Brazil: Debit Balance Offsetting: From A Benefit To Companies To A Thorn In Their Side

The tax offsetting, currently regulated by Federal Revenue's Normative Instruction (IN/RFB) no. 1 300/12, is a tool extremely effective for companies computing or accruing credits subject to offsetting.

However, lately, it has been increasingly frequent to observe rulings that do not ratify companies' set-offs on the argument that "the credit informed in the Declaration of Set-off ("DCOMP") is not sufficient to prove the settlement of the payable Corporate Income Tax ("IRPJ") and Social Contribution on Net Income ("CSLL") and the computed debit balance."

This has been occurring because, by a coincidence, companies computing and paying Income Tax based on the taxable-income method have been increasingly resorting to offsetting to settle monthly payments of the IRPJ and CSLL - based on estimates thereof - and have been computing debit balances in the end of the calendar year.

The non-ratification of set-offs associated with estimates of the IRPJ and CSLL has been generating, in a ripple effect, the non-acknowledgment of the debit balances determined in the year end, and that situation has been causing a multitude of proceedings.

Since we are in the front of two different decisions, but having a same substantiation (non-acknowledgment of the credit right used to offset the estimated IRPJ or CSLL), we consider it fully possible to apply to these cases articles 103 and 105 of the Code of Civil Procedure, which provide for the principle of connection in civil proceedings, in supplement to art. 47 of the Internal Regulation of the Administrative Council of Tax Appeals ("CARF"), with the purpose of preventing contradictory decisions.

Furthermore, that leads to a double collection of the same taxable event ("bis in idem"), given that, undoubtedly, the final result of the offsetting related to IRPJ and CSLL estimates will not cause any negative impact on the computed debit balance amount, because either the decision favorable to the taxpayer will determine the cancellation of the estimates via offsetting (validation of the credit), or the decision unfavorable to the taxpayer will determine that the latter shall settle the debts (estimates) indicated therein for offsetting, but still not offset, what will confirm, as a consequence, the ground for the respective credit right.

This is so true that the own Brazilian Federal Revenue, by means of its Office for Coordination of Taxes on Income, Property and Financial Operations ("COSIT"), has enacted Private Letter Ruling no.18, of 10/13/2006, according to which, in case of non-ratification of the DCOMP related to the monthly estimated debit, the fact that the offsetting is under administrative examination and has not been definitively judged yet does not affect the credit related to the debit balance computed in the end of the base period related to that estimate.

The Federal Revenue's position corroborates the Judiciary Branch's position about the maintenance of the status of "cancellation" of the debits offset until the definitive judgment on the respective tax administrative proceeding, as set forth in Law no. 9 430/96, article 74, paragraphs 2, 9, 10 and 11.

That procedure, however, has not been adopted by the Judgment Offices (Delegacias de Julgamento) (administrative trial courts), which continue upholding the Federal Revenue's rulings, despite any arguments offered by taxpayers in their defense (statement of dissatisfaction). That has been contributing to an increase in the number of proceedings at the CARF and an uncertainty among taxpayers, which are being required to abide by defective judgments and/or conflicting decisions concerning a same credit.

Hence, for an appropriate judgment on the administrative proceedings, that is what is expected from the Judgment Offices and the CARF itself, we believe that, for similar cases, the taxpayers should insist on the binding application of the provision in Private Letter Ruling ("COSIT") no. 18, seeking to enable set-offs resulting from debit balances or, at least, upon the gathering of the respective proceedings, to prevent the risk of conflicting decisions and legal uncertainty among taxpayers.

Edimara Iansen Wieczorek and Marco Favini are, respectively, a partner and an attorney at Demarest Advogados.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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