Brazil: Tax Fraud: Former Government Securities

Last Updated: 1 November 2017
Article by Viseu Advogados

Escrito Por Fernanda de Oliveira Biagione

 There has long been identified increases in the consistent practice of offering older titles of government debt as a way to supposedly ward off tax debts of taxpayers, mainly before the Brazilian Federal Revenue Department.

The strategy used in such cases is to offer such securities as a means of suspension of payment of tax credits - or even its extinction, by way of compensation, for example - and also its presentation as security at tax enforcement offices.

In this sense it is important to clarify, initially, what are the government bonds issued by the National Treasury which are supported by national legislation, notably by Law n. 10.179/2001, see: (i) National Treasury Bills - LTN, (ii) Financial Treasury Bills - LTF and, (iii) National Treasury Notes - NTN. Interestingly, these securities are not issued in the form of a letter, but blockedurally (electronically). This is, incidentally, one of the most common ways for identifying fraud involving government securities, since normally the titles offered are made in the form of letters.

Despite the prediction brought by art. 6 of Law n. 10.179/2001, authorizing the use of public securities for purposes of paying federal taxes, since they are in the condition of "due", the Treasury said that it no longer occur with bonds issued in accordance with Law n. 10.179/2001, since they would have been collected at maturity. The only exception in this case would be that provided for in art. 105 of Law no. 4.504/1964, which deals with the possible use of agrarian debt bonds for the payment of ITR.

After such premises, it is important to stick to the titles that are most commonly subject to fraud. This relationship was established by the Federal Revenue Department and, in face of the growing number of identified cases, was the subject of an explanatory booklet released by the Attorney General of National Treasury - PGFN on the Internet [1], in order to prevent tax fraud.

The first one is the National Treasury Bill - LTN, which was issued in the 70's and had its maturity date set for no more than 365 days. Typically, these letters are offered accompanied by false documents called "TRR" and "RAM" screen in the form of letter, in series purple, green, blue, etc, which in fact never existed.

Fraudsters also often provide "policies of domestic debt." These are securities issued by the mid-twentieth century by the Brazilian government whose purpose was to raise funds to finance the necessary actions to the country. We can mention as examples the policies of public debt bonds, war bonds, economic modernization bonds, financial recovery bonds and domestic debt securities federally founded in 1956. Interestingly, these titles are not worth since 1969.

Another very common form of fraud is identified as offering policies issued in French Francs, which were the result of agreements between the governments of Brazil and France and the National Association of Securities Holders of France. Such titles also lost its validity after 1951, the end of convocations held to its payment.

Moreover, it is also common to offer other securities from government debt from foreign debt of the country, which are due to borrowings in private financial institutions or through releases of securities in the international market. These documents were issued in their foreign currency and abroad in the form of a letter, especially in England, France and the United States. It shall be noted that for this very reason, that is, because they were issued and redeemed abroad, they are considered foreign rights for this purpose, being subjected, therefore, the foreign jurisdiction.

Among the arguments used as a way to "legitimize" the validity of such securities, fraudsters often cite the existence of credit arising from enforcement action in respect of the external public debt filed against the Union. Likewise, it is also common to mention the application of monetary correction during the redemption of the securities in significant values, based on false technical opinions or opinions devoid of any credibility. It is argued further the possibility of applying to these older securities the same treatment given to securities issued in accordance with Law no. 10.179/2001 and justify the fraud in the absurd possibility of conversion of foreign government bonds in Treasury notes.

These arguments are often demonstrated in presentations that resemble more advertisements of dubious character, full of coarse grammatical errors and technical errors in the sphere of law, as, for example, the mention of legal/constitutional principles inapplicable to the case - or even nonexistent - use of consistent strategy in the application of procedural requirements impossible or highly risky, etc.

It is important to clarify that the only form of suspension of the tax credit under Internal Revenue Code - CTN is the deposit of the full amount due and in kind. That's what advocates art. 151, II, of CTN and Summary no. 112 of STJ.

Moreover, for the purpose of extinguishing tax credit, offering a public debt title is not an extinctive modality of tax credit, as embodied in the payment in kind, not being, however, the case envisaged in art. 156, item XI of CTN, since that article provides for "real property, in the form and conditions established by law", which is not the case.

Likewise, specifically at the federal level, it is important to emphasize that there is impediment expressed in the law to allow the use of government bonds for the purpose of offsetting tax debts, according to the provisions of art. 74, § 12, item "c", of Law n. 9.430/96, which regulates compensation of taxes under the Brazilian Federal Revenue Department. Note that, under the relevant law, compensation will be considered unreported in this case.

However, it is imperative to clarify that the public offering of securities for the purpose of offsetting tax credits is not entirely prohibited in other spheres of power, it is, however, essential that there is a law that authorizes the possibility of extinction of the tax credit. This was the view repeatedly expressed by the Supreme Justice Court, relying on interpretation based on art. 170 of CTN, as seen, for example, in the judgment of the EDcl in AgRg in REsp 1.238.247/RS[2]. As an example, this affirmative legal provision happened exactly with the issue of State Decree no. 43.443/2012 of Rio de Janeiro, in which that state has allowed the extinction of tax credits through state compensation with judicial writ issued by it.

Therefore, we recommend that taxpayers stay tuned for those species of fraud which, once identified, implies consequences not only in the sphere of taxation, such as the possibility of imposition of aggravated penalty, forfeiture of benefits, litigation conviction in bad faith, etc, but also in criminal accountability for crimes against the tax.

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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