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Anti-avoidance framework

Regulation

What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?

Since the mid-1990s, the federal government has implemented specific anti-avoidance rules (SAARs) to mitigate the effects of international tax planning under the Organisation for Economic Cooperation and Development (OECD) OECD Action Plan on Base Erosion and Profit Shifting (BEPS). These rules have been implemented in Brazil through legislative changes since 1998 based on the OECD’s recommendations in the Harmful Tax Competition Report.

Examples of SAARs adopted by Brazil are taxation on worldwide income, transfer pricing rules, a list of low-tax jurisdictions (black list) and privileged tax regimes (grey list), increased rate of income tax on payments to low-tax jurisdictions, limitation on the deductibility of such payments and thin capitalisation rules.

In 2015 the federal government attempted to introduce the mandatory disclosure of tax planning, inspired by Action 12 of BEPS, under which taxpayers would have to disclosure to the Federal Revenue Service tax-efficient transactions which lacked significant non-tax reasons or which were based on indirect legal acts. The initiative was not passed into law.

In 2016 the Federal Revenue Service issued normative rulings dealing with the mutual agreement procedure in Brazil and the obligation of companies filing the country-by-country report, in alignment with Actions 14 and 13 of BEPS. In the same year, the Federal Revenue Service introduced an obligation for entities enrolled with the Federal Revenue Service to disclose the final beneficiaries of entities, whether residents or non-residents.

Brazil chose not to sign the Multilateral Convention on the Implementation of Tax Treaty-Related Measures but rather to enter into bilateral agreements, such as that entered into with Argentina in 2017, which modified the original tax treaty entered into between the countries to include new measures to prevent tax avoidance. 

To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?

In recent years, Brazil has implemented various measures in order to align its legislation with BEPS. In this context, the National Congress incorporated the Convention on Mutual Administrative Assistance in Tax Matters 2010 and the Federal Revenue Service signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information. Through these agreements, Brazil has formally adhered to the Common Reporting Standard, with the intention of undertaking the first exchanges of financial information in 2018.

Further, in 2015 the federal government attempted to introduce the mandatory disclosure of tax planning, inspired by Action 12 of BEPS, under which taxpayers would have to disclose to the Federal Revenue Service tax-efficient transactions which lack significant non-tax reasons or which are based on indirect legal acts. The initiative was not passed into law.

In 2016 the Federal Revenue Service issued normative rulings on the mutual agreement procedure in Brazil and the obligation of companies filing the country-by-country report, in alignment with Actions 14 and 13 of BEPS. Finally, the Federal Revenue Service issued a normative ruling that defined economic substance requirements for holding companies of specific countries and those benefiting from privileged tax regimes, in alignment with Action 5 of BEPS.

Is there a legal distinction between aggressive tax planning and tax avoidance?

There is no legal distinction or clear line between aggressive tax planning and tax avoidance. Tax avoidance is characterised by acts of commission or omission before the occurrence of the taxable event, and without the taxpayer intending to violate the law.

In contrast, aggressive tax planning, or tax evasion, involves unlawful practices, based on sham and fraudulent acts, in order to eliminate the taxable event.

In addition, tax authorities usually broaden the concept of abuse of rights in order to disregard transactions and structures implemented by taxpayers based on the argument that taxpayers do not have an absolute right to organise their economic lives at their own discretion, but must observe the limits imposed by the law for the exercise of their rights with respect to the principles of equality before the law and capacity to pay taxes.

Penalties

What penalties are imposed for non-compliance with anti-avoidance provisions?

Non-compliance with anti-avoidance provisions may lead to the issue of tax assessments, where the tax authorities would charge the taxes due plus a penalty of 75% and interest calculated by the Selic rate. In case of sham, fraud or misconduct (unusual in transfer pricing matters), a penalty of 150% is applied.

In addition, a 50% penalty may also be applied if the taxpayer underpays its monthly corporate income tax.

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