State of Rio de Janeiro approves friendly notification of charge before beginning a tax procedure

Law No. 6,884, of September 5th, 2014, amended Law No. 2,657/1996, which sets forth ICMS rules, in order to create a specific Section (Section VII-A Procedures without Loss of Spontaneity), related to the possibility that the State Revenue Service issue a friendly notification before beginning any tax procedure to impose penalties, for the taxpayer to regularize the obligation it had failed to comply with.

According to these new provisions, the friendly notification does not imply loss of spontaneity (article 69-A, paragraph 1, I, Law No. 2,657/1996) and does not consist of a notification able to characterize the beginning of an administrative tax proceeding (article 69-A, paragraph 1, II, Law No. 2,657/1996).

(Law No. 6,880, 09.05.2014, Official Gazette – RJ 09.08.2014. Available at: <http://www.alerj.rj.gov.br/processo2.htm>. Accessed in: Sept., 2014).

STATE LEGISLATION/RJ ICMS debts due until July 31st, 2014 may be included in the term-payment program of the State of Rio de Janeiro

Decree No. 44,949, of September 11th, 2014, amended Decree No. 44,780/2014, which created the ICMS term-payment program of the State of Rio de Janeiro, providing that ICMS debts due until July 31st, 2014 may be included in the program. Until then, the program only comprised debts due until December 31st, 2013 (article 1, Decree No. 44,780/2014).

Another amendment concerns the inclusion in the program of amounts related to infractions concerning ICMS triggering events. Originally, Decree No. 44,780/2014 allowed the inclusion of such amounts as long as the related events had occurred until December 31st, 2013 (article 1, paragraph 2). After Decree No. 44,949/2014, the inclusion of such amounts is allowed concerning triggering events that took place until July 31st, 2014.

Finally, this new Decree amended the provision that allowed the inclusion of penalties derived from non-compliance with ancillary obligations. Originally, only penalties due until December 31st, 2013 could be included (article 1, paragraph 3). The amendment allowed the inclusion of penalties due until July 31st, 2014.

(Decree No. 44,949, 09.11.2014, Official Gazette-RJ 09.12.2014. Available at: <http://www.dividaativa.rj.gov.br/decreto_44949.asp>. Accessed on: September, 2014).

INTERNAL REVENUE SERVICE

Revenue derived from barter trade of real estate is taxable for companies that develop activities concerning real estate and are subject to income tax based on presumed profit

The Internal Revenue Service published on 09.05.2014 Normative Opinion No. 9, clarifying that in the barter trade of real estate, with or without additional amounts, performed by a company dedicated to real estate activities that computes income tax based on presumed profits regime, both the estate value and the additional amount received, if applicable, are taxable revenue.

The IRS understands that since bartering is similar to purchasing and since the gross revenue comprises the result of sale in sale transactions, the value of the real estate received by a company dedicated to real estate activities under a bartering agreement must be included as gross revenue, and, as a consequence, is taxable by IRPJ, CSLL, PIS and COFINS.

According to this Opinion, the value of real estate received is gross income also concerning purchases of land followed by a confession of debt and promise to give as payment an estate built or to build.

(IRS Normative Opinion No. 9, 09.04.2014, Official Gazette 09.05.2014. Available at: <http://www.receita.fazenda.gov.br/Legislacao/PareceresNormativos/2014/parecer092014.htm>. Accessed in: September, 2014).

SUPREME COURT - STF

Covenants that limit benefits granted in Manaus Free-Trade Area are declared unconstitutional by the Supreme Court

Brazilian Supreme Court declared that Covenants No. 01, 02 and 06 issued by Confaz in 1990 are unconstitutional. These covenants created limitations to benefits and immunities granted to Manaus Free-Trade Area by (i) excluding cane sugar from ICMS non-imposition when remitted to be commercialized or manufactured in Manaus Free-Trade Area; (ii) revoking the exemption granted by ICM Covenant 65/88 to semi-manufactured products and (iii) cancelling the benefit to keep credits concerning raw material, secondary inputs and packing material used for manufacturing products to be commercialized or manufactured in Manaus Free-Trade Area.

These Covenants have never been in force, because, since 1990 (when they were enacted), they have been suspended due to an injunction granted by the Full Board of Brazilian Supreme Court in the records of Unconstitutionality Lawsuit 310 (ADI 310).

This Court understood that all rules concerning this Free-Trade Area were accepted by 1988 Constitution, thus, these Covenants violated the Constitution for creating undue limitations to benefits and immunities granted to that region. Moreover, the justices mentioned as grounds for this decision article 15 of Complementary Law No. 24/75, which waives CONFAZ decision for tax benefits related to Manaus Free-Trade Area.

(Available at: <http://www.stf.jus.br/portal/cms/verNoticiaDetalhe.asp?idConteudo=260715>. Accessed in: September, 2014).

SUPREME COURT - STF

Unconstitutionality of ICMS Protocol No. 21/2011

On 09.17.2014, Brazilian Supreme Court judged jointly Unconstitutionality Actions No. 4628 and 4713 – filed respectively by the National Confederation of Goods, Services and Tourism (CNC) and National Confederation of Industry (CNI), both reported by Justice Luiz Fux – and Extraordinary Appeal No. 680089, reported by Justice Gilmar Mendes and submitted to the general repercussion system.

The Court’s Full Board declared that ICMS Protocol No. 21/2011 of the National Council of Fiscal Policy (CONFAZ) is unconstitutional for violating article 155, paragraph 2, VII, “b” of the Constitution. This Protocol dealt with the collection of ICMS on interstate remittances of products to final consumers who had acquired the product from the remitter online, by telephone, show-room or similar means.

The Justice that reported these ADI’s, Luiz Fux (impeded to vote in RE 680089), mentioned this rule is materially unconstitutional, since ICMS Protocol No. 21/2011 provides for the distribution of ICMS revenues, which cannot be dealt by this type of rule. Moreover, he sustained that the Protocol violates article 155, paragraph 2, VII of the Constitution, since it creates, in its Section 2, a type of tax substitution regime when requiring that the State of origin withholds the tax without existence of legal provision for such collection.

He also mentions that the States that signed the Protocol invaded the competence of the States of origin, which are defined by Constitution as the ones with power to charge ICMS in this situation and that Binding Precedent No. 323/STF was violated by the States that apprehended products or limited the transit of cargo until companies pay the amount these States understand due.

By majority of votes – Justice Marco Aurélio voted in the opposite sense, the Supreme Court limited the effects of this decision to the date when the injunction was granted, when Justice Fux suspended the application of this Protocol until the Full Board issued a final decision. Justice Gilmar Mendes, who reported RE No. 680089, concluded that, although it is necessary to have a division mechanism to avoid

concentration of wealth in the States of origin, with the purpose of ensuring that the States of destination also receive part of the ICMS, “this need does not suffice to acknowledge the legitimacy of this rule considering constitutional provisions”.

This decision has not been published yet.

(ADI’s 4628 and 4713. Available at: <http://www.stf.jus.br/portal/cms/verNoticiaDetalhe.asp?idConteudo=275382>. Accessed in: September, 2014).

FEDERAL REGIONAL COURT 3RD REGION – TRF3

Internal Goodwill

A Judiciary Court has analyzed for the first time an Infraction notice related to the use of internal goodwill, deciding favorably to the National Treasury. The Third Panel of TRF3 has denied relief by majority of votes to the Appeal filed by Libra Terminal 35 S/A, being defeated Justice Nery Júnior, which granted relief to the appeal.

In summary, the judicial lawsuit relates to Administrative Proceeding No. 18471.000947/2006-33 (currently waiting the judgment of a Special Appeal filed by the company), in which the 1st Panel of the 1st Taxpayers’ Council unanimously denied relief to the taxpayer’s Voluntary Appeal on 05.28.2008. Administrative judges understood then that the goodwill could not be amortized since company ZBT was incorporated solely to allow creation and enjoyment of the goodwill. Moreover, they maintained the aggravated penalty of 150% for understanding there was simulation.

In the judicial sphere, the TRF3 maintained the 1st instance decision. Summoned Judge Rubens Calixto defended in his vote that, notwithstanding the correctness of accounting procedures, one should consider the accounting principle of essence over appearance. Thus, the capitalization should occur based on real market value, which does not happen when the business is artificially performed within the same economic group (economic grounds of the goodwill paid due to future profitability). Therefore, according to the reporting judge, for a corporate restructuring to be legitimate, it must result from existing facts, not from facts artificially and formally reported in documents or in accounting or tax records. For this reason, the infraction notice is correct, because everything indicates that there was a corporate triangle in order to artificially create goodwill to be then amortized, being the operations performed by companies controlled by the same entities.

Contrarily to the vote of reporting summoned judge Rubens Calixto, federal judge Nery Júnior understood that the records had sufficient proof that the formal accounting requirements necessary to enjoy goodwill, as provided by articles 7 and 8 of Law No. 9,718/98 and articles 385 and 386 of Income Tax Rulings, Decree No. 3,000/99. Besides that, he stated that the burden of proof that the accounting facts were not true belonged to administrative agents, as provided by article 923 of Income Tax Rulings, and they failed to prove it, since they have not denied validity to the valuation report presented by the taxpayer, which grounds the expectation of future profitability.

(Appeal No. 0017237-12.2010.4.03.6100. Available at: <http://web.trf3.jus.br/diario/Consulta/VisualizarDocumentosProcesso?numerosProcesso=201061000172371&data=2014-09-12>. Accessed in: September, 2014).

ADMINISTRATIVE TAX COURT – CARF

CARF decides again that the 30% limit does not apply to the offset of tax losses upon extinction of a company

Recently, the 3rd Ordinary Panel of CARF’s 1st Chamber understood that the limit to offset tax losses, known as the “30% limit” does not apply to the final statement of a company extinguished due to a merger.

According to the vote of the reporting judge, since the exclusion of the limit upon extinction of a company due to merger is not clearly mentioned in law, the judge must analyze the legal system – as a logical, balanced and integrated system – in order to find the most adequate interpretation.

In this sense, he understood that the legislator decided to distribute over time the enjoyment of loss for offsetting purposes, aiming at ensuring continuity of tax payment. In other words, the 30% limit is only justifiable when there is an assumption of continuity of a company. When it is extinguished due to a merger, this offsetting limit does not apply.

(AC No. 1103001.058).

ADMINISTRATIVE TAX COURT – CARF CARF decides that social security taxes are not imposed on amounts paid as profit sharing

CARF judged an Infraction Notice involving Banco BTG Pactual whose main discussion related to the charge of social security taxes on amounts paid as profit sharing, due to the alleged failure to comply with requirements provided by Law No. 10,101/02.

Administrative Judge Wilson Antonio de Souza Corrêa, who reported the case, understood that all requirements were fulfilled. Tax agents’ arguments were refuted by the following grounds: (i) companies may establish different goals to employees, managers and high executive when elaborating profit sharing programs, provided that they are established by a convention or collective agreement; (ii) performance evaluations may be subjective, since they must include personal opinions and comments, which are subjective; (iii) the applicable legislation does not provide for any mathematical formula to define profit sharing payment criteria. These criteria are defined by the minimum and maximum amounts to be paid, benefits to assiduous workers, performance of extraordinary work etc.; (v) employees that contributed to create the company’s profit must receive their profit sharing share, even if they do not have a performance evaluation if they were hired in the end of the year.

In summary, CARF understood that the agreement comprised clear and objective rules concerning profit sharing rights and accessory rules, including mechanisms to assess information related to the compliance of the agreement. For this reason, no social security tax is due.

(AC n. 2301-004.051).

ADMINISTRATIVE TAX COURT – CARF CARF decides that Treaty Brazil-Argentina does not avert taxation of profits earned abroad Recently, the 4th Chamber of 2nd Ordinary Panel of CARF decided that the profit of a controlled company located in a country with which Brazil has a treaty to avoid double taxation must be taxed.

The final decision was that the provision of Treaty Brazil-Argentina does not avert taxation according to article 74 of Provisory Law No. 2,158, which sets forth that “the profits earned by a controlled or related company located abroad are consider available to the controlling company in Brazil at the day of the balance sheet in which they were computed”. In practice, this means that the dividends do not have to be distributed to Brazil to be taxed.

Specifically concerning Treaty Brazil-Argentina, Article XXIII provides for exemption of the dividends paid by a company located in Argentina to a company located in Brazil that owns more than 10% of the capital of the paying company. Therefore, as understood by the appealed decision and by the taxpayer, Article XXIII of the Treaty Brazil-Argentina implies the non-taxation of “fictitious” dividends paid to Brazil.

However, CARF reformed the 1st instance decision, because, according to reporting judge Leonardo de Andrade Couto, this position ends with Article X of the Treaty: “[…] if Article X provides that the dividends paid by the Argentinian Company are taxed in Brazil and may be taxed in Argentina, one cannot understand that, under the same rule, these dividends cannot be taxed in Brazil, if taxable – even if not taxed – in Argentina.

For this reason, he concludes that if the treaty’s purpose is to avoid double taxation, the best interpretation of both provisions is that if the dividends paid by Argentinian companies were not subject to withholding income tax, there is no double taxation, so these amounts are fully taxable in Brazil, as provided by Article X. On the other hand, if these dividends were taxed in that country, article XXIII applies, with income tax exemption to amounts distributed to companies/individuals located in Brazil. Therefore, since there is no indication that the dividends were taxed in Argentina, there is no exemption in Brazil. (AC No. 1402-001.713).

CONFAZ National Council of Fiscal Policy suggested that the Federal Senate postpones discussions concerning ICMS reform According to an article published by Valor Econômico, on 08.15.2014, the National Council of Fiscal (CONFAZ) decided to suggest that the Federal Senate postpones discussions concerning ICMS reform to after elections. The Senate is analyzing the Senate Bill of Law No. 130/2014, presented by Senator Luiz Henrique (PMDB/SC), which provides that irregular ICMS benefits may be validated without unanimous decision. (Valor Econômico, 08.19.2014, p. E1).