Brazil’s House Commission of Constitution and Justice is reviewing and debating Legislative Decree Project 413/2007, which introduces the tax information exchange agreement signed by Brazil and the United States in Brasilia on March 20, 2007, into Brazil’s legal system
Brazil’s House Commission of Constitution and Justice is reviewing and debating Legislative Decree Project (Projeto de Decreto Legislativo, or PDC) 413/2007, which introduces the tax information exchange agreement signed by Brazil and the United States in Brasilia on March 20, 2007, into Brazil’s legal system. (For the agreement, see Doc 2007-8185 [PDF] or 2007 WTD 63-10 .)
What should be a mere formal review and approval of an international agreement is becoming a sovereignty issue at Brazil’s House of Representatives, which may lead to the full rejection of the agreement by the Brazilian Congress. Some lawmakers argue that the agreement is unconstitutional and illegal.
PDC 413/2007 was submitted by the executive branch to the House of Representatives on December 20, 2007. On June 18, 2008, the House Commission of Finance and Taxation approved the PDC with no major debate or questions. However, as soon as PDC 413/2007 reached the House Commission of Constitution and Justice, questions arose regarding the constitutionality of the agreement and the impact to Brazilian companies.
Some lawmakers are unsure of the practical consequences that the agreement may bring to Brazilian companies with business in the United States. They fear that the IRS may use (or abuse) Brazilian tax information as a basis to audit Brazilian businesses and transactions in the United States with adverse consequences.
The agreement provides for the exchange of information of a series of taxes existing in both countries. For the United States, the taxes include federal income taxes, federal taxes on self-employment income, federal estate and gift taxes, and federal excise taxes.
In Brazil, the list of covered taxes is longer and includes:
- individual and corporate income tax (IRPF and IRPJ, respectively);
- industrialized products tax (federal excise tax, or IPI);
- financial transactions tax (IOF);
rural property tax (ITR); - Program for Social Integration contribution (P.I.S.);
- social contribution for the financing of the social security (COFINS); and
- Contribution for the Financing of Social Security (CSL).
According to the agreement, confidential tax information could be transferred between tax authorities of both countries. The agreement even provides that if tax agents so desire, they may ask the other country to investigate taxpayers in that other country. Under the agreement, tax authorities of one country would be able to verify documents, registers, and other relevant data regarding a tax examination, as well as obtain original and unedited books, papers, and records, and other tangible property, including information held by banks, other financial institutions, and any person, including nominees and trustees, acting in an agency or fiduciary capacity.
The range of activities covered by the TIEA also concerns Brazilian lawmakers.
On July 8 lawmaker Regis de Oliveira delivered an opinion to the House Commission to reject the agreement based on its unconstitutionality, illegality, and poor wording.
Oliveira’s first argument to reject the agreement is its formal unconstitutionality. He argued that the difference between an agreement and a treaty is the importance of the relevant issues at stake. Less relevant issues can be regulated by an agreement, while those with essential matters to the contracting state must be regulated by a treaty. He also argued that the Brazil-U.S. TIEA is not a mere agreement of minor importance, but a true treaty with major implications to Brazil’s legal system. Thus, it should have been signed by President Luiz Inácio Lula da Silva under article 84, Item VIII of the Brazilian Federal Constitution. However, Brazilian Federal Revenue Department Chief Commissioner Jorge Rachid signed the agreement, and therefore it would be formally unconstitutional.
Oliveira also concluded that the agreement is materially unconstitutional because it violates article 37, Item XXII of the constitution. That article provides that the tax administration is an activity essential to the functioning of the Brazilian state and can be exercised only by local public servants (Brazilian tax agents). But because the agreement allows several tax activities to be carried out by U.S. tax agents on Brazilian soil, the agreement would violate article 37 and would be materially unconstitutional.
Oliveira also points out that the agreement allows the exchange of tax information regardless of whether the requesting party does not need that information for its own tax purposes. This is clear in Article V(2) of the agreement, which reads: “The requested party shall take all relevant information gathering measures to provide the requesting party with the information requested, notwithstanding that the requested party may not, at that time, need such information for its own tax purposes.”
For Regis, this provision is unreasonable because under Brazilian laws, a request for information should be allowed only in special, exceptional circumstances, not as a general rule. He also questioned the agreement provision (Article V, 3(b)) that deals with placing an individual under oath.
According to Oliveira, that provision is illegal, because in Brazil it would be required only for an individual under a judicial procedure, not a tax administrative procedure.
Based on those arguments, Oliveira proposed the rejection of PDC 413/2007and, therefore, the rejection of the agreement with the United States. Oliveira’s opinion will now be subject to debate and vote in the House Commission of Constitution and Justice. Thereafter, it will be subject to vote by the full House of Representatives. If rejected by the House of Representatives, the agreement may never become applicable and effective in Brazil.