The Brazilian Internal Revenue Service ("IRS") released on 03/05/2015 a report with the outcome of federal tax inspections carried out during the year of 2014 and also a summary of the plan prepared by the tax authorities with respect to inspections to be held by the IRS during the year of 2015.
Based on the information presented by the IRS in this report, we comment below the inspection results of 2014 and also what taxpayers and foreign investors can expect from the federal tax inspections to be carried out during 2015.
The Results of 2014
Regarding the results of inspections carried out in 2014, it is noteworthy that the tax assessments related to taxes administered by the IRS resulted in the second largest amount in the history of the country, in the total of approximately BRL 150,000,000,000.00. This amount was only surpassed in 2013, when the federal authorities generated about BRL 190,000,000,000.00 in assessments.
In parallel to the large amount involved in tax assessment notices issued during the year of 2014, the report released by the federal tax authorities reveals that the "debt maintenance index" has increased significantly over the last five years, due to the voluntary payment of assessed debts or due to the unfavorable outcome of such tax assessments in definitive decisions rendered by the Administrative Council for Tax Appeals ("CARF").
This high index of unfavorable outcome of tax assessments also shows that the IRS's strategy applied during 2014 has generated very positive results due to the fact that IRS has been investing in technical training of its tax auditors, forming specialized groups to inspect specific subjects, redefining the way that the taxpayers have to file their ancillary obligations in order to enable an efficient electronic inspection and also intensifying supervision over the so-called major taxpayers. In addition, these inspections of 2014 generated an indirect financial result, due to the voluntary payment of taxes for the taxpayers in order to avoid punitive fines.
Regarding the tax assessments issued in 2014, the IRS's report shows that the industry was the group of taxpayers that received over one third of the tax assessment notices, generating a volume of approximately BRL 58,000,000,000.00 in debts, whereas, in relation to natural persons, the majority of debts was focused on managers or owners of business companies, which received about BRL 2,100,000,000.00 in assessments.
With respect to the audited subjects, tax planning considered abusive and for the sole purpose of tax economy corresponds to a significant number of the IRS tax inspections in 2014. In fact, the issue regarding such tax planning has generated great repercussions at administrative courts as in many cases corporate structures were disregarded by tax authorities, although they were in principle in compliance with the requirements of Brazilian law. In addition, we highlight that there is no express provision forbidding corporate reorganizations with the purpose of taxes economy. Therefore, such assessments have been creating, in our opinion, a scenario of legal uncertainty with regard to corporate structures adopted by companies and, ultimately, tending to discourage foreign investors to adopt certain acquisitions structure for new investments in Brazil.
In short, we can say that the 2014 results make it clear that the Brazilian IRS has improved its audit procedures and invested in training for tax auditors. On the other hand, the outcomes of part of the administrative proceedings generated by federal assessments sometimes reveal a scenario of legal uncertainty which could in the long term discourage foreign investors in Brazil, affecting the national economy.
What to expect for 2015
Inspections to be performed by federal tax authorities are planned about a year before the inspection procedures take place. This means that the IRS has already defined who will be the majority of the taxpayers (natural persons and legal entities) to be audited during 2015.
According to the plan recently released, 9,478 legal entities and 5,073 natural persons will be audited during this year. And despite being significantly low, this group of taxpayers to be inspected is responsible for over 65% of the federal revenue collected annually by the Brazilian IRS. The IRS inspection plan for 2015 clearly shows, in our view, an extension of the strategy that generated the impressive results obtained in 2014.
Among the operations and situations previously selected by the Brazilian IRS for the inspection of taxpayers in 2015 - and that, therefore, will probably generate the most significant tax assessments this year – the following should be highlighted:
- amortization of goodwill, without complying with the legal requirements for such amortization, creating thereby an undue reduction of the tax basis of the Corporate Income Taxes;
- the existence of a volume of financial transactions of certain taxpayers that is incompatible with the revenue reported to the federal tax authorities by financial institutions and/or by State and Municipal tax authorities, suggesting revenue omissions, which are taxable by PIS and COFINS taxes and also by the Corporate Income Taxes;
- tax treatment related to investments abroad and capital gains abroad; and
- distribution of profits in excess of the permitted limit for exemption of income tax.
With the fiscal actions scheduled for 2015, the IRS expects to recover about 158,000,000,000.00 related to federal taxes. Such huge amount indicates that there is still a big number of infractions regarding the federal legislation, which can occur by a misunderstanding of the law and/or the tax ancillary obligations. Thus, the positive consequence of these IRS measures is that the taxpayers in general will probably become more knowledgeable about the tax issues.
On the other hand, such huge amount also suggests that IRS has been adopting a very restrict and, in our opinion, arguably interpretation of the legislation, which tends to discourage the taxpayers (especially new investors) to adopt some structures that could be more favorable from a tax point of view. Regarding this aspect, we understand that taxpayers should analyze carefully and previously all potential tax implications on significant transactions that they intend to do, in order to face potential tax assessment.
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.