The first panel of Brazil's Supreme Court (STF) has delivered an important decision that limits the imposition of penalties on taxpayers. The Court held that a penalty that exceeds the value of the tax due is unconstitutional. In Extraordinary Application 833106/GO, in which the state of Goiás appealed a decision that favored taxpayer Akaembu Transportes e Comercio Ltda., the STF held that a penalty that exceeds the value of the assessed tax violates the constitutional tax principle of non-confiscation established in article 150, Item IV, of the Brazilian Constitution. The STF's decision was published in the official gazette on December 12, 2014.It is not unusual for federal, state, and local governments to impose penalties of up to 300 percent of the tax due, particularly in cases of perceived fraud. At the federal level, the standard penalty is 75 percent of the tax due. However, the penalty doubles (to 150 percent) in cases of tax evasion, fraud, or collusion. In extreme situations, the 75 percent and 150 percent penalties may be increased to 112.5 percent and 225 percent, respectively, if the taxpayer fails to provide to the tax administration requested clarification, files, and access to electronic data.

At the state level, penalties for noncompliance with reporting and ancillary obligations can be calculated based on the transaction's value, which may exceed many times the tax due.

The STF decision is a milestone that may help to change the existing rules. The bad news is that the decision is binding only on the parties involved. Nonetheless, it will certainly be used by taxpayers as an important precedent to challenge tax penalties that exceed the amount of the tax due.

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