligations.

With respect to the Brazilian ancillary obligations, it is worth stressing that the Brazilian tax system is very connected to electronic platforms. This means that any mismatch of information involving ancillary obligations could lead to (i) an infraction notice (administrative sphere), or (ii) a tax foreclosure (judicial sphere) by the tax authorities.

Taxpayers

From a taxpayers’ standpoint, tax controversies arise whenever a taxpayer decides to challenge any tax assessment, which could be formalised through:

• fillings and claims against formalised/materialised contingencies, such as infraction notices (administrative sphere) or tax foreclosures (judicial sphere); and
• judicial claims aiming at the recognition of any non-assessment (for future tax triggering events), with the possibility of, additionally, requesting the recovery of amounts unduly paid over the last five years, counted as from the filing of such a claim.

With regard to the possibility of requesting the recovery of amounts unduly paid over the last five years, it is worth mentioning that the Brazilian Supreme Court can establish a prospective overruling under a leading case (modulação de efeitos), which means that the effects of such a decision would only be applicable to future events (instead of retroactively). Consequently, it would void the recovery of excess payments made in the past. However, the Brazilian Supreme Court’s precedents have also recognised that this prospective overruling should not be applicable to prior lawsuits.

Brazil is a federal republic composed of the Federal Union, states and municipalities, where power is exercised by distinct and independent bodies.

Consequently, taxes could be claimed by the Federal Union, states (there are 27 in Brazil) and municipalities (there are more than 5,000 in Brazil).

As for the taxes that give rise to the most tax controversies, PIS/COFINS (federal social contributions assessed over companies’ revenues) generate a significant quantity of litigation in Brazil, since (i) its tax base is disputable (ie, the exclusion of amounts/taxes from its tax base), and (ii) the existence of cumulative and non-cumulative regimes raises disputes regarding the possibility of obtaining and maintaining tax credits.

At the state level, ICMS (state value-added tax assessed over sales of goods and some services) represents a significant portion of tax disputes, since its non-cumulative regime, regulated by 27 distinct legislations, also raises several tax controversies regarding the possibility of obtaining and maintaining tax credits.

At the municipal level, ISS (municipal tax assessed over services) also represent a significant portion of tax disputes, since there are more than 5,000 municipalities enacting distinct laws and there are several disputes regarding such tax, such as (i) which municipality is entitled to claim such tax (whenever services involve more than one municipality), and (ii) the definition of which cases/situations would be characterised as involving an import of services (under contracts involving companies abroad and Brazilian companies). 

Tax controversy can be mitigated through a deep analysis of taxpayers’ tax returns, books and ancillary obligations (“non-materialised tax contingencies”), which is usually performed in Brazil by the taxpayer, with a review by an audit/accountant firm. 

This is because there are a number of situations – such as tax base calculation, use of credits, tax benefits, accordance with all rulings regarding ancillary obligations – that can be mitigated if some controls and procedures have previously been reviewed.

It is worth noting that the non-compliance with these procedures could not only lead to tax claims involving the non-payment of taxes, but also the imposition of fines that could surpass the amount of claimed taxes.

Since Brazil has not adhered to a common international standard, Brazilian tax legislation does not replicate the OECD's Base Erosion and Profit Shifting (BEPS) recommendations or the EU’s measures to combat tax avoidance.

Although Brazil is not an OECD member, it has requested to join that organisation and take a seat on debates involving the BEPS project. Brazil has attempted to reflect such strategies under local rules to as great an extent as possible, as illustrated by Provisional Measure No 685, of 21 July 2015 (“MP 685/15”); Normative Ruling No 1,681, of 28 December 28, 2016 (“IN 1,681/16”); and Normative Ruling No 1,669, of 9 November 2016 (“IN 1,669/16”), which, respectively, aimed at replicating locally BEPS Action Plans Nos 12 (Mandatory Disclosure Rules), 13 (Country-by-Country Reporting), and 14 (Making Dispute Resolution Mechanisms More Effective).

Despite these attempts, a “substance over form” approach was introduced into Brazilian legislation by Supplementary Law No 104, of 10 January 2001 (“LC 104/01”), which brought provisions intended to enable the tax authorities to disregard a taxpayer’s acts or businesses and, consequently, impose taxes based on a substance over form perspective. The following sole paragraph was included in Article 116 of the Brazilian Tax Code, provided by Law No 5.172, dated of 25 October 1966 (Código Tributário Nacional – CTN): “Sole paragraph. The administrative authority shall be able to disregard juristic acts or transactions whose purpose is to disguise the occurrence of the triggering event of a law of the nature of the elements that make up a tax obligation, subject to the procedures defined in the ordinary laws”.

It is worth mentioning that, on 11 April 2022, the Brazilian Supreme Court confirmed the constitutionality of this provision through its decision on Action for Declaration of Unconstitutionality No 2,446. Despite that, the Brazilian Supreme Court has decided that such provision would only be applicable to transactions in which there is evidence of fraud or simulation.

In addition to the principal claimed amounts, tax authorities can also impose fines and interest calculated according to the SELIC rate (Brazil's base interest rate set by the Brazilian Central Bank and currently set at 11.75% per year).

As for the fines, there are two main types of penalty that could be applied by the federal tax authorities in cases of issuance of a tax assessment:

• a 75% statutory penalty, applied in cases which the tax authorities believe that the taxpayer did not engage in any wilful misconduct, fraud or simulation; or
• a 150% aggravated penalty, which is imposed when the tax authorities believe that the taxpayer practised acts that should qualify as wilful misconduct, fraud or simulation.

Under Brazilian tax law, an aggravated penalty of 150% may only be imposed in cases in which the fraudulent/collusive intent is effectively evidenced.

In general terms, the tax authorities have a five-year statute of limitation for initiating audits against Brazilian taxpayers, except in cases of simulation, fraud or wilful misconduct, in which case such term may be increased to six years.

In relation to accounting and tax matters, Brazilian companies are required to maintain accounting books and tax information required to support tax audits.

The federal tax audit procedures are ruled by Normative Ruling No 6478/2017, which prescribes, among other things, the different types of tax audit that can be carried out by the Brazilian Federal Revenue, such as:

• a regular tax audit proceeding (Termo de Distribuição de Procedimento Fiscal de Fiscalização – TDPF-F) aimed at the inspection of tax obligations (collection of taxes and fulfilment of ancillary obligations); or
• a special tax audit proceeding (Termo de Distribuição de Procedimento Fiscal Especial – TDPF-E), established in order to prevent the destruction of evidence.

According to Normative Ruling No 6478/2017, tax audits shall also meet some formal requirements, such as:

• the description of the nature of the tax audit proceeding (ie, regular or special);
• the period for the conclusion of the tax proceeding; and
• the taxes and respective period under analysis.

These requirements are important for the taxpayer to comprehend which tax obligations will be inspected by tax authorities.

As a general rule, a regular tax audit proceeding starts with the issuance of a tax audit proceeding (Termo de Distribuição do Procedimento Fiscal – TDPF) and should be closed within a 120-day period, although the tax authorities could require an extension of that period to conclude a tax procedure.

Tax audits are conducted through electronic proceedings, which means that requests and responses should be formally presented under such tax audit proceedings.

If necessary, tax authorities may schedule a virtual meeting with the taxpayer for further clarification.

Since the Brazilian tax system is very connected to electronic platforms, especially regarding ancillary obligations, the cross-check confirmation of all stated values and pieces of information requires a special attention.

In addition to this, the inspection of tax credits resulting from distinct situations – such as resale of goods or inputs under the manufacturing process for PIS/COFINS purposes – could also result in some tax questionings.

Furthermore, the fulfilment of requirements to receive and maintain tax benefits may also be verified under a tax audit.

Over the last few years, Brazil has entered into tax information agreements (TIEAs) with several jurisdictions. In parallel, Brazil has also signed the Intergovernmental Agreement (IGA) with the USA in 2014, which implements the Foreign Account Tax Compliance Act (FATCA) in Brazil and which was subsequently approved by Presidential Decree No 8,506/2015.

In addition to that, Brazil has also implemented country-by-country reporting through Normative Ruling No 1,681/2015, based on the BEPS Action Plans, which obliges multinational groups, controlled by Brazilian entities, to present tax information regarding other jurisdictions.

Some strategic measures should be adopted to avoid any issue involving tax audits, such as:

• responding to all queries from the tax authorities;
• providing responses focusing on the specific question/matter questioned; and
• keeping the tax authorities informed in case any difficulties may appear.

When tax authorities find any deficiency, they issue an Infraction Notice (which includes penalties and interest) and the taxpayer is notified. Counting from this notification, there is a 30-day term to present a defence before the first level administrative court.

After that, the first level administrative court will analyse the defence and issue a decision (in most cases maintaining the assessment since the first level judges are tax inspectors themselves).

Once the first level decision is issued, if it is unfavourable, the taxpayer then has another 30 days to file an appeal to the Administrative Tax Court (CARF). If the decision is favourable to the taxpayer, the case is necessarily submitted to the second level analysis.

Depending on the nature of the decision rendered by the Panel of the Administrative Tax Court, there is a third level of jurisdiction. By means of an appeal known as a Special Appeal, both the taxpayer and the authorities can take the case to the Special Chamber of the Administrative Tax Court. This Special Appeal, however, is only applicable when there are conflicting decisions issued within the Administrative Tax Court related to the same matter.

During the administrative dispute, the requirement to pay the total amount is stayed and the taxpayer is able to litigate without offering any type of guarantee. This means that tax debts cannot be enforced during administrative litigation and the taxpayer is still entitled to a tax clearance certificate.

Tax authorities have a five-year statute of limitation for the issuance of infraction notices against Brazilian taxpayers, except in cases of simulation, fraud or wilful misconduct, in which case such term may be increased to six years.

There is no deadline for the administrative tax proceeding to be decided and closed. However, a typical timeframe for the resolution of an administrative dispute is around three to four years.

After the administrative discussion is finished and an unfavourable final decision is rendered (if that is the case), the taxpayer may either file for a lawsuit and start a new discussion in the judicial sphere or wait for the tax enforcement to be filed by the tax authorities, against which the taxpayer can then file a defence, if a guarantee is presented.

In the first case (filing a lawsuit – writ of mandamus or ordinary lawsuit), in order to stay the requirement to pay the debt, the company will need to present a guarantee to discuss the matter judicially if an injunction is not granted by the judge at the beginning of the judicial discussion.

If the taxpayer opts to wait for the enforcement, the federal debt will be classified as an Overdue Tax Liability and the amounts are increased by 20% (related to the legal fees of the public attorney). However, the legislation foresees a broader range of guarantees that can be presented in a tax enforcement other than cash (ie, bank guarantees, insurance and attachment of assets).

If the taxpayer does not submit any guarantee, the Public Treasury will require the online attachment of the company’s financial assets. This type of attachment is made directly in the company’s current accounts, which are frozen up to the limit of the debt in dispute. If this measure is unsuccessful, the Public Treasury may require the attachment of the company’s other assets or the partners and manager’s personal assets, depending on the case.

Regarding the proceeding itself, the first level decision is issued by a singular judge. Favourable first level decisions are subject to mandatory appeal and in the case of an unfavourable decision, the taxpayer is allowed to appeal to the Second Level Court.

After the second level, both the taxpayer and the authorities are allowed to file appeals to the Superior Courts. The Superior Court of Justice (STJ) reviews non-constitutional matters and the Supreme Federal Court (STF) reviews only constitutional matters. There is no analysis of evidence by the Superior Courts.

Evidence is important for tax disputes, since the misunderstanding of facts or documents may result in a distinct decision.

However, if there is any dispute regarding a fact, the judge may commission an expert to analyse and report on the facts and presented documents.

It is worth stressing that this expert should not interpret tax legislation, focusing exclusively on non-legal matters, such as the fulfilment of ancillary obligations or the analysis/confirmation of the facts and documents presented by the parties under dispute.

After this step, the judge – being as certain as possible regarding the facts/documents – will be able to interpret the tax legislation and render a final decision on the case.

As a general rule, the Brazilian Code of Civil Procedure (CPC) establishes that the burden of proof remains with the plaintiff. This means that if the taxpayer decides to file a judicial claim against any tax assessment, the burden of proof will remain with the taxpayer.

However, whenever a tax foreclosure is filed, the burden of proof remains with the defendant, which means that the taxpayer will need to prove that this tax foreclosure was wrongfully filed.

Initially, taxpayers should previously prepare all required documents to file a judicial claim with no risk of a lack of documentation.

In addition to that, taxpayers should also verify whether the judge has already responded to all the arguments to be presented under a judicial dispute, since, in case there is a lack of analysis, the Brazilian Code of Civil Procedure (CPC) determines that this decision would be considered null.

According to the Brazilian Code of Civil Procedure (CPC), the judicial courts and judges are obliged to observe some decisions rendered by the STJ and the STF, such as:

• decisions rendered under a centralised constitutional review by the STF;
• same subject-matter claims (recursos representativos de controvérsia) considered by the STJ; and
• binding precedents (súmulas vinculantes) issued by the STF.

If a decision in favour of a taxpayer is rendered at first instance, a mandatory appeal is automatically filed to a second level court.

Conversely, upon an unfavourable decision rendered by a judge, the taxpayer is allowed to appeal to the second level court.

It is worth stressing that this appeal filed by the taxpayer must meet some formal requirements, such as the presentation of previous facts and the arguments and legal grounds that sustain the review of this first instance decision.

After the second level instance, there is no mandatory appeal, which means that taxpayers and National Treasury/state/municipal attorneys shall fulfil the same requirements to file appeals and reach Superior Courts.

As a rule, appeals filed by the taxpayers could be presented within 15 working days, while National Treasury/state/municipal attorneys may present appeals within 30 working days.

Once the appeals are filed, they are automatically distributed to a Second Level Panel, composed of five judges.

However, the appeal shall be analysed by a board of three judges (randomly chosen among that five) and one of them would be entitled to report the case to other judges.

Once the trial is scheduled, the parties are entitled to request oral statements during trial, which shall be concluded within 15 minutes.

After a decision is rendered by the second level instance, the parties can present a motion for clarifications or directly appeal to superior courts and, ultimately, the STJ and STF.

Since there is no analysis of facts or evidence by the Superior and Supreme Courts, a motion for clarification is commonly used by the parties previously to filing an appeal to a third level instance.

It is worth stressing that these appeals before the Superior and Supreme Courts must meet some formal requirements, such as the violation of a federal law for an appeal aiming at STJ review, and the violation of the Brazilian Constitution for an appeal aiming at STF review.

Tax litigation cases are initially decided by a single judge, nominated through a public civil examination.

Second Instance

Second level judges are appointed by the full bench of the second level court through merit or seniority.

It is worth noting that in each five nominations for a second level judge, four should be selected from first level judges, while one should be nominated from either the Brazilian Bar Association (OAB) or the Public Prosecutors (Ministério Público).

Second level courts are composed of Civil and Criminal Panels, each composed of five second level judges. Tax appeals are analysed by Civil Panels. 

Third Instance

The third level instance is composed by the STJ and the STF.

The STJ is formed by 33 Ministers appointed by the President of the Republic after approval of the Federal Senate.

The STJ is organised according to the specialisation of the case matter in three Sections, which by their turn are formed by two Panels each.

Sections are composed by ten Ministers each and Panels by five Ministers each. First and second Panels are responsible for analysing tax appeals. If there is a divergent interpretation among these Panels, the case shall be decided by the first Section (which encompasses the first and second Panels).

The STF is formed by 11 Ministers appointed by the President of the Republic after approval of the Federal Senate.

The STF is organised into two Panels of five Ministers each. Both Panels are responsible for analysing tax appeals related to any violation of the Brazilian Constitution. The Full Bench of the STF is composed of all 11 Ministers.

Although the Brazilian Tax Code has provided, since 1966 and in broad terms, the possibility of negotiating tax debts, this process had never been regulated, until the federal government recently enacted Law No 13.988/2020 and the Federal Treasury General Attorney (PGFN) has also recently enacted ordinances enabling the Ordinary Tax Transaction, and the Procedural Contract (“Negócio Jurídico Processual – NJP”).

In general terms, the Ordinary Tax Transaction, ruled by Ordinance PGFN No 9,917/2020, grants taxpayers the possibility of:

• discounts for credits considered difficult to recover or irrecoverable of up to 50% of the total amount of the debt, which can reach 70% in the case of an individual entrepreneur, microenterprise or small business undergoing judicial recovery;
• payment of the debt in instalments over up to 84 months, which can reach 100 months in the event of an individual entrepreneur, microenterprise or small business undergoing judicial recovery; and
• flexibility around rules involving the provision of guarantees, pledge and sale of assets.

Another possible negotiation alternative provided by the federal government is the Procedural Contract, ruled by the Ordinance PGFN No 742/2018.

Although the NJP does not provide any discounts, this settlement mechanism provides the possibility of discussing the payment methods with the PGFN.

According to the terms of the Ordinary Tax Transaction, the taxpayer must:

• provide information about its assets or income, whenever requested by the PGFN;
• act in good faith, not using the transaction to harm its competitors;
• definitively acknowledge the debts included under the Ordinary Tax Transaction; and
• settle the debt within the period agreed under the Ordinary Tax Transaction, which could reach 84 months (or 100 months in the event of an individual entrepreneur).

Tax mediation or arbitration does not exist in Brazil.

The presentation of a ruling request is feasible in Brazil, and it aims to clarify the interpretation of tax authorities regarding the tax legislation.

At the federal level, Decree 70.235/72 regulates the requirements that shall be met by the taxpayer, such as:

• the ruling request regarding the tax legislation shall be connected with a specific fact or circumstance;
• it should be presented through a written request; and
• the taxpayer cannot be under a tax audit connected with the requested fact.

Once the taxpayer receives the formal response from the tax authorities, this positioning would be effective and with binding effects for the tax authorities and that specific taxpayer.

If there are (i) new facts/circumstances regarding the ruling request, (ii) new tax legislation regulating the facts/circumstances in question, or (iii) new interpretations from the tax authorities, the previous formal response may be revoked by the tax authorities.

Nonetheless, this new positioning would only be applicable to future events (instead of retroactively), which provides security for the taxpayers in Brazil and avoids tax disputes regarding previous tax-triggering events.

Federal Tax Transactions can be proposed by the PGFN to any taxpayer, that will subsequently decide whether to proceed – or not – with the adhesion, which means that requirements would be equal to all taxpayers; or through a singular proposition, in which the circumstances and possibilities of settlement involving that specific taxpayer would be deeply analysed.

It is worth stressing that the propositions presented to all taxpayers are limited to a BRL15 million threshold, while there is no threshold for singular propositions.

In addition to that, Federal Tax Transactions also grant taxpayers the possibility to reduce or settle the acknowledged debts with judicial pay orders (precatórios judiciais), which encourages taxpayers to use a credit that, although formally recognised by the courts, would only be compensated within a few years (which is the usual period until a judicial pay order is settled).

In Brazil, ADR mechanisms are not applicable to transfer pricing cases or cases of indirect determination of tax.

Reading the criminal aspects of a tax controversy, if the administrative discussion closes with an unfavourable final decision, such an administrative tax proceeding may lead to the filing of a criminal administrative proceeding to analyse the same facts which could also lead to an allegation of a crime against the tax system.

In this respect, the tax authorities are required to communicate to the Public Prosecutor’s Office any administrative violation which, in theory, could also represent a crime.

However, some measures can be adopted in order to shelve or at least suspend this criminal administrative proceeding, such as payment of the tax debt or legal discussion of the duly guaranteed tax debt.

Upon receiving the communication from the tax authorities, the Public Prosecutor’s Office may present judicial charges against the taxpayer, if it understands it has all the elements required for such a move; or request the filing of an administrative criminal proceeding in order to examine the facts.

Usually, the Public Prosecutor opts for the second possibility, in order to analyse all the facts.

In Brazil, the administrative criminal proceeding can only be initiated after a final unfavourable decision is rendered in the administrative sphere.

Once the administrative criminal proceeding is initiated, the taxpayer may adopt some measures aimed at the shelving or at least the suspension of this proceeding, through either payment of the tax debt or legal discussion of the duly guaranteed tax debt.

If the taxpayer succeeds in shelving or suspending the administrative criminal proceeding, no judicial charge shall be filed.

On the other hand, if the taxpayer is not succeeded and the Public Prosecutor opts for presenting judicial charges against the taxpayer, the practice of the crime must be proven and shall be analysed and confirmed within a three level instance judicial litigation. 

A 150% aggravated penalty is imposed whenever the tax authorities believe that the taxpayer has practised acts that should qualify as wilful misconduct, fraud or simulation.

However, under Brazilian tax law, an aggravated penalty of 150% may only be imposed in cases in which the fraudulent/collusive intent is effectively evidenced. In cases where fraudulent/collusive intent is not proven, taxpayers may succeed in a tax litigation (administrative or judicial) aimed at the reduction of such fine to a 75% statutory penalty, which is applicable in cases where the taxpayer did not engage in any wilful misconduct, fraud or simulation.

In Brazil, it is not possible to enter into an agreement to prevent a criminal trial.

However, the full payment of the claimed tax (plus fines and interest) would eliminate the liability for crimes against the tax system.

In Brazil, the criminal sphere may only be initiated once after a final unfavourable decision is rendered in the administrative sphere.

Subsequently, some measures may be adopted in order to shelve or at least suspend this criminal administrative proceeding, such as payment of the tax debt and/or legal discussion of the duly guaranteed tax debt.

Thus, if these steps are surpassed, the judicial charges against the taxpayer shall be analysed and confirmed within a three level instance judicial litigation.

In parallel, the judicial tax dispute may proceed independently. However, if the claimed tax (plus fines and interest) is settled, it would eliminate the liability for crimes against the tax system.

A “substance over form" approach was introduced in Brazilian legislation by Supplementary Law No 104, of January 10, 2001 (“LC 104/01”), which introduced provisions intended to enable the tax authorities to disregard a taxpayer’s acts or businesses and, consequently, impose taxes based on a substance over form perspective.

However, the Brazilian Supreme Court has recently decided that such provision would only be applicable to transactions in which there is evidence of fraud or simulation.

Over the last decades, Brazil has entered into several Double Tax Treaties (DTTs) to avoid double taxation with other jurisdictions. However, Brazilian DTTs do not contain an Article similar to Article 9 (2) of the OECD Model Convention, which obliges contracting states to provide for corresponding adjustments.

However, in the context of the BEPS Project, Brazil has committed to seek a solution for double taxation cases caused by transfer pricing adjustments through a mutual agreement procedure (MAP).

Therefore, nowadays, MAPs are the available mechanism for eliminating double taxation arising from differences in the OECD methodologies and the application of Brazilian statutory rules.

Although Brazil has no GAAR/SAAR in force, tax authorities may disregard a taxpayer’s acts or businesses and, consequently, impose taxes (plus a fine and interest) based on a “substance over form” rule prescribed in Article 116, sole paragraph of the Brazilian Tax Code.

Brazil is not a member of the OECD and Brazilian legislation is not aligned with the OECD Transfer Pricing Guidelines. Since Brazil has not adhered to a common international standard on transfer pricing reporting, multinational enterprises may deal with double taxation situations.

In an OECD scenario, where the tax authority of a contracting state increases the profits of an enterprise due to the application of the transfer pricing rules (“primary adjustment”), the resulting double taxation is to be eliminated through a mechanism provided for in bilateral treaties, according to which the tax authority of the other contracting state should also provide for adjustments with a view to reducing the amount of profits taxable therein. Such mechanism is known as a “corresponding adjustment”.

However, Brazilian DTTs do not contain an Article similar to Article 9 (2) of the OECD Model Convention, which obliges contracting states to provide for corresponding adjustments.

Advance pricing agreements are not available in Brazil.

In Brazil, there are several tax disputes involving cross-border situations, especially connected to the nature of the transaction, which could impact the tax burden involved.

For instance, remittances made abroad as a result of the import of a service or a licensing to use customised software would be subject to a withholding tax, while remittances abroad, in connection with the acquisition of perpetual licences for personal use, would not be subject to withholding tax.

Thus, it is important that agreements reflect the nature of the transaction, in order to avoid any additional tax assessment and consequent tax litigation. 

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In Brazil, administrative litigation is not subject to any costs or procedural fees.

In order to initiate a judicial claim, taxpayers shall pay court fees, which correspond to a small percentage of the amounts involved, such as 1% or 4%. This percentage may vary depending on the court in which such litigation is initiated.

However, each court establishes a cap for its court costs. For instance, São Paulo’s State Court prescribes that its court costs shall be limited to approximately BRL95,000.

Tax authorities, however, are tax exempt from filing a tax foreclosure.

The Brazilian Code of Civil Procedure (CPC) establishes that the defeated party shall reimburse the prevailing party for all expenses incurred during the judicial litigation, such as court costs and judicial expert fees.

In Brazil, ADR mechanisms are not subject to any specific costs or procedural fees.

In 2022, the National Council of Justice (CNJ), which is the judicial body responsible for monitoring the Brazilian Judiciary, released a detailed report regarding the status of tax judicial litigation in Brazil. This report details, for example, that tax foreclosures represent 36% of all judicial procedures pending trials.

Moreover, according to the statistics made available by the Brazilian Supreme Court, tax cases currently represent approximately 10% of all pending cases at the Supreme Court.

In general, the tax disputes involving the highest amounts in Brazil relate to:

• social contributions over revenues (PIS/COFINS);
• corporate income tax (IRPJ) and the social contribution on net profits (CSL);
• tax on services (ISS);
• state value-added tax assessed over the sales of goods and some services (ICMS); and
• withholding income tax (IRRF).

According to the report made available by the CNJ, 51.4% of first level judicial decisions confirm the decisions rendered in the administrative sphere, while 48.6% of first level judicial decisions modify the decisions rendered in the administrative sphere.

Initially, taxpayers should verify in which cases and situations a tax litigation should be initiated, since it is possible to obtain some tax results with no litigation.

For instance, on 24 April 2018, the STJ published a decision rendered in Special Appeal No 1.221.170/PR (Anhambi Case), which settled that the concept of input (which generates PIS/COFINS credits) should be assessed in accordance with the essentiality or relevance criteria, that is, considering the indispensability or importance of a certain item or expense for the development of the taxpayer’s economic activity.

Based on that, it is necessary to identify the activity pursued by the taxpayer (based on a review of its business activities) and evaluate the indispensability or importance of this expense for the development of this economic activity.

Thus, if these requirements are accomplished, the taxpayer would be entitled to offset PIS and COFINS debts with credits originating from such expenses, with no need for previous tax litigation.

On the other hand, if tax litigation is necessary, the pros and cons of each type of judicial claim should also be analysed prior to the initiation of a tax litigation.

For example, a writ of mandamus grants a shorter period of litigation and exempts the defeated party from the payment of attorneys’ fees in favour of the prevailing party. However, all evidence and documents needs to be presented at the time this claim is initiated, with no possibility of a court expert investigation regarding any evidence. This means that all documents should be clear and the facts undisputed.