Originally published in the June 1 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s official gazette of May 28 published Law 11,941/09, which creates an unprecedented new tax payment schedule that allows taxpayers to pay unpaid federal taxes over a period of up to 15 years.
In addition to the long term for payment, the new payment schedule grants favorable discounts for interest and penalties due on those unpaid tax debts. Law 11,941 is the result of the conversion into law of Provisional Measure 449 of December 4, 2008, and confirms most of the items included in the provisional measure.
The new payment schedule differs from the payment schedule originally created by Provisional Measure 449 for small tax debts, which has been confirmed by Law 11,941.
Congress proposed the new tax schedule during Provisional Measure 449’s legislative approval process.
- Tax Payment Schedule
Law 11,941 creates a new tax payment schedule for any unpaid federal tax debts due by November 30, 2008, regardless of whether collection procedures have begun. It applies to both individual and corporate taxpayers.
The payment schedule is divided into categories depending on the number of installments desired by the taxpayer. Different discounts apply for each category, as follows:
lump sum payment: discount of 100 percent for penalties (delay and assessed), 45 percent for interest, and 100 percent for Federal Revenue Attorney General’s Office (Procuradoria Gerald a Fazenda Nacional, or PGFN) fees for debts under PGFN collection procedures; 2 to 30 installments: discount of 90 percent for penalties (delay and assessed), 40 percent for interest, and 100 percent for PGFN fees; 31 to 60 installments: discount of 80 percent for penalties (delay and assessed), 35 percent for interest, and 100 percent for PGFN fees; 61 to 120 installments: discount of 70 percent for penalties (delay and assessed), 30 percent for interest, and 100 percent for PGFN fees; or 121 to 180 installments: discount of 60 percent for penalties (delay and assessed), 25 percent for interest, and 100 percent for PGFN fees.
- Payment Schedules for Specific Tax Debts
Law 11,941 extends the same discounts and payment schedules to the following tax debts:
all federal excise tax (IPI) debts, regardless of amount, due by or before May 31, 2008, originating from undue IPI credits from acquisitions of raw material, intermediate products, and packaging materials taxed at zero IPI rate or not subject to IPI;
balances from three previous payment schedules: REFIS, created by Law 9,964/2000, PAES, created by Law 10,684/2003, and PAEX, created by Provisional Measure 303/2006;
unpaid social security debts, which according to article 38 of Law 8,212/91 could be paid in up to 60 monthly installments; and COFINS (Contribution for the Financing of Social Security) tax debts due by professional service companies (this tax was ruled constitutional by the Supreme Court on September 17, 2008).
For the two first categories of debts listed above (IPI and previous payment schedules, except PAEX), the original version of Provisional Measure 449 granted other, albeit less favorable, discounts. Provisional Measure 449 did not make balances from the PAEX payment schedule eligible for the measure’s new payment schedule.
Provisional Measure 449 allowed a maximum number of 60 installments and smaller discounts for interest and penalties than the new law provides. The payment conditions created by Law 11,941/09 are unquestionably more favorable.
- Election
Taxpayers are entitled to elect which tax debts they will include in the new payment schedule. The election must be filed by the last business day of the sixth month following the publication of Law 11,941/09, or November 30, 2009.
There is no need to provide guarantees of any kind unless the guarantees have already been offered in the course of a collection action. In this case, the guarantee will be kept as is.
Further regulations will be issued within 60 days by both the Federal Revenue Department and the PGFN.
- Use of Tax Losses
Paragraph 7 of article 1 of Law 11,941 is innovative in that it allows taxpayers to use tax loss carryforwards — both from income tax and the 9 percent social contribution on net income (CSL) — to pay the remaining amounts of penalties (delay and assessed) and interest under the new tax payment schedule.
This is a welcome opportunity for a taxpayer with tax loss carryforwards because usually they can only be used to offset up to 30 percent of the taxpayer’s taxable income. Law 11,941 allows the taxpayer to reduce the balance of tax loss carryforwards without the 30 percent limit.
In practical terms, that means a taxpayer can use its tax loss carryforwards to pay for all interest and payments levied on unpaid tax debts and can include only the principal in the payment schedule. Law 11,941 specifies that the amount of tax loss carryforwards eligible for payment of penalties and interest is equivalent to the corporate income tax and CSL rates (25 percent and 9 percent, respectively) applied over the existing balance of tax loss carryforwards.
Although further regulations on this issue are required, the law appears to describe a situation such as the following. Assume a taxpayer with eligible tax debts of $2 million, of which $1 million is principal, $200,000 is assessed penalties, and $800,000 is a few years’ interest. Also, assume that the taxpayer has $3 million in tax loss carryforwards.
If the taxpayer elects for the 180-month installment payment, the $2 million debt first would be reduced to $1.68 million as follows:
1 million of principal (no discount according to Law 11,941);
80,000 of penalties ($200,000 reduced by the 60 percent discount); and
600,000 of interest ($800,000 reduced by the 25 percent discount).
If the taxpayer applies 25 percent (income tax rate) and 9 percent (CSL tax rate) over its $3 million balance of tax loss carryforwards, it gets $1.02 million, $680,000 of which could be used to pay the remainder of penalties and interest due under the new tax payment schedule (that is, after the schedule’s discounts).
If so, the taxpayer would end up with a tax debt of $1 million that could be paid in 15 years.
- Interest Rate
Congress originally conceived that the new tax payment schedule would have an interest rate that was the greater of: the long-term interest rate, currently 6.25 percent per year; or 60 percent of the SELIC interest rate (used on unpaid federal tax debts), currently 10.25 percent per year.
At the time of promulgation of Law 11,941 President Luiz Inácio Lula da Silva vetoed such an interest rate, saying that the law already granted very favorable conditions for taxpayers to pay their unpaid tax liabilities.
Therefore, payments under the new tax schedule will be calculated according to the SELIC rate.
- Other Provisions
Regarding the new tax payment schedule, Law 11,941 also provides the following provisions:
The payment schedule of a corporate taxpayer may be paid, partially or totally, by its individual owners. This could be useful for small companies.
No installment can be smaller than BRL 100 for corporate taxpayers or BRL 50 for individuals.
Three unpaid installments will disqualify the taxpayer from the schedule.
Taxpayers that have elected for the payment schedule originally created by Provisional Measure 449 may apply to switch (with all applicable discounts) to the new payment schedule by November 30.
During the payment term, the taxpayer may elect to amortize, partially or totally, the unpaid balance of the payment schedule with discounts. Amortization cannot be smaller than 12 installments.
Tax debts under judicial litigation secured by cash deposits are eligible for the new tax payment schedule with all applicable discounts. In that case, the taxpayer must formally request that the cash deposit be converted into a payment. Any excess of the cash deposit will be refunded to the taxpayer.
Many points of Law 11,941 remain unclear and require regulations for full application. The law states that the Federal Revenue Department and the PGFN will issue further regulations within 60 days.
David Roberto R. Soares da Silva