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Brazilian Tax Authority proposes rules for corporate taxpayer classification

Following the cooperative compliance efforts of the Organisation for Economic Co-operation and Development, the Brazilian Tax Authority has proposed an ordinance that would classify corporate taxpayers as A, B or C classes, with A taxpayers being more compliant with tax filing and payment obligations and C taxpayers being less compliant.

To determine the classification, the tax authorities would analyze the capacity of the taxpayer to:

  • Maintain its tax cadaster (i.e., taxpayer register) to ensure it is updated and aligns with the taxpayer’s activities
  • Present truthful returns
  • File returns timely
  • Pay taxes timely and accurately

Per the proposed text, the classification would take into consideration the taxpayer’s behavior during the past five years (same as the legal statute of limitations in Brazil) and would be reported to the taxpayer once a year through the mailing system within the electronic Support Virtual Center (e-CAC). Taxpayers would then have 30 days to file a request to have their classifications revised. The delegate responsible for the tax authorities’ unit that covers the region in which the taxpayer is domiciled would determine whether the taxpayer should be reclassified, and the delegate’s decision would be final (i.e., no appeals would be available).

The proposed ordinance would allow the tax authorities to amend A and B classifications if any indication exists that the taxpayers might have committed fraud, tax evasion or other crimes against the tax system. Likewise, the proposed ordinance would allow the tax authorities to revise the classification of B and C taxpayers if the taxpayers manage to regularize the situations that led to non-compliance and a lower classification.

Some behaviors that would lead the tax authorities to classify taxpayers as B or C include:

  • Changes in the taxpayer’s behavior after an upward revision of classification
  • Requests for refund or offsetting of compensation when the tax authorities disagree with the existence of the credit
  • Outstanding tax assessments
  • Recurrent corrections to tax returns
  • Breaches of agreements related to tax amnesties and other programs

The tax authorities also would conduct an analysis of a taxpayer’s returns related to customs clearance.

Corporate taxpayers classified as A taxpayers would receive the following benefits:

  • An indication of non-compliance before an audit begins to allow the taxpayer to resolve the situation before penalties are assessed
  • Priority in being served by or obtaining appointments with the tax authorities
  • A certificate indicating the corporation’s tax compliance

Conversely, corporate taxpayers classified as C taxpayers would be subject to:

  • Inclusion in the Special Auditing Regime (Regime Especial de Fiscalizacao – REF)
  • Measures to compel compliance, such as suspending tax regimes or requiring taxpayers to list all of their assets to show that they have enough to cover their tax exposures

Given the complexity of Brazil’s tax legislation, the amount of controversy and litigation in Brazil, and the complexity of Brazil’s lengthy, detailed tax returns and ancillary filing obligations (all electronic, allowing for immediate cross-checking), it is possible that the majority of Brazilian corporate taxpayers would have difficulty obtaining A or B ratings. Accordingly, the proposed ordinance should preferably allow taxpayers to appeal revision determinations and have provisions for suspending the tax debt when it is the subject of litigation so that it does not affect the classification. Also, benefits for those that manage to get an A classification seem to be too modest, given the difficulties in obtaining such a classification.

For individuals, the proposed ordinance would encourage compliance by adding text in the tax return receipt that potential compliance breaches exist.

Taxpayers may submit comments on the proposed ordinance until 31 October 2018. If the proposed ordinance is adopted, its provisions would be effective as from the date of publication in the Official Gazette.

EYG no. 011637-18Gbl

Download this Tax Alert as a PDF file.

 

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