Speaking to ITR, an administrative judge in São Paulo says a ‘great debate’ is needed before tax and transfer pricing can be reformed
Taxpayers would be subject to an unhealthy level of uncertainty over transfer pricing and other tax disputes if Brazil adopted OECD advice about the judicial process, an administrative judge has told ITR.
In a letter seen and previously reported on by ITR, the former director of the OECD’s Centre for Tax Policy and Administration, Grace Perez-Navarro, encouraged Brazil’s finance minister Fernando Haddad to reverse a law change because of concerns over judicial imbalances and lengthy appeals in tax cases.
The change of law in 2020 marked the removal of the casting vote in Brazil’s Administrative Court of Tax Appeals (CARF), which is made up of eight judges, four representing the private sector and four who come from the Federal Revenue of Brazil (RFB).
Previously in the case of a tie between judges, the casting vote gave the president of CARF decisive weight in any judgment. Now, following the removal of that power, a decision will always go the way of the taxpayer in the case of a tie, meaning tax payments and penalties are waived.
CARF rulings can also only be appealed if the taxpayer loses, a process which the OECD says takes approximately seven years and can then be followed by another decade of review.
But according to Allan Fallet, an administrative judge at the Administrative Tax Court in São Paulo, the OECD’s advice – if taken in isolation – would cause a “scenario of insecurity for taxpayers” .
He notes that the absence of a casting vote provides taxpayers with security in a system that, as a whole, already treats them unfavourably.
Fallet, who is also a partner at Mauger Muniz Advogados, adds that the CARF has already changed its position on “at least six major tax discussions, five of which are unfavourable to taxpayers”.
“With the change in the tiebreaker by Law 13.988/2020, taxpayers began to win a series of important discussions in CARF, among them disputes related to TP,” says Fallet.
However, in the letter seen by ITR, the OECD said “a reconsideration of the approach established in 2020 would be justified, and unless a better and more effective model is developed, it may be appropriate to return to the previous practice”.
The letter, dated March 31, went on to say that “a return to that process would mitigate the possible negative consequences of the model established in 2020”.
Those “negative consequences” relate to the high number of tax disputes that are now decided in favour of taxpayers following ties, according to the OECD letter, which also took issue with the large quantity of CARF decisions that taxpayers can dispute.
Perez-Navarro’s letter attempted to address these issues, arguing that they produced a drain on Brazil’s public finances and created an “unintended incentive against voluntary tax compliance”.
The letter added to an ongoing debate around Brazil’s tax system and how best to balance favourability between taxpayers and the RFB.
However, Fallet suggests that due to the complexity of the Brazilian tax system, legislative issues like this should not be addressed independently, and instead should be viewed as part of an entire framework.
He says that the OECD’s advice “should be taken into consideration for the debates, but we cannot just copy its conclusions due to the complexities and specificities of our judgment system”.
He adds that the Brazilian system is difficult to understand by observers from other jurisdictions.
Instead, Fallet suggests that broader and more detailed reforms are needed if the issues in Brazil’s tax system are to be addressed, and that this will take lengthy discussion between multiple parties.
“The ideal would be the opening of a great debate between judges, society and scholars of the federal tax administrative proceedings so that we can think together and calmly about the necessary changes and the correct updating of all the specific legislation, and not just the tiebreaker criteria in the ruling.”
Provisional Measure No. 1.160/23, to reverse Law 13.988/2020 and return to the casting vote system, is now sitting in Congress.