Originally published in the August 22 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
A recently published decision by Brazil’s Taxpayers’ Council, an administrative tax court of appeal within the Ministry of Finance, could have serious consequences for taxpayers with unsecured federal tax liabilities that distribute dividends to their shareholders. The court has confirmed that those taxpayers could be subject to a controversial 50 percent penalty.
The decision was rendered in Appeal 105-16.490 on May 23, 2007, by the 5th Chamber of the 1st Taxpayers’ Council, but was not published in Brazil’s official gazette until April 10, 2008.
The summary of the decision reads as follows:
Statutory Penalty — The 50 percent penalty applies over the amount distributed to equity holders when [the taxpayer has] unsecured tax debts pending with the federal government, its agencies, or the social security system, limited to half of the [relevant] debt (Article 32 of Law No. 4,357/1964, as amended by Law No. 11,081/2004). Penalties are not subject to the rules of prohibition of confiscation applicable to taxes, because they are not tax (Article 3 of the National Tax Code).
The penalty is not new. It was originally created by Law 4,357/1964, but was never applied, and some argue that it was tacitly revoked several years ago. However, to the surprise of practitioners and taxpayers, the penalty was “recreated” by article 17 of Law 11,051/2004.
Failure to comply with article 17 of Law 11,051/2004 results in penalties equal to 50 percent of the amounts paid or distributed (for the company), and equal to 50 percent of the amount received (for the recipients), up to 50 percent of the unsecured tax liability.
The decision by the Taxpayers’ Council rejects one of the taxpayers’ main arguments: that the penalty violates the constitutional prohibition against confiscation of property without due process. In its summary (no full text was available as of press time), the decision makes clear that the prohibition against confiscation applies only to taxes, and not to tax-related penalties.
The decision is the first on the subject and shows that both the court and the Federal Revenue Department are willing to apply the penalty to force taxpayers to secure their tax liabilities via pledges of assets, cash deposits, and other collateral admissible under Brazilian law.
It is important to note that courts may take a different approach, freeing taxpayers from the penalty. A precedent, although temporary, was established by the 26th Federal Court of São Paulo in 2005 in favor of the São Paulo chapter of the Brazilian Bar Association. In that case, the Bar Association argued that the original provision of Law 4,357/1964 was revoked by Brazil’s Constitution in 1988, and also that the penalty is disproportionately high, immoral, and unreasonable and violates taxpayers’ constitutional right to property and the constitutional prohibition against confiscation of property without due process.
Nevertheless, taxpayers with unsecured debts should be very careful when distributing profits to equity holders to avoid the unnecessary assessment of the 50 percent penalty.
David Roberto R. Soares da Silva