Suspended Taxes Deductible in Some Cases, Brazil's Revenue Department Says


Suspended Taxes Deductible in Some Cases, Brazil's Revenue Department Says


Originally published in the June 2 edition of World Tax Daily (Copyrights Tax Analysts)

Brazil’s Federal Revenue Department (FRD) has published a private letter ruling (PLR) that provides for the deductibility of suspended taxes in certain circumstances. PLR 29/2010,1 which was published in the official gazette on May 12, deviates from the FRD’s traditional position on the subject and may give taxpayers an opportunity to deduct unpaid taxes in certain circumstances.
It says that taxes that have been suspended by means of a court order granted in an action other than a writ of mandamus, or that are subject to a payment schedule, are fully deductible for purposes of the corporate income tax and the 9 percent social contribution on net income (CSL).

Under Brazil’s tax laws, the general rule is that under the accrual method of accounting, taxes and social contributions are fully deductible for tax purposes as they are incurred by the taxpayer, regardless of their due date. An exception to this general rule was created in 1995, when Law 8,981/1995 established the nondeductibility of taxes that have been suspended under three situations described in article 151 of the 1966 National Tax Code, as follows:

  • there has been a cash deposit of the disputed amount before a court of law or during an administrative proceeding;
  • the case at issue is under administrative protest or appeal; or
  • an injunction has been granted by a court of law in a writ of mandamus action.

In any of the aforementioned situations, the government’s ability to initiate collection procedures is suspended until the dispute is resolved before the competent court — administrative or judicial. Because of that suspension, the National Congress acknowledged that it was not fair to allow a tax deduction while the taxpayer is disputing the tax. The restrictions on the tax deduction of suspended taxes have been backed up by administrative and court precedents.
However, in 2001 Complementary Law 104/2001 amended article 151 of the National Tax Code to include two new situations in which collection procedures may be suspended: when an injunction is granted in a lawsuit other than a writ of mandamus, and when taxes are due under a payment schedule (in which unpaid taxes are paid in monthly installments during a certain period of time).

PLR 29/2010 clarifies that because the two new situations added by Complementary Law 104/2001 are not expressly listed in Law 8,981/1995 as situations preventing tax deductibility, the taxes suspended thereunder should be deductible for purposes of corporate income tax and CSL.

The FRD cited article 108, paragraph 1 of the 1966 National Tax Code, which states that the use of analogy cannot result in the levy of a tax not expressly permitted by a law. PLR 29/2010 takes the position that the rejection of a tax deduction for situations not expressly included by Law 8,981/1995 would amount to the use of analogy to increase the taxpayer’s corporate income tax and CSL (because the lack of a deduction would increase the taxable income and, as a consequence, the tax due). Because article 108, paragraph 1 prohibits the use of analogy for that purpose, the deduction of taxes suspended by any of the two suspension situations created by Law 104/2010 should be accepted, the FDR stated.

This PLR is particularly relevant when one considers the 2009 special tax payment schedule that allows taxpayers to pay unpaid federal taxes in installments lasting as long as 180 months. By adopting the position stated in PLR 29/2010, taxpayers may be able to deduct the unpaid taxes included in the 2009 special tax payment schedule. That may be a great opportunity to generate a tax deduction that until now was not available.
However, caution is advised and taxpayers should first consult with their accountants, lawyers, and tax advisors to determine the risks and opportunities because PLR 29/2010 is binding only on the filing taxpayer and does not immediately affect other taxpayers in similar situations. Also, other superintendences of the FRD (there are 10 in all) may not accept this position; the General Coordination Office for the Tax System, which has jurisdiction over the superintendences, may also issue a ruling revoking PLR 29/2010.

Footnote

1 Issued by the Superintendence of the FRD for the 4th Region, which has jurisdiction over four northeastern states: Alagoas, Paraíba, Pernambuco, and Rio Grande do Norte.

David Roberto R. Soares da Silva