On September 20, 2019, Law No. 13,874/2019 ("Law") was published in the Federal Official Gazette, converting Provisional Measure No. 881/2019 ("PM") into law. The Law institutes the Declaration of Economic Freedom Rights, establishes free market guarantees as well as provisions regarding the Brazilian government as normative and regulating agent.
From a tax perspective, the Law brought few changes to the PM's wording, the most relevant being the Law’s inclusion that the Office of Attorney General of the National Treasury ("PGFN") may waive its right to challenge decisions and file appeals or counterarguments on constitutional matters decided by the Federal Supreme Court (“STF”) or on other matters within the scope of their jurisdictions decided by the Superior Court of Justice (“STJ”) or the National Panel of Case Law Standardization under the General Repercussion Systematic process or ”Repetitive Appeals.”
From a tax perspective, the main changes introduced by the PM and confirmed by the Law can be summarized as follows:
- There is no longer a legal limitation for the PGFN to shelve tax execution proceedings on overdue tax liabilities. Previously, the limit was ten-thousand Reais (R$ 10,000.00). When the Law comes into force, the amount will be established by an act of the PGFN.
- Precedents of the federal tax administration, to be issued by a committee consisting of members of the Superior Court of Administrative Tax Appeals ("CARF"), the Brazilian IRS, the Ministry of Economy and the PGFN, will bind all normative and decision-making acts issued by those offices;
- The situations in which PGFN may waive its right to challenge decisions and file appeals or counterarguments, have been expanded. From now on, these situations are no longer tied exclusively to the consolidated case law of the STJ and the STF on the matter. This waiver may occur in relation to (i) matters on which the PGFN or the Federal Attorney General's Office ("AGU") have already issued an Opinion; (ii) matters considered as binding by the federal tax administration; (iii) matters based on legal provisions declared unconstitutional by the STF, on the diffuse control level; and (iv) matters declared constitutional by the STF or decided by the STJ, the Superior Labor Court ("TST"), the Superior Electoral Court ("TSE") or the National Panel of Case Law Standardization, within the scope of their jurisdictions, when there is no possibility of a reversal of the decision, in accordance with the criteria defined in an Act of the PGFN.
- Situations of waiver may be extended to proceedings involving a different theme from the one being judged when they are subject to the decisive grounds of the main judgment or the consolidated case law.
- Tax auditors cannot constitute tax assessments on whose subject matter an appeal has been waived, with due regard for the provisions of the Opinion of the PGFN or the Opinion or Precedent of the AGU. In addition, they shall observe such matters when ruling on the official review of assessments or requests for refund of overpaid taxes;
- The PGFN may refrain from going to court and withdraw appeals, when the pecuniary benefit intended by doing so does not meet the criteria of rationality, economy and efficiency. Such provision applies, as appropriate, to the AGU and the Attorney General's Office of the Central Bank of Brazil.
- Both the judiciary and the PGFN may use joint efforts to analyze the framing of cases and appeals in the waiver of appeal. They may also enter into procedural legal transactions based on Article 190 of the Civil Procedure Code.
- These procedural legal transactions will be stipulated in accordance with subsequent PGFN regulations and also apply to the other federal administrative agencies and courts.
With the exception of the abovementioned changes , the scope of the Law is limited, and Section 1, paragraph 3 expressly states that, with the exception of the right of any individual or legal entity to file any document using microfilm or digital means, the provisions of Sections 1 to 4 do not apply to tax law.
Regarding the free market guarantees, the Law also prohibits the Public Administration from creating, under the pretext of tax enrollment, requirements that contradict the principle of free development of low risk economic activities (Section 4, IX).
Another important new provision included in the Law is the replacement of e-Social by a more simplified system of bookkeeping of social security, labor and tax obligations. Pursuant to Joint Note SEPRT/RFB/SED No. 1/2019, the Special Secretary for Social Security and Labor and the Special Secretary of the Internal Revenue Service must issue, by September 30, 2019, a joint normative act that will regulate how to submit this information.
In addition, pursuant to the Law, the same replacement and simplification procedure must occur with “Block K” of the RFB Production and Inventory Control Book.
As per Section 3, paragraph 4, I, the freedom granted to define sales prices cannot be used for the purpose of reducing the value of the tax due, postponing the levy thereof or remitting profits overseas in the form of costs.
In addition, the tacit approval of government licenses, after the maximum term for analysis has elapsed, as provided in Section 3, paragraph 6, I, does not apply to tax matters of any kind.
The Law kept in its text the PM's modifications to the piercing of the corporate veil, establishing that the proceeding can only affect the assets of shareholders or managers who have directly or indirectly benefited from the improper use and defining what is meant by deviation of purpose and co-mingling of assets.
Among the modifications that may have a significant tax impact is the definition that the mere expansion of or change of the original purpose of the specific economic activity of the corporate entity does not constitute a deviation of purpose. Likewise, the existence of an economic group does not allow the piercing of the corporate veil.