Section 28 of Law 13,988/20, which resulted from the conversion of Executive Order No. 899/19 into law, put an end to the casting vote in the decisions of the Administrative Tax Appeals Board (Carf) and brought relief for taxpayers who, not infrequently, saw tax debts maintained due to the double vote granted to the judge representing the National Treasury.


The change occurs in a context in which CARF’s decisions had begun to prioritize tax collection and in which judgments involving complex legislation, the interpretations of which the tax authorities have changed over the years (e.g., cases of transfer pricing and goodwill), began to be decided by a casting vote in favor of the tax authorities, awakening in society a feeling of injustice and legal uncertainty.


Section 28 is currently being questioned from both formal and substantive points of view in the  Direct Actions of Unconstitutionality (ADIs)[1] filed before the Federal Supreme Court and in the Public Civil Action (ACP)[2] filed before Federal Court[3].


Validity of the rule under review

The allegation most frequently used in questioning section 28 is that the change in the casting vote was made by "jabuti” or "legislative smuggling", conduct rejected by the STF in ADI No. 5.127, ruled in 2015.


In general terms, the lawsuits filed against the new law provision claims that the Appended Amendment No. 01, which aimed to append the texts of Amendments 9 and 162 to the PLV 02/2020, lacks of thematic relevance. According to the rationale adopted, MP 899 deals with extrajudicial negotiation of existing and established claims, while section 28, setting forth a tie-breaking rule in an administrative decision, disciplines the procedure for determining and demanding the tax debt.


Besides the fact that ADI No. 5,127 deals with a completely different factual and normative context, the truth is that the interpretation intended by the plaintiffs in the ADIs and the ACP removes from the Legislative Branch the constitutional prerogative of effective participation in the process of conversion of an executive provisional measure into law.


Far from allowing the legislative bodies to use the legislative procedures to approve matters completely dissociated from the matter selected as relevant and urgent by the Executive Branch, the hindering of the legislative activity to the point of preventing improvement of the measures is an affront to the constitutional text.


In fact, the new rule is proving to be one of the greatest instruments of tax justice ever introduced in the legal system. As is known, the current tax laws are the result of extensive regulations, many times amended, quite complex, and impregnated with technical inaccuracies, ambiguities, and gaps.


The cost to society (State and taxpayers) is immense. Excessive litigation, very high penalties (75% and 150%), costs with guarantees, increase in the state apparatus (number of attorneys, tax agents, advisors, etc.), enormous uncertainty for investors and companies, increase in business costs (infrastructure, personnel, attorneys, etc.), fees for losses in litigation (State and taxpayer), among others.


In this case, the thematic relevance of the new provision is very high. The transcription of part of the explanatory memorandum of MP 899 leaves no doubt and, in fact, seems to have been written tailor-made to justify the end of the casting vote: "6. (...) it is an instrument of solution or resolution, through appropriate means, of tax disputes, bringing with it, far beyond a tax collection purpose, which is extremely important in a scenario of tax crisis, of cost reduction and correct treatment of taxpayers, whether those who no longer have the capacity to pay, or those who have been assessed, not infrequently, due to the complexity of the legislation that allowed a reasonable interpretation contrary to that considered appropriate by the tax authorities."


The rule extinguishing the casting vote, therefore, is added to the set of provisions dealing with tax settlements, in order to achieve a common purpose.


Having overcome the first claim, two additional arguments are raised to support the illegality of section 28.


One of them concerns the supposed invasion of private initiative by the Brazilian Presidency. The lawsuits filed maintain that the discipline of the organization and functioning of the administrative bodies is reserved to the initiative of the President and that, therefore, change of the casting vote should have been subject to a bill or order authored by him.


It so happens that section 28 does not interfere with CARF’s structure. The rule concerns to the proclamation of a result in the event of a tie in the administrative proceeding, ruling for extinguishment of the tax debt in this case. It is therefore a tax matter that influences the final issuance of the tax debt.


The last argument, which, in our view, does not merit in-depth discussion, is based on the logic that the issuance of general rules on assessments is reserved for complementary laws and that, in these terms, the National Tax Code (CTN) is responsible for regulating the matter. Under CTN’s guidelines, the assessment is exclusively within the competence of the tax authority.


This point, which was addressed in the PCA, seems to us to be a hermeneutical construction that goes beyond the text of the law. It suffices to note that section 28 in no way affected the assessment activity of tax agents.


Application of the rule to pending cases

The remaining question is the effects of the end of the casting vote for cases pending of analysis in the administrative and judicial spheres. Some people believe that the rule is purely procedural in nature and, as such, only applies prospectively.


Section 28 provides that the facts indicated in the assessment shall no longer be defined as an infraction in the event of a tie in the quorum for voting. When there is a tie in the judgment, it is assumed that there was no typical fact apt to give rise to tax collection.


This is the understanding that best aligns the provision with the tax system. This is because, in accordance with the dynamics adopted prior, the doubt regarding maintenance of the tax assessment was always transformed into certainty of the double vote by a judge representing the National Treasury, in flagrant violation of the principles of due administrative process, equal protection, strict legality, tax consistency, and, especially, the provisions of section 112, II, of the CTN, according to which the tax law should be interpreted in the manner most favorable to the taxpayer.


From this one can extract that in dubio pro taxpayer: if there is doubt about the factual circumstances justifying application of the law, the interpretation most favorable to the taxpayer should prevail.


Section 28 only established as positive law a guideline that was already emanating from the legal and tax systems with the intention of privileging the idea that dubious interpretations are decided in favor of the taxpayer and reinforcing the value of closed consistency (see section 112 of the CTN mentioned above and sections 5, II, and 150, I, of the Federal Constitution, which deal with the Principle of Legality at the general level of the Law and the Principle of Closed Consistency in the Tax Law, respectively).


In a certain manner, it is an instrument to rescue the concept of a tax enshrined in section 3 of the CTN, which is an obligation instituted by law and charged through fully binding administrative activity. More than the simple reading of this provision suggests that the important thing is to note that, in order to be a tax, one must be sure of its institution and collection, two qualities that are missing in cases decided by a casting vote.


Section 28 is also harmonious with the command of section 204 of the CTN, which provides for a presumption of certainty and fixed value of the debt registered. Assessments that, in an administrative review process, have the same number of judges opining for and against their legitimacy do not preserve these attributes of certainty, fixed value, and enforceability.


Section 28 is a hybrid rule, with a predominant characteristic of substantive law. It goes far beyond a simple rule concerning administrative procedure. It provides that tax debts are only valid when there is reasonable certainty that the facts will be subsumed under the overarching rule of application, bringing to the ordinary legislative level a scenario for extinguishment of the tax debt, within the framework of section 156, IX and sole paragraph, of the CTN.


In this context, section 106, II, "a" of the CTN expressly states that the law applies to past acts or facts, provided they are not definitively judged, when it excludes a situation from the infraction framework. Pursuant to section 5, XXXVI, of the Federal Constitution and section 502 of the Civil Procedure Code only final and unappealable judicial decisions have the force of being definitive. Thus, the application of section 28, under the cloak of section 106, covers all cases already decided in the administrative sphere, as well as those in progress that have already had appellate decisions in favor of the tax authorities based on a tied decision.


Because it brings in new rules to the legal relationship between taxpayers and the Federal Government, that is, a supervening law, section 28 should be applied to ongoing cases, regardless of their procedural stage. In general, considering the specific case, a request for review in the judicial level must be included in the complaint or be part of an unnamed petition, bringing to the case the news of the supervening rule.


In the administrative level, a request for review of cases in progress must be made by means of a motion for clarification, appeal, or unnamed petition, the latter in the event that the appeal has already been filed. Once the request for review has been accepted, the result of the administrative decision shall be amended to reflect the command of section 28. Following this, the opportunity for motions and appeals should be opened for the Attorney for the National Treasury. It is not a question of conducting a new judgment, in view of the most complete lack of a normative provision in this regard but recognizing a different result.[4]


In view of the above, since this is not a rule of an exclusively procedural nature and since it provides for elements that interfere with the tax relationship itself between the taxpayer and the tax authorities, establishing a scenario for extinguishment of the tax debt, we believe that the provision can cover all cases in which the merits of the tax debt are still under discussion (i.e, all the cases that do not have a final and unappealable judicial decision).


It is not yet known how panels of the Carf will act in the face of this legislative change, but, for us, one thing is certain: although surrounded by uncertainty, the end of the casting vote brings about a perception of improvement in the tax judiciary. We will continue to hope that the board members will adopt the most appropriate interpretation of the issue and give priority to the intention of the legislator.


[1] (i) ADI No. 6399, filed by Augusto Aras, attorney-general of the Republic; (ii) ADI No. 6,403, filed by the Brazilian Socialist Party (PSB); and (iii) ADI No. 6,415, filed by the National Association of Tax Auditors of the Federal Revenue Service of Brazil (Anfip).

[2]Public Civil Action 1023961-69.2020.4.01.3400, filed by the Institute of Defense in Administrative Proceedings (Indepad).

[3] At the request of the STF, under ADI No. 6399, filed by the PGR, the House, the Senate, the Presidency, and the AGU have already expressed an opinion in favor of its legality.

[4] We disagree, therefore, with the guidance adopted in the recent decision issued in Ordinary Action No. 5094299-45.2019.4.02.5101/RJ, of May 29, 2020.

The natural gas industry in Brazil had its development guided, for many years, by the business plan of a single player, which controlled practically all stages of the product value chain.


The activities predominantly performed by this player included basically all forms of introduction of natural gas into the Brazilian economy, such as the production (and mainly the processing and outflow) of offshore natural gas, the importation of natural gas from Bolivia, and the import and regasification of liquefied natural gas (LNG).


Thus, even if a given company obtained the right to produce natural gas in Brazil, it had no choice but to sell the product to the dominant player, since the input of this energy source into the Brazilian economy can only take place after its specification, and all the infrastructure for processing and treating natural gas was held by this single player.


This control also reached the natural gas transport infrastructure, such that virtually all the capacity of the transport pipelines was exclusive to this one company.


In addition to transportation, significant participation also reached most natural gas distribution companies, impacting on the capacity from the supply to the point of consumption.


Although the concentration of such activities in a single player was essential for the initial structuring of the natural gas industry in Brazil, given the need for large investments in an environment, at the time, of much uncertainty, the current reality no longer allows for this configuration. Over time, such structural control of the industry ended up having an impact on the offer of the product itself and the implementation of new investments and projects, resulting in an increase in the price of natural gas due to absence of free competition.


In view of this environment, the Gas for Growth initiative represented, in 2016, the pooling of efforts between the public power and the private sector to map out the main aspects of the natural gas industry in Brazil with a view to preparing a transitional environment in order to finally enable the entry of new players and reduce the influence of the player that had been dominant until then.


The multiplicity of issues identified within the scope of the Gas for Growth initiative led the public power, especially the part responsible for regulatory policies, to deepen its analysis of some specific fronts, understood to be strategic for the final objective of opening the natural gas market in Brazil. One of the fronts considered strategic was taxation, given the importance of thoroughly assessing the challenges faced by the industry now and in the future.


With resources from the World Bank under the META Project, the federal government, represented by the Ministry of Mines and Energy (together with the National Petroleum Agency and the Ministry of Finance, now the Ministry of Economy), hired a specific study on the "Challenges of the Brazilian tax system in the natural gas industry", which would help build a new plan for the industry in Brazil. Machado Meyer was selected in a bidding process to develop the work, which began and ended in 2018, thanks to the joint efforts of the tax and infrastructure/energy areas of the firm.


Based on all the information accumulated, the federal government launched in 2019 the New Gas Market program, which aims to make natural gas more competitive based on four main actions:


  • promote competition;
  • harmonize state and federal regulations in the sector;
  • stimulate the integration of the gas sector with the electrical and industrial sectors; and
  • remove tax barriers that prevent market opening and competition.


Based on this important milestone, Brazil entered a new phase of projects in the various stages of the natural gas industry chain. As is natural in any new phase (even more of this magnitude) and in view of the already complex Brazilian tax system, new challenges are being faced and gradually overcome.


This article aims to contribute to the debate on some of the issues that most affect the market today.


Natural gas processing: tax aspects


One of the main challenges to transform natural gas produced in Brazil into wealth concerns access to processing infrastructures, called Natural Gas Processing Units (NGPUs).


While all the NGPUs are held by a single player, which performs the activity exclusively for its own benefit, natural gas processing does not present itself as a relevant tax challenge.


However, with the entry of new players into the market, who will need to access this infrastructure to adapt the crude natural gas produced in Brazil (known in the industry as "rich gas" because it contains several other gaseous hydrocarbon streams), it is now necessary to qualify, from a legal and tax standpoint, the processing activity performed by the NGPU holder for the benefit of the natural gas owner.


The first challenge that emerges from this new activity concerns a potential conflict of jurisdiction between states and municipalities, given the possible concomitant interpretation of both entities as legitimate to charge taxes within their jurisdiction, which are the ICMS and ISS (respectively).


Although the judicial precedents point to the jurisdiction of the states to tax such activities, qualified as a kind of "industrialization to order" operation, the absence of a clear normative rule still represents some legal uncertainty for the sector.


Although the issue related to the conflict of jurisdiction between states and municipalities has been overcome (assuming the prevalence of the current judicial position on the assessment of the ICMS), the absence of state regulation regarding compliance with the principal and ancillary obligations ends up being another tax challenge to be overcome.


This is because the common ICMS legislation was conceived with reference to operations with physical, tangible goods, whose quantification takes place before (and according to) the physical movement of the goods. Natural gas, however, is a fungible product that circulates through continuous flow pipelines, and it is not possible to apply the common rules provided for in state ICMS legislation.


There are also other elements of complexity, such as the times and movements of liquid derivatives of natural gas, obtained from the processing activity. Such liquid derivatives, such as liquified gas derived from natural gas (LGNG), can be transported by other modes, which would induce compliance with the common rules for issuing tax documents, generating conflict with the special rules applicable to natural gas.


These are just some of the tax challenges of the activity of processing. Many others are still under discussion for regulations at national level.


Regasification of imported LNG: tax and customs challenges


In addition to tax challenges, the structuring of imported LNG regasification projects faces customs complexities, which are being resolved by the competent authorities on a one-off and successive manner.


Among the customs challenges faced in implementing imported LNG regasification terminals are the need for customs clearance at the terminals, which are often designed in conjunction with stationary Floating Storage Regasification Units (FSRU), and the application itself of the customs procedure of temporary admission with total suspension of taxes for these goods.


The possibility of customs clearance of such terminals and especially of the FSRUs that make them up is an example of recent improvement of customs legislation to accommodate this new reality of the natural gas industry. The legal gap, which generated legal uncertainty, was resolved with the publication of Ordinance No. 473/20, of the Federal Revenue Service of Brazil, significantly reducing doubts with respect to the legal feasibility of such projects.


Other aspects, however, still need to be better regulated, such as the temporary admission of FSRUs in the economic use mode itself with total suspension of taxes, direct discharge and customs clearance procedures, the ancillary obligations applicable for receipt, storage, and regasification of LNG (notably when there is access from third parties in the terminal or shared loads), among others.


It is worth noting that third-party access to LNG terminals is also susceptible to the same type of conflict of jurisdiction between states and municipalities faced in processing activities, and the legal interpretation is similar.


On the other hand, the times and movements of LNG in the context of import, storage, and regasification thereof are quite different from those found for processing activity. It is therefore appropriate to have specific regulations that take account of such distinctions.


Importation of natural gas and LNG: conflicts of jurisdiction


The import of natural gas from Bolivia, through the Brazil-Bolivia Gas Pipeline (Gasbol) and the import of LNG may also face tax challenges related to conflicts of jurisdiction between the states in defining what entity has standing to charge the ICMS on importation.


This controversy arises from the possible inconsistent interpretation among the states regarding the criteria legally relevant in defining in which state the "legal consignee" of the import operation is located: for example, would it be the state in which the importing establishment is formally recorded, where the goods enter the Brazilian territory (citygate of Corumbá, in the case of natural gas imported from Bolivia), where the respective customs clearance occurs or where the regasification activity occurs (in the case of LNG)?


Case law points to certain criteria, recently reinforced by the judgment on the merits of Internal Rules Appeal No. 665.134/MG, under the general repercussion framework (in a context of operations not related to the natural gas industry).


However, there are still three civil lawsuits (ACOs) pending a decision that specifically deal with the case of natural gas imported from Bolivia. Given the peculiarities (in the most various senses) of natural gas, there would be greater legal certainty after the judgment of these specific cases, in which such particularities were brought to the debate.


Natural gas transportation: tax challenges


The activity of natural gas transportation is, without a doubt, critical making the supply and demand of the product viable in Brazil, given its continental dimension and the concentration of production and processing in a few states.


Moreover, as it is a product placed into a real “grid industry", the connection between the sources of input and the points of distribution and consumption of natural gas is decisive for the optimal functioning of the sector. Other relevant aspects of this industry are the dynamism resulting from the continuous flow of natural gas and its essential nature for Brazil's own energy security, considering the importance of this input for the generation of energy by thermal power plants.


While the natural gas industry was dominated by a single player, the transport aspects of the product were not so relevant since the entire capacity of the transport pipelines was purchased by a single company and all the natural gas transported was owned by the same company.


The opening of the market to new players necessarily depends on the supply of natural gas transport capacity to third parties with the aim of enabling new trading flows with the product, thereby encouraging the competitiveness desired and price shock at the end of the chain.


Given this need and the physical characteristics of natural gas itself (which does not allow for perfect physical identification and binding of each molecule input into the transportation grid to its respective holder), a unique model was conceived in Brazil (but already adopted in other countries) for contracting for transportation capacity based on the quantities of natural gas input and withdrawn from the transport system. It is called an "entry-exit model".


According to this model, different players (sellers and buyers of natural gas, technically referred to as "shippers") can contract their own capacities to input natural gas into each carrier's transport system and remove it.


The framework of this disruptive contractual model (considering the traditional Brazilian reality) in the tax system was also a significant challenge, especially at the state level, since ICMS is also levied on inter-municipal or interstate transportation services.


The regulation of this transport model was understood as one of the priorities to give support to the other initiatives to open the market, which was done by means of Sinief Agreement No. 03/18 (especially with the changes brought about by Sinief Agreement No. 17/19).


Although the tax basis for this activity is already structured, there are still other improvements that tend to be implemented with the maturation itself of the natural gas industry in Brazil, such as the interconnection of the pipeline systems owned by the different transportation companies and the establishment of grid codes, which will also trigger new tax challenges.


Thermoelectric generation from natural gas: tax challenges


Although not a new challenge in itself, the new phase of the natural gas industry tends to intensify the tax obstacles to the activity of thermoelectric generation from natural gas. This is due to the fact that natural gas is a transitional fuel to less polluting and more environmentally friendly sources and helps preserve Brazil's energy security. It is also due to the firm demand for gas created by thermal power plants in Brazil, which makes other investments in the industry as a whole feasible.


The main tax challenge relating to thermoelectric power generation from natural gas arises from the different ICMS assessment systems for transactions involving natural gas and electric power.


This is because the ICMS tax arrangement applicable to the natural gas supply chain is the traditional one, whereby the tax must be collected from the state where the selling establishment is located. Thus, the seller collects the ICMS tax on the sale of natural gas to the state in which it is located, indicating on the tax document the amount of tax due for the respective recording of a credit by the purchaser of the product. These tax credits may be used by the purchaser to offset other ICMS debts it may ascertain in its transactions, in compliance with the non-cumulative tax principle set out in article 155, paragraph 2, subsection I, of the Federal Constitution.


The ICMS assessment system for transactions involving electric power is different, since the Federal Constitution itself establishes that the tax will not be levied on interstate transactions. The logic of the constitutional legislator in establishing such an assessment system was to assign the product of the ICMS tax collection to the states where electricity consumption occurs, since its generation tends to be concentrated in a few states, usually privileged due to natural circumstances. Consumption, on the other hand, occurs throughout the Brazilian territory. At the time when this system was conceived, the Brazilian electric grid was less diversified and massively composed of hydroelectric plants, which do not depend on inputs taxable under the ICMS.


Exit of goods exempted or not taxed under the ICMS are exceptions to the principle of non-cumulativeness, which leads to reversal of entry  of tax credits related to previous transactions (except if the ordinary legislation of the specific state authorizes the maintenance of such credits).


Additionally, the company acquiring the electric power in interstate transactions (such as a state energy distributor, for example) will have to pay the ICMS tax on its transactions selling the power within the state, which are often subject to higher rates than those for products in general (in the state of Rio de Janeiro, the ICMS tax rate on electric power corresponds to 28%, while in the other operations it is 18%, for example).


Analyzing the tax levied on the supply chain of natural gas for thermoelectric generation, it is possible to identify, therefore, a significant tax challenge related to the incompatibility of the ICMS assessment arrangements, which leads to cumulative taxation and, ultimately, higher cost in the electric power generated via natural gas, thus reducing the competitiveness of these projects.


The form usually adopted by states to mitigate the effects of the incompatibility of the ICMS taxation systems for natural gas and electric power is the use of special taxation arrangements (mainly through the granting of tax deferrals) or the granting of tax benefits (such as exemptions, in which situations there are other legal and political complexities for the valid institution of such incentives).


The incompatibility of ICMS assessment arrangements on transactions involving natural gas and electricity is, therefore, the main tax challenge to be faced with respect to natural gas thermoelectric projects.


Challenges in other sectors


In addition to the issues mentioned, which have not been completely exhausted and call for further inquiry and analysis, other important segments for the natural gas industry also face relevant tax challenges, such as fertilizer plants, the "Fafens" (regarding the fertilizer tax system, mainly imported fertilizers); intensive consuming industrial segments (sectors such as glass, ceramics, etc.); the chain for the sectors vehicular natural gas (VNG) and heavy fleet LNG; and the natural gas flow activity itself, among others.


Although the challenges are many, one may note a constant evolution in the business environment of the natural gas industry, contributing attract investments and generate wealth in Brazil. In this respect, a united effort between public authorities and the private sector is fundamental in formulating public policies that give support and legal certainty to the most modern and efficient business models for the industry.


After a long period of discussion and debate, this year the federal government enacted Law No. 13,988, which, among other measures, regulated tax settlement with respect to federal debts. The measure was widely awaited, since the National Tax Code brought in the possibility of settlement since it was published in 1966. However, subject to regulation by law, the provision remained ineffective for 54 years.


In general terms, Law No. 13,988/20 established the requirements and conditions for the Federal Government, its instrumentalities, and foundations, to promote settlements aimed at settling disputes related to the collection of tax or non-tax debt.


As regards tax matters, three major groups, subject to their own rules, were covered by the legislation:


  • Debts already enrolled as outstanding debt (in the modalities of adhesion or individual proposal);
  • Debts arising from a relevant and widespread controversy (only in the modality of adhesion);
  • Debts arising from litigation relating to a small amount (only in the form of adhesion).


Infralegal acts, ordinances to be issued by the Ministry of Economy, the National Treasury Attorney's Office, or the Federal Revenue Service and future notices, are responsible for disciplining in detail the criteria and conditions for each type of settlement.


This is the case of PGFN Ordinance No. 14,402 and Ministry of the Economy Ordinance No. 247. The first, issued on June 16, established the conditions for exceptional settlement in the collection of debts already enrolled as outstanding debt of the Federal Government, while the second established the requirements for adhesion to tax litigation of a relevant and widespread legal controversy and/or litigation of small value. We will look at the two acts in more depth below.


PGFN Ordinance No. 14,402 - exceptional settlement for debts enrolled due to the effects of the coronavirus


PGFN Ordinance No. 14,402 brought in a set of rules for debtors and the Federal Government to enter into agreements regarding the debts already enrolled as outstanding, but with the effects caused by the coronavirus pandemic as a cause.


The objective, among others, is to enable the transitory overcoming of the economic and financial crisis and to ensure that the collection of debts is adjusted to the expectation of receipt and the capacity to generate income.


This exceptional settlement may include debts registered and managed by the PGFN whose value adjusted for inflation is equal to or less than R$ 150 million. Debts of greater value may be the subject to settlement, but via individual proposal.


Taxpayers who have debts considered irrecoverable or difficult to recover and who adhere to the exceptional settlement should pay the downpayment of 0.334% of the consolidated value of the debts within 12 months. The residual value, with discounts that vary depending on the debtor's situation or activity, should be paid in installments as follows:


a) For individual businessmen, microenterprises, small businesses, educational institutions, Charitable Hospitals, cooperative societies, and other civil society organizations covered by Law No. 13,019/14 whose debts are considered irrecoverable or difficult to recover:


  • Reduction of up to 100% of the amount of interest, penalties, and legal charges, observing a limit that can vary between 30% and 70% of the total value of each debt subject to negotiation and a variation of 36 to 133 monthly and successive installments.


b) For other legal entities under judicial reorganization, judicial liquidation, extrajudicial liquidation, or bankruptcy proceedings:


  • Reduction of up to 100% of the amount of interest, penalties, and legal charges, observing the limit of 50% of the total value of each debt subject to negotiation within up to 72 monthly and successive installments.


c) For individuals whose debts are considered irrecoverable or difficult to recover:


  • Reduction of up to 100% of the amount of interest, penalties, and legal charges, observing the limit of 70% of the total value of each debt subject to negotiation within up to 133 monthly and successive installments.


d) For other legal entities whose debts are considered irrecoverable or difficult to recover;


  • Reduction of up to 100% of the amount of interest, penalties, and legal charges, observing a limit that can vary between 35% and 50% of the total value of each debt subject to negotiation in monthly and successive installments that may vary from 36 to 72 months.


For purposes of classification of a debt as recoverable or difficult to recover, the degree of recoverability of the debts enrolled will be assessed by the PGFN, taking into account the economic situation and payment capacity of the debtors.


The ability to pay, in turn, will be measured after an examination of the actual impact of the new coronavirus pandemic on the legal entity's gross revenue or the monthly income of the individual (i.e. an assessment of the percentage reduction in revenue or gross income from March of 2020 to the date of adhesion, compared with the same period in 2019).


Adherence to the exceptional settlement will be done exclusively through the Regularize portal, on the PGFN website, between July 1 and December 29, 2020.


ME Ordinance No. 247 - settlement for significant litigation and for small value litigation


ME Ordinance No. 247 establishes the general rules for the settlement of debts linked to litigation that is significant and subject to widespread legal controversy. This modality allows the concession of a discount of up to 50% of the debt, with a maximum discharge period of 84 months.


Adherence to this modality also requires publication of a notice from the PGFN or RFB, in which the matters approved by the Minister of Economy and the other criteria will be listed. In addition to the RFB, the PGFN, and the Carf, the OAB and the confederations of the economic category may suggest to the Minister of Economy the subjects that may be joined as theories of relevant and widespread legal controversy.


A relevant and widespread legal controversy is considered to be that which goes beyond the subjective interests of the cause and, preferably, has not yet been subject to a judgment by the procedure for repetitive appeals along the lines of article 1,036 et seq. of Law No. 13,105/15.


The controversy will be considered widespread when it involves: (i) claims in at least three different federal circuit courts; (ii) more than 50 lawsuits by different taxpayers; (iii) an incidental proceeding for resolution of repetitive claims whose admissibility has been accepted by the court; and (iv) claims involving a significant portion of a certain economic or productive sector.


Relevance will be considered demonstrated when there is: (i) economic impact equal to or greater than R$ 1 billion, considering known cases; (ii) divergent decisions between the ordinary panels and the Superior Chamber of Carf; and (iii) divergent judgments or decisions in the judicial sphere.


The ordinance also establishes that, in this type of settlement, adhesion must cover all disputes existing on the date of the request and related to the theory at issue in the settlement.


The act of the Ministry of Economy also dealt with litigation of small values, exclusive to individual taxpayers, microenterprises, or small businesses and whose amounts of principal and penalty, per individual case, do not exceed 60 minimum wages.


For this modality, adhesion also requires the publication of a future public notice, which will establish the discount criteria (up to 50% of the total value of the debt), payment terms (installment payment within up to 60 months), or offer and substitution of guarantee.


The Brazilian Federal Revenue Service (RFB) has once again expressed the understanding that the portions of the transportation voucher and food assistance paid for by the company and by the employee are treated differently for the purposes of social security contributions. On June 30, 2020, the RFB published the Cosit Consultation Resolution  No. 58/20, following some of the assumptions already adopted in Cosit Consultation Solution No. 04/19.


According to the RFB, the company hiring services through the assignment of labor may deduct from the calculation basis of the employer's social security contribution (gross amount of the invoice, receipt, or service receipt) the amounts defrayed by the borrower as transportation vouchers and food assistance, the latter in natura if before the Labor Reform, and also by means of ticket or card, if later.


The RFB highlights that the legislation authorizes the deduction from the tax basis of the withholding tax only of the portion of the transportation voucher and food assistance borne by the company. The same reasoning does not apply to the portion of co-pay deducted from employees' remuneration, which must be included in the calculation basis, since one could not contemplate "the possibility that the company would be able to deduct from the calculation basis the tax due a sum that does not belong to it."


A similar issue had already been addressed in Cosit Consultation Resolution 04/19, whereby the RFB clarified that, when the food assistance is paid by both the company and the employee, the treatment of these amount for the purposes of levying social security contributions should be different.


In that scenario, the understanding adopted was that the portion of the food assistance deducted from the employees in a co-pay system will be included in the calculation basis of the social security contributions as part of their remuneration, since the amount discounted constitutes employee salary. The share paid by the employer, in turn, would not be in the basis for calculating the contributions in question.


Although the consultation dealt only with food assistance, the discussion is similar for transportation vouchers, medical and dental assistance plans, and supplementary pension funded via co-pay with employees. There is a controversy as to whether such funds are taxed to employees and not employers, if the RFB's understanding is followed. What is discussed is whether or not these funds make up the contribution salary.


The two consultation solutions indicated are binding on the RFB and support the actions of other taxpayers, as per article 9 of Normative Instruction No. 1,396/13. Failure to comply with these guidelines may result in assessments of taxpayers and rejection of any refunds, which are rarely overturned in the administrative sphere.


However, there are favorable court decisions recognizing the possibility of excluding employees' co-pay installments from the calculation basis for social security contributions, since article Article 28, paragraph 9, of Law 8,212/91 established that the amounts received as transportation vouchers, food assistance, medical and dental assistance plans, and supplementary pension plans are not included in the contribution salary.


There are robust legal bases for it also be recognized that, in the period before the Labor Reform, the benefit of food assistance provided through vouchers or a prepaid card in the context of the PAT is not subject to taxation through social security contributions, in accordance with applicable regulations.


In view of this scenario, it is advisable for companies to carefully evaluate the treatment to be given given to the amounts paid in each case in order to ascertain the existence of excess withholding or even exposure, which may require adjustment of procedures or even the use of preventive measures.


The impacts of the crisis generated by the covid-19 pandemic on the economy as a result of the isolation measures imposed on the population and the shutdown of business activities led to the adoption of a series of tax measures to mitigate its effects by governments around the world.


In order to guide the actions that could be taken by countries in this scenario, the Organization for Economic Cooperation and Development (OECD) published a report with recommendations to be adopted in each of the four phases of the pandemic identified by the entity, from the initial phase, which involves the suspension of economic activities, a period in which the containment measures remain, with impacts on economic activity, through resumption, in which it would be necessary to stimulate the return to investment and consumption, until the last phase of recovery of public finances after the pandemic. Each of these phases would involve different measures to be taken.


In the early stage of the pandemic, where Brazil is currently, the OECD recognizes the need for immediate responses by governments to mitigate the first impacts suffered and recommends tax measures to provide relief to businesses and families and preserve jobs and economic activity.


An analysis of the international panorama shows that, among the tax measures recommended by the OECD, the one most adopted by countries involves deferment of tax payments. According to the OECD, 75% of the member countries of the entity and of the G-20 have adopted these measures, such as Germany, France, Italy, Spain, and the United States.


In line with the OECD’s recommendations, other tax measures widely adopted by the countries were: extension of the filing of ancillary obligations, flexibility in the payment of outstanding tax debts, a greater possibility for tax recovery, suspension of collection of default charges and penalties for non-payment of taxes, among others.


Several countries have also adopted measures to effectively reduce the tax burden in the early stages of the pandemic to preserve the cash flow of companies. In this context, the most common measures announced by the countries involved reductions in tax rates and payroll contributions, exemptions for priority sectors in the crisis (such as health), and those most impacted by the pandemic (such as tourism and airlines).


In addition, several countries have reduced the rate of their consumption tax (VAT) not only on products related to the fight against the pandemic, such as the United Kingdom, Norway, China, Colombia, and Turkey, among others.


Certain countries have introduced measures to offset tax losses for the year 2020 against profits earned in prior years, such as the United States, New Zealand, Norway, and Poland (carry back). Others have amended legislation to extend the tax loss use period for the year 2020 into the future, as is the case for China and the Slovakia (carry forward).


The rare exception to the rule for countries that have effectively sought to reduce the tax burden of their taxpayers is, for the time being, Saudi Arabia, which has increased the rate of its consumption tax (VAT) from 5% to 15%. The measure was adopted to deal with the impact of the coronavirus and the drop in the barrel price of oil in the world.


Measures adopted by Brazil

The actions of other countries in the tax area ended up influencing Brazil’s attitudes. The federal government, following the trend abroad, implemented the deferral of  tax payments, such as social security contributions on payroll and contributions to the Social Integration Program (PIS) and Social Security Financing (Cofins).


In the list of tax measures of a more administrative nature, Brazil decided to postpone the filing of a series of tax returns, suspend the performance of procedural acts before the Brazilian Federal Revenue Office (RFB), extend the expiration date of tax clearance certificates relating to federal tax debts and outstanding tax federal debts (CND), and suspend collection procedures by the Attorney General's Office (PGFN). It also published rules and procedures that must be observed by taxpayers when entering into settlements with the Tax Authorities, in order to extinguish administrative and judicial disputes.


With respect to tax policy measures, Brazil reduced to zero the rate for Tax on Financial Operations (IOF/Credit) in a series of credit operations contracted between April 3 and July 20, 2020, granted a reduction in the rate of the social security contributions due to the S System, and reduced to zero the rate of Import Tax (II) and Tax on Industrialized Products (IPI) for priority products in the fight against and prevention of the coronavirus.


Such tax measures were not as significant, however, as those adopted in other countries and may not reach the level of relief received by companies abroad. Thus far, for example, no reductions in Corporate Income Tax (IRPJ) rates have been granted, as seen in other jurisdictions. The rules on the use of tax losses have not been adjusted either. Although there was a reduction in the rate for contributions due to the S System  and deferral in the payment of the employer's social security contribution, there was no reduction in the rate for the employer's social security contribution, as seen in other countries, which may be crucial to maintaining jobs.


In addition, some tax proposals that go against what has been announced by other countries and recommended by the OECD draw attention. For example, while in the international experience the greatest concern of governments is to support the economic activity of companies, and not to increase taxes, in Brazil it is possible to identify in recent months a series of proposals for increasing collection of taxes both at the federal and state levels.


This is the case of the bills presented with the objective of instituting in Brazil the Tax on Large Fortunes (IGF). Currently there are more than 30 bills in the House of Representatives and the Federal Senate seeking the institution of this tax - nine of them were presented during the pandemic.


In recent months, nine bills have also been presented, currently in the House of Representatives and the Federal Senate, aiming the institution of compulsory loans to cover expenses generated by the state of public calamity related to the coronavirus.


Also at the federal level, a bill was presented with the purpose of increasing the Social Contribution on Net Profits (CSLL) rate for financial institutions.


At the state level, in turn, one highlight in São Paulo is Bill No. 250/20, which proposes changes in the Causa Mortis Transfer and Donation Tax (ITCMD) legislation with the objective of increasing the collection of such tax. The bill proposes a series of changes, such as a tax increase based on adoption of progressive rates of up to 8% and a levy on private pension plans and on earnings and income from estates and renunciation of inheritance, currently exempt. In the current scenario, with the significant number of deaths due to covid-19, increasing the tax rate on inheritance seems to us to be a contradiction.


Instead of discussing proposals such as those mentioned above, legislators should be concerned with discussing other relief measures that would further help Brazil reduce the impacts generated by the coronavirus. They could evaluate, for example, flexibilization of the rules on the use of tax losses, decrease in the rate of employer social security contributions, suspension of collection of penalties and interest due to non-payment of taxes, among other measures that would position Brazil alongside the more developed countries in combating the effects of the crisis (and not alongside Saudi Arabia, which increased taxes).