Launched in October of last year as a very positive initiative by the Federal Revenue Service of Brazil (RFB) to guide taxpayers, in addition to avoiding default and potential litigation, the draft ordinance establishing a federal program to encourage tax compliance, Pro-Compliance, has some very questionable points that we shall review in this article.

The text was submitted to Public Consultation No. 4/2018 of the Federal Revenue Service of Brazil (RFB) to receive opinions and proposals from the taxpayers, but since October of 31, when the time limit for the contribution ended, no normative act was published to ratify or modify the draft of the original ordinance that will establish the program.

The proposal is inspired by the program named "Nos Conformes" (in English, "Compliant"), instituted by the State of São Paulo through Complementary Law No. 1,320/2018, and the Compliant Debtors Tax Registry, to be implemented by the Attorney’s Office of the National Treasury.

According to the explanatory memorandum of the RFB's draft ordinance, Pro-Compliance "seeks to encourage taxpayers to adopt good practices in order to avoid misconduct and comply with the law." These "good practices" are related to compliance with principal and ancillary tax obligations (payment of taxes and submission of returns and information to the tax authorities).

According to the draft, the program has the objective of settling tax debt, through measures that facilitate its payment, guide and support taxpayers, and prevent the creation of debts, delinquency, and litigation (administrative or judicial). To this end, taxpayers will be classified into categories (A, B, or C) according to their recent[1] history of relationship with the agency. To create the classification, the RFB will take into account the following criteria: (i) registration and maintenance of a registration status compatible with their activities; (ii) filing with the RFB of returns and documents with integrity, accuracy, and timeliness; (iii) full and timely payment of taxes due (article 4 of the draft ordinance).

Taxpayers classified into category A, with the best history, will be entitled to the following benefits: (i) prior information on indicia of an infraction determined by the Federal Revenue Service before a tax proceeding is initiated, which would enable taxpayers to return them to good standing without imposing the penalties applicable; (ii) priority service when appearing in person; (iii) priority in review of claims by the RFB, including in relation to the receipt of refunds, subject to the priorities defined by law; and (iv) Certificate of Tax Compliance issued by the Internal Revenue Service (article 12 of the draft ordinance).

In turn, taxpayers classified into category C will be subject to "the rigors of the law",[2] such as inclusion in the Special Inspection Regime addressed by the RFB Normative Instruction No. 979/2009, which imposes, among other measures, maintenance of uninterrupted supervision at the taxpayer’s establishment, reduction of calculation periods and tax withholding periods, compulsory use of electronic control of transactions carried out, and daily collection of the respective taxes, with special control in the issuance of commercial and tax documents.

These taxpayers will also be subject to the application of coercive measures, such as restrictions on those who do not bring into good standing debts subject to a Special Administrative Charge, among them, cancelation of tax benefits, inventorying of assets, and the exclusion from installment payment programs. As there is no provision regarding the treatment to be given to taxpayers classified into category B, it is inferred that they will not have differentiated treatment.

The points in the draft that may be considered fragile relate precisely to the criteria established for classifying taxpayers. Regarding the confirmation of the presentation of returns and documents with integrity and accuracy, for example, article 8, IV, of the draft establishes as one of the criteria to be observed the "results of requests for refunds, reimbursement, and returns and declarations of offsets." Once again, the RFB, like the isolated fine provided for in article 74, paragraph 17, of Law No. 9,430/96,[3] seems to seek to penalize taxpayers in the event of mere rejection of requests for restitution, reimbursement, or non-recognition of offsets.

The adoption of this criterion may constitute a violation of the right to petition provided for in the Federal Constitution (article 5, XXXIV), as it ends up creating obstacles (including financial obstacles) for companies to petition the public authorities in defense of their right to recover taxes improperly collected. In this sense, the means of political sanctions is a kind of mechanism to discourage taxpayers from seeking to defend their rights.

It is also worth remembering that taxpayers who have their request for restitution or reimbursement denied, or who have an offset not ratified by the Internal Revenue Service, have the constitutional right to demonstrate in the judicial sphere the legitimacy of their claim or the good standing of the offset conducted. Therefore, as set forth in the draft ordinance, this criterion may lead to violation of the guarantee of the inalienability of the access to Justice (article 5, XXXV, Federal Constitution).

In order to analyze the presentation of returns and documents in a timely manner, the criterion of "repeated rectifications of returns" will be reviewed (article 9, III). The problem is that, within the legal deadline, taxpayers have the right to rectify returns without them being considered untimely, which would rule out the use of this criterion for the purpose of classifying taxpayers.

In addition, the provision that classification will consider periods prior to the issuance of the ordinance represents an unlawful retroactive effect of the rule, since it may lead to penalization of taxpayers for conduct adopted before even knowing the rules.

The greatest controversy, however, is related to the severe consequences and penalties imposed on taxpayers in category C. Among them, cancelation of tax benefits by means of an administrative act (the ordinance) and, more seriously, the imposition of penalties even in cases where the taxpayer is in good standing with the tax authorities, but has received this classification.

There is not even a provision regarding reporting to the competent authority for the application of penalties related to the cancelation of tax benefits, which may violate the principle of legality and the right of defense and an adversarial proceeding.

It is important to point out, however, that after being informed of their classification by means of an e-CAC, taxpayers may request a review of this classification within 30 days, “upon identifying an error in the application of the criteria" (article 5, paragraphs 1 and 2, of the draft ordinance). Thus, although there is no appeal against the RFB’s decision to review such a request, the draft ordinance provides mechanisms to review the classification. It is advisable, however, that this request be processed with supersedeas effect, in order to promote the right to an adversarial proceeding and a full defense.

There is also no provision regarding disclosure of the taxpayers’ classification to third parties, as in the Nos Conformes program. Such disclosure, as long as the taxpayer does not object, can be beneficial and bring about competitive advantages for those who are classified into category A.

In summary, even considering that a rapprochement between the tax authorities and taxpayers is always welcome, the Pro-Compliance program, as proposed in the draft ordinance that establishes it, may bring in uncertainties and questions. There are points that need improvement, including in order to avoid injustice in taxpayer classifications.

[1] According to article 4, paragraph 3, of the draft ordinance, historical for the current year up to the last four years as of the calendar year of 2016.

[2] According to the explanatory memorandum of the draft ordinance.

[3] One-time fine of 50% applicable over the value of the debt subject to declaration offset that is simply not approved.