Originally published in the February 11 edition of World Tax Daily (Copyrights Tax Analysts)
The gap between the interest rate that financial institutions pay on deposits and the higher rate they charge for loans is having a curious effect on corporate taxpayers. Many Brazilian companies are putting off tax payments, allowing interest to accrue, rather than taking out high-interest loans from banks to pay their tax obligations.
Unpaid (and unassessed) federal taxes are subject to penalties of 0.33 percent per day, up to 20 percent, plus interest calculated according to the government-monitored SELIC interest rate, which is currently 12.75 percent per year.
Although the SELIC rate fell 1 percentage point in January, the reduction has not been reflected in banks’ interest rate spreads. According to studies by the Central Bank, Brazilian banks in January 2008 charged interest rates that were 18.23 percentage points above the SELIC rate for cash flow loans. In December 2008 the gap soared to 26.5 percentage points on average.
As a result, some corporate taxpayers with cash flow problems have opted to finance their business by delaying their periodic tax payments. The delays sometimes are accompanied by a lawsuit challenging or disputing a given tax before a federal court of law.
Depending on the tax and the specific circumstances, taxpayers may seek an injunction to suspend tax payments. The most common legal actions involve social security contributions on certain payments made to employees; the 9 percent CSL (social contribution on net income) on export income; the deduction of excess state VAT (ICMS) credits for income tax purposes; and P.I.S. and COFINS tax credits on some expenses.
With an injunction, a taxpayer is able to suspend those tax payments while the injunction is in effect. If the injunction is revoked, the taxpayer has 30 days to pay the tax due with interest at the SELIC rate but does not have to pay a penalty. After 30 days, the tax is due with a delay penalty of 20 percent, but the taxpayer also runs the risk of being assessed, in which case the penalty goes up to 75 percent of the unpaid tax.
If litigation or an injunction isn’t an option, the more aggressive taxpayers simply decide not to pay their federal taxes for a while, hoping they will not be assessed before they settle their tax liability. Even in those cases, the financial costs (apart from the risk of being assessed) may make the risk worthwhile. In annual terms, an unpaid tax can cost a company up to 32.75 percent (the 12.75 percent SELIC interest rate and a 20 percent delay penalty), while the interest on a cash flow loan can reach 39.25 percent (the 12.75 percent SELIC rate and the additional 26.5 percentage points in the banks’ rate spread).
The nonpayment of a tax may be too risky, however, because the Federal Revenue Department has the resources to cross-check taxpayers’ information. The filing of monthly or quarterly tax returns by taxpayers or their clients gives tax authorities enough information to assess the taxpayer for unpaid taxes. In that event, any possible advantage of delaying a tax payment could result in a concrete disadvantage, because a 75 percent penalty will apply.
David Roberto R. Soares da Silva