On February 19, the Joint Commission for Executive Order No. 899/19 approved the text of the bill to convert the Executive Order (MP) in law, which is now to be voted in the Chamber of Deputies. The so-called Taxable Person MP was published on October 17, 2019, with the purpose of regulating tax transactions, which has been admitted by the National Tax Code for over 50 years. The measure aims to reduce tax litigation and to fill the public coffers for debts deemed irrecoverable or difficult to recover.

The original text of the MP received 220 parliamentary amendments and was discussed at a public hearing held on the 13th, attended by representatives of the government and taxpayers.

According to the report approved by the commission, the approval of the MP meets the constitutional requirements of urgency and relevance, especially due to the fact that the debt portfolio under judicial discussion that could be subject to settlement would be in the order of R$ 1.4 trillion, an amount higher than half of the Federal Government's outstanding debt inventory. In the administrative sphere, R$ 600 billion was said to be linked to about 120,000 lawsuits in progress before the Administrative Tax Appeals Board (Carf).

The high degree of litigation between taxpayers and the tax authorities, associated with significant volume of potential funds to be collected, was said to justify the relevance of the measure.

The Joint Committee opted to forward the matter in the form of a conversion bill because it believes that this is the best alternative in order to organize the amendments accepted and to give the text the structure recommended by the legislative technique. The 61 amendments approved aim, according to the proposition report, to rule out potential errors of unconstitutionality and illegality and to mitigate the risk of objections.

The main aspects of the new proposal:

  • Three types of transactions are provided for: (a) debts, whether or not tax in nature, enrolled as outstanding federal tax debt; (b) tax debts in judicial or administrative litigation, involving a widespread and relevant legal controversy; and (c) tax debts in administrative litigation of low value.

  • In the first type, the transaction may be proposed by the Attorney General of the National Treasury (PGFN) or by the debtor, on an individual basis or by adherence based on a public notice. The proposal may relate to: (i) the granting of discounts in penalties, late fees, and charges relating to debts classified by as irrecoverable or difficult to recover; (ii) the term or method of payment, including deferral and default fines; and (iii) offering, substituting, or disposing of guarantees or freezes.

  • For companies in general, the principal amount of the tax debt does not allow for a reduction. A reduction of more than 50% in the total value of the debts transacted is also forbidden. Payment of the debt must occur within 84 months. For individuals, small businesses, and microenterprises, reduction of the debt principal is not allowed, but reduction of the total amount may reach 70% and have a payment term of up to 100 months.

  • In the bill, the discretion of the revenue authorities in classifying what should be considered irrecoverable or difficult to recover has been reduced: this classification is no longer exclusively assigned to the revenue authority, and the PGFN must act to establish the objective criteria for this classification.

  • The proposed settlement will not suspend the enforceability of tax debts or the progress of the respective tax foreclosures, which does not prevent a stay in proceedings by agreement of the parties, until the debts are extinguished.

  • In the second type, the settlement proposal is made by the public authorities, with a view to closing customs and tax disputes arising from "relevant and widespread legal controversy." The taxable person must adhere to the conditions and requirements laid down in the public notice. In this case, there is no provision for a settlement on an individual basis.

  • A legal controversy involving a considerable number of taxpayers, going beyond the subjective interests of the cause, is considered relevant and widespread.

  • Reductions and concessions in this case are also limited to a discount of 50% of the debt, with a maximum term for payment of 84 months.

  • The taxpayer that adheres to the settlement will be subject, with respect to future and uncompleted taxable events, to the understanding given by the tax authorities to the matter in dispute, with the exception of prospective termination of the settlement resulting from binding precedents (STF decisions in concentrated control of constitutionality, binding precedents, appellate decisions in proceedings of assumption of jurisdiction, or resolution of repetitive claims and repetitive appeals) or with respect to a matter that is the subject of an opinion, in force and approved by the PGFN, that reaches a conclusion to a different effect, and in the other cases of dismissal by the PGFN to challenge and appeal, as provided for in article 19 of Law No. 10,522/02.

  • Still in the second type: (i) the adherence will cover all litigation related to the theory at issue in the settlement existing on the date of the request, not yet definitively ruled on; (ii) the application for adherence suspends the processing of administrative proceedings as long as the review thereof lasts; and (iii) adherence that does not entail extinguishment of the administrative or judicial litigation will not be admitted, except in the event that it is possible to segregate subject matter of the debate, under the terms of a public notice to be published by the public authority.

  • Special attention should be given to the scope of the waiver that this type of settlement by adherence should entail in practice, since the rule imposes on the taxpayer relinquishment of discussion in all proceedings involving the same legal theory, in accordance with the criteria to be defined in the public notice. In principle, it would not be possible to select specific cases for relinquishment, which could render the settlement inviable.

  • In turn, in the third type, the transaction falls exclusively on tax debts under administrative litigation whose value does not exceed 60 minimum wages and that have as the taxpayer an individual, microenterprise, or small company. The granting of discounts may not exceed the maximum limit of 50% of the total value of the debt, in which case a reduction in the value of the principal is authorized.

    In all types:

  • Although it expressly prohibits the settlement of debts by repeatedly delinquent debtors, the proposition does not define what should be understood as being a “repeatedly delinquent debtor", assigning this task to another specific law.

    Currently, the closest possible legal provision is Bill No. 1,646/19, under way in the Chamber of Deputies and according to which a repeatedly delinquent debtor would be "taxpayer whose tax behavior is characterized by substantial and repeated default on taxes.” This default was said to correspond to the existence of debts in the name of the debtor or related individuals or legal entities, whether or not recorded as outstanding debt of the Federal Government, and in the amount of R$ 15 million or more, in an irregular situation for a period of one year or more.

  • Settlements that reduce criminal fines and grant discounts for debts related to the Simples Nacional tax regime, pending the enactment of a complementary law, and to the FGTS, pending the authorization of its Board of Trustees, is prohibited.

  • The proposed settlement is conditioned on the abandonment of administrative and judicial litigation regarding the subject matter of the settlement and the waiver of any claims of a right on which these claims are based, including legal actions of a collective nature. In the case of judicial proceedings, the waiver must be subject to a request for extinguishment of the settlement with a resolution on the merits, through the ratification of the settlement, under the terms of item "c" of subsection II of article 487 of the Code of Civil Procedure.

  • The Federal Revenue Service is not authorized to file foreclosure proceedings in the event of termination of the settlement, but may request that the judicial reorganization proceeding be converted into bankruptcy in this case.

  • Failure to comply with the conditions established in the settlement will result in termination thereof in the cases provided for by law. The debtor shall be notified of this act and may challenge it within 30 days. Within this period, it is also permitted to bring into good standing a curable defect that gives rise to a notice of termination.

In relation to the points of attention identified in the text of the MP, the conversion bill deals with a very important issue, referring to the instruments of relinquishment to be requested by the debtor in judicial proceedings.

According to the new wording proposed, the purpose of the request for waiver to be submitted to the court will be to close the proceeding with a resolution on the merits for ratification of the settlement. It will also have the effect of forming a judicially enforceable instrument. Therefore, since this is a typical settlement, with mutual concessions from party to party for the ending of the dispute, there should not be, in our opinion, any judgment to charges for loss of suit.

In this respect, it is also inconsistent, in our view, to provide for a mere reduction in the legal charges incurred when registering the debt as outstanding debt of the Federal Government. Since they take on the nature of attorneys' fees, such amounts should also be excluded from the final amount to be paid in the event of a settlement.

On the other hand, the conversion bill no longer addresses the situation of tax debts that have not yet been registered, but for which the administrative proceeding has already been closed. This debt, in principle, would not be provided in any of the settlement types, until it is the subject matter of a legal action, in the form of article 19 of the bill.

If the goal of the measure is to reduce litigation, it is as important to close ongoing proceedings as it is to avoid the initiation thereof. Thus, it would be necessary that debts already created not yet enrolled in outstanding debt could also be subject to settlement.

In turn, the proposition rightly seems to have solved the situation of tax debts not yet created by the tax authorities, by providing that the second type of settlement must have as reference a controverted theory, being only conditioned, in principle, on the existence, on the date of publication of the public notice, of an active judicial or administrative litigation pending final judgment, in relation to the theory that is the subject matter of the settlement.

Therefore, the existence of a materialized contingent liability is not required to settle on a certain legal theory, which allows the rule to be applied in writs of mandamus and declaratory suits whose subject matter is discussion of the tax obligation, for example.

Thus, criticism is maintained regarding the supposed lack of provision for settlements with debts in the interim between the final creation thereof in the administrative sphere and the registration in outstanding debt. However, extension of the measure to legal disputes involving an as yet unestablished tax obligation deserves praise.

As for administrative litigation for small amounts (debts not exceeding 60 minimum wages for which the taxpayer is an individual, a microenterprise, or a small business), the bill, in consideration for the more favorable conditions for the settlement, brings in a relevant limitation on the taxpayer's right to resort to Carf, which will certainly be challenged. It is expected that the judgment of such cases will be carried out at the last level of appeal by a panel of the Federal Revenue Service, observing the binding effect of Carf's understanding.

This means that such taxpayers would not have access to a parity judgment at the last level of administrative appeal, since all the judges at the judgment offices are tax auditors of the Federal Revenue Service. In addition, the hearings at the offices are not currently disclosed to taxpayers, who are only notified regarding the outcome of the judgment, without the possibility of monitoring it in person, scheduling hearings with judges, or submitting oral argument.

In our opinion, if the proposal is approved, the regulations to be issued by the Revenue Service will have to change the functioning of the offices so that the agency may function as the last level of appeal, with full guarantee of an adversarial proceeding and a broad defense for taxpayers and the legality itself of the final creation of the tax debt, by means of equal structuring of the adjudicatory bodies (judges appointed by the RFB and by taxpayers).

Once the general terms of the bill for conversion of the Taxable Person MP is presented, there is great expectation surrounding the enactment of the law and the regulations thereof.

The bill went to the Chamber of Deputies for a floor vote. The limit for approval by the two legislative houses is March 25, 2020.