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In this newsletter you will find CARF decisions published in 2020 regarding relevant and favorable issues for taxpayers:
1. Tax Liability of administrators and third parties.
2. Use of a vehicle company does not prevent the use of goodwill.
3. Return of equity interest at book value.
4. State VAT tax benefits (which are not taxed via Corporate Income Taxes).
5. Tax Reclassification of goods without fine and interest charges.
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1. THERE ARE LIMITS TO THE TAX RESPONSIBILITY OF ADMINISTRATORS AND THIRD PARTIES
In recent rulings, CARF Ordinary Panels have stated that the Tax Authorities are not free to hold administrators and third parties responsible for tax debts.
Unanimously, ruling n. 2201-005.559 ruled-out a third-party joint and several liability, given that the judges understood that although the third party had an economic interest in the matter, the tax authority did not show the taxpayer’s legal interest thereon. This understanding is in accordance with CARF case law, which states that there must be a legal interest for the application of the liability rule referred to in Article 124, I, of the Brazilian Tax Code. That is, to be held responsible, the subjects must have participated together in the practice of the taxable event.
The same ruling also analyzed the liability of directors for company debts, in which the Tax Authorities did not demonstrate the practice of acts contrary to the law. As highlighted by the ruling, under the terms of Article 135, III, of the Brazilian Tax Code, the directors, managers of legal entities of private law can only be considered personally responsible for the company’s tax debts when proven to act outside the limits of their functions, in violation of the law, Articles of association or bylaws. The Tax Authorities cannot hold a person responsible only based on the executive position held at the time of the taxable events.
This understanding has been adopted in several other CARF rulings. In a similar situation, Ruling n.1401-003.725 also dismissed the tax liability established under the terms of Article 135, III of the Brazilian Tax Code. As emphasized by the judges, as the Tax Authorities did not provide sufficient evidence that the directors would have acted in violation of the law, Articles of association or bylaws; they could not be held responsible for the company’s tax debts.
Likewise, in Ruling n. 2301005.823 the judges stated that any liability of directors under the terms of Article 135, III would only be possible upon proof of intent, which the Tax Authorities failed to provide.
2. USE OF A VEHICLE COMPANY DOES NOT PREVENT THE USE OF GOODWILL
In the last few months, at least two CARF rulings have been published recognizing the right to goodwill amortization incurred in the acquisition of companies, even when the operation involves the use of a vehicle company.
Rulings n. 1301-004.168 and 1201-003.288 analyzed tax assessments regarding Corporate Income Taxes, due to the disallowance of goodwill amortization in corporate transactions involving the use of vehicle companies. For the Tax Authorities, the use of such companies would be sufficient proof of dissimulation, as well as the intention of defrauding the national treasury. The CARF, however, dismissed this argument.
In both rulings the prevailing understanding was that the mere use of a vehicle company in the operation that generated the goodwill would not be sufficient for it to be disregarded or for the configuration of fraud. The judges highlighted that the taxpayer has the right to choose the most beneficial way to carry out its legal business. Thus, if there are two equally valid ways to achieve a certain objective, it is reasonable to choose the least burdensome, including the one that results in the greatest tax benefit.
3. THERE IS NO TAX ON THE RETURN OF EQUITY INTEREST AT BOOK VALUE
Article 22 of Law 9,249/95 states that “the assets of the legal entity, which are delivered to the holder or to the partner or shareholder, as a return of their participation in the capital stock, may be valued at book or market value”. If the valuation is at book value, there should be no taxation.
In Ruling n. 1201-003,229, the CARF cancelled a tax assessment issued due to a reduction of share capital made at book value, with a subsequent sale of the asset by the shareholder. Most of the judges understood that the Tax Authorities’ claim that the taxpayer had performed abusive tax planning should be dismissed.
In this case, the capital reduction was justified in the context of a dispute between the company’s shareholders. While part of the shareholders wished to sell assets held by the company, the others did not agree with the sale, so the capital reduction was agreed so that the transaction would be made possible for those who agreed with the sale.
The Superior Chamber of the CARF also analyzed the matter. In Ruling n. 9101-004.709 most of the judges understood that the reduction of share capital made at book value would be a valid operation. Therefore, the assessment was cancelled due to the absence of evidence of dissimulation.
Further, in Ruling n. 9101-004.505 the Superior Chamber of the CARF unanimously decided that, in cases where the tax assessment is maintained, with the tax calculated using the rate applicable to legal entities (34%), the amount collected by the individuals as income tax must be considered when calculating the resulting due Corporate Income Taxes. Therefore, the assessment should charge only the difference in values resulting from the application of the higher rate.
4. THERE IS NO CORPORATE INCOME TAX ON TAX BENEFITS GRANTED BY THE STATES
Ruling n. 1401-003,874 analyzed a tax assessment that charged Corporate Income Taxes on a tax benefit granted by the Government of the State of Paraná, in the form of a presumed credit of ICMS (State VAT). In the view of the Tax Authorities, the tax benefit would be a “subsidy for funding” and should be subject to Corporate Income Taxes. The non-taxation of this benefit would depend on the taxpayer demonstrating that the corresponding amounts would have been applied in the implementation of a predetermined economic enterprise.
The 1st Ordinary Panel of the 4th Chamber of the 1st Judgment Section of the CARF, by unanimous vote, dismissed this requirement due to lack of grounds. The case was analyzed from the perspective of Supplementary Law n. 160/17, which establishes that the tax benefits granted by States must be considered “investment subsidies”, as long as they respect the guidelines established in Article 30 of Law 12.973/14, which determine the need to account the amounts in the profit reserve and the impossibility of distributing them as profits.
The same understanding was established by most judges in the 1st Panel of the Superior Chamber of Tax Appeals, in Ruling n. 9101-004.486. In this case, the Court dismissed the Tax Authorities’ claim that the amount equivalent to the granting of the tax benefit should be used to implement or expand a certain economic enterprise, as a requirement to exclude this amount from the Corporate Income Tax basis.
5. THE TAXPAYER CANNOT BE SANCTIONED FOR USING A TAX CLASSIFICATION THAT HAS BEEN REPEATEDLY ACCEPTED IN CUSTOMS CLEARANCE
In Ruling n. 3402-007.089, the CARF analyzed a case in which the taxpayer would have used the same tax classification of goods in 255 import declarations over approximately four years, without any questioning by the Tax Authorities. After this period, however, the Federal Revenue decided to reclassify the goods and sanction the taxpayer.
The majority of the judges decided that the validation of the tax classification in the context of customs clearance would constitute a repeated practice by the Tax Authorities, which would result in the impossibility of charging fines and late payment interest, according to the terms of Article 100 of the Brazilian Tax Code. As the conduct of the tax authority would be formal and repeated, it would have resulted in the taxpayer ‘s reasonable assumption that the tax classification would be correct.