Dear Mr. Secretary, - JOTA Info

Sindifisco Nacional - Sindicato Nacional dos Auditores Fiscais da Receita Federal do Brasil

SDS Conjunto Baracat, 1º andar - Asa Sul, Brasília-DF - Cep: 70392-900. Fone (61) 3218 5200 / 5201. E-mail: [email protected]

https://www.sindifisconacional.org.br

To

Mr. David Lewis

Executive Secretary, FATF Secretariat

2, rue André Pascal

75016 Paris Cedex 16

France

Dear Mr. Secretary,

SINDIFISCO NACIONAL (National Union of Federal Revenue of Brazil Tax Auditors), entity

representing Brazilian revenue service Tax Auditors, hereby presents information and expresses its

concern regarding the effects of recent legislative change that suppressed the “quality vote” rule

in the Administrative Council of Tax Appeals (Conselho Administrativo de Recursos Fiscais - CARF),

the federal-level Brazilian board of tax appeals, which may henceforth influence the performance

of competent federal authorities to assert and consolidate relevant tax legal facts, and

compromise the fight against tax evasion, corruption, money laundering, financing of terrorism

and of other criminal activities, among others.

A – The Federative Republic of Brazil commitment to the highest of standards in the fight against

corruption, tax crimes and the financing of terrorism and of criminal organizations

Internationally, the Federative Republic of Brazil has been constantly expressing its

commitment to and sharing its efforts in fighting corruption, tax crimes and the financing of

terrorism and of criminal organizations.

In its relations with the Organisation for Economic Co-operation and Development (OECD),

widening since the 1990s, Brazil is considered the OECD’s most engaged Key Partner and a source

of valuable policy experience. Brazilian federal administrative bodies, namely the Federal Revenue

of Brazil (RFB, tax authority), the Administrative Council for Economic Defence (CADE, competition

regulator), and the Federal Court of Auditors (TCU, court of auditors - budget) set fine examples of

vivid interaction with the Organisation.




Furthermore, Brazil take part in a number of forums, committees and working groups

within the OECD sphere, in matters that encompass tax administration, aggressive tax planning,

the BEPS package1, among many others, notwithstanding the number of agreements signed by

Brazil in related subjects, denoting the significance of its commitment to the objectives and

themes addressed in the OECD. And, in May 2017, at the OECD’s Ministerial Council Meeting, the

Federative Republic of Brazil expressed its intention to join the Organization, knowing that the

interactions between the OECD and Brazilian public administration bodies already are a reality.

In regard to the Financial Action Task Force (FATF), Brazil is a member of the international

group since 2000, also in a regional sense (Latin American, GAFILAT), having already been

scheduled for June and July 2021 an in loco visit in the context of mutual assessments, as well as a

plenary discussion for February 2022, highlighting several Brazilian administrative bodies and

agencies continuous efforts to combat money laundering and the financing of terrorism.

The incorporation of international norms in the Brazilian legal system, such as the United

Nations Convention against Corruption2, the Inter-American Convention Against Corruption3, the

United Nations Convention against Transnational Organized Crime (the Palermo Convention)4, and

the Convention on Combating Bribery of Foreign Public Officials in International Business

Transactions (The OECD Anti-Bribery Convention)5, attests to the aforementioned commitment to

the highest standards in the fight against corruption, and against tax and financial crimes.

Brazil specifically addresses the crime of money laundering in federal Law nº 9613, of 3

March, 1998, and subsequent amendments that also emphasised harmful acts against foreign

public administration bodies and the financing of terrorism, challenging the latter with even more

determination after federal Law nº 13260, of 16 March, 2016.

The Federal Revenue of Brazil, according to its functions as the federal-level tax authority,

acts with a daily promptness to counter those crimes, and SINDIFISCO NACIONAL, entity

representing Brazilian revenue service Tax Auditors, on behalf of this professional category, and

aligned with the utmost performance of the Brazilian tax authority and the country in its entirety,

hereby manifests its deep concern after the legislative change prompted by federal Law nº 13988,

of 14 April, 2020, as follows.

B – The Administrative Council of Tax Appeals

Body of the federal public administration, linked to the currently-named Ministry of

Economy, the Administrative Council of Tax Appeals (CARF) is the federal-level Brazilian board of

1 In G20 meetings, Brazil has also been favouring progress in themes developed within the scope of the OECD. 2 Federal Decree nº 5687, of 31 January, 2006. 3 Federal Decree nº 4410, of 7 October, 2002. 4 Federal Decree nº 5015, of 12 March, 2004. 5 Federal Decree nº 3678, of 30 November, 2000.




tax appeals6 responsible for ruling on tax demands arising from acts of competence of the Federal

Revenue of Brazil (RFB), making decisions in the administrative level about the application of

legislation regarding taxes administered by the previously mentioned RFB.

The CARF was established by Provisional Measure nº 499, of 3 December, 2008, later

converted into federal Law nº 11941, of 27 May, 2009, and implemented by the then Minister of

Economy in 15 February, 2009, by means of Ordinance nº 41, of 17 February, 2009. Another act by

the same Ministry (Ordinance nº 256, 22 July, 2009) passed the by-laws of the new administrative

body7, in force since then, considering amendments to it.

In its structure, the Sections and the Superior Chamber of CARF are composed of panels of

councillors, representatives from the fiscal administration and from the taxpayers8, each

occupying half of the seats at court, with a representative of the former serving as President, to

whom is conferred the prerogative of making use of the so-called “quality vote” (a casting vote) in

the event of a draw between the councillors (judges), thus avoiding stalemates in the decision-

making process. In these terms, federal Decree nº 70235, of 6 March, 1972, altered by the

aforementioned Law nº 11941, of 27 May, 2009, provides (free translation):

Article 25. [...] § 9o The positions of President of the Panels of the Administrative Council of Tax Appeals, of chambers, its panels and of special panels are to be occupied by councillors representing the Fiscal Administration, who, in case of a stalemate, shall have the quality vote, and the Vice-President positions, by taxpayers representatives.

Even though proceedings are carried out at the administrative level, in a process of

administrative acts review, the Administrative Council of Tax Appeals values the soundness of its

procedures, affirming guarantees of publicity and due process, as well as the adversary system and

full defence. The capacity to object decisions, taking the demands to the presence of a Superior

Chamber (CSRF) to settle conflicts and define understandings regarding tax legislation, in addition

to the ability to consolidate recurring and uniform decisions through binding precedents (of

mandatory observance), attest to CARF abidance for the precepts listed above.

It is very important to notice that, with regard to its functions, CARF assesses the legality of

administrative acts with due consideration of the interpretation of tax legislation offered by the

6 Article 25, federal Decree nº 70237/1972 (free translation). Rulings on tax and social security imposition procedures administered by the Federal Revenue of Brazil is of the competence: I - at the first level, of the Offices of Trial of the Federal Revenue Service; […] II - at the level of appeals, of the Administrative Council of Tax Appeals, body composed of a panel of judges equally from the fiscal administration and from the taxpayers, part of the structure of the Ministry of Economy, with the task to rule on ex officio and voluntary appeals of the first level, as well as appeals of a especial nature. 7 Available at: http://idg.carf.fazenda.gov.br/acesso-a-informacao/institucional/regimento-interno/ricarf-multivigente-junho-2019-v2.pdf. 8 Appointment of councillors representing the fiscal administration considers candidates nominated from a triple list, sent by the Federal Revenue of Brazil, while that of representatives of taxpayers from a triple list drafted by confederations representing economic sectors and categories and union centrals. In both cases, the selection of councillors is made based on the technical evaluation of the Committee for Monitoring, Evaluation and Selection of Directors (CSC), deciding on the aforementioned triple lists sent by the respective representation groups. The CSC is made up of the President of the Administrative Council of Tax Appeals (CARF) and representatives of the Federal Revenue of Brazil (RFB), the Attorney-General Office (PGFN), the confederations representing national economic sectors and categories, civil society, and the Brazilian Bar Association (OAB).

http://idg.carf.fazenda.gov.br/acesso-a-informacao/institucional/regimento-interno/ricarf-multivigente-junho-2019-v2.pdf

http://idg.carf.fazenda.gov.br/acesso-a-informacao/institucional/regimento-interno/ricarf-multivigente-junho-2019-v2.pdf




taxpayers - half of the body seats - without losing sight of the fact that it represents the federal

fiscal administration ruling on its own acts - therefore, implementing the administrative review of

those acts.

This is essential to understand the logic that legitimises the use of the “quality vote” as a

mechanism to overcome deadlocks in CARF decision-making process. As a body created, it is

noteworthy, for the administrative review of acts originated from the federal public administration

itself (more specifically, acts from the Federal Revenue of Brazil), it is only reasonable, including in

terms of legal certainty, that in the eventuality of an impasse the fiscal administration - again, in

the administrative level - has the disruptive vote.

It is worth to observe that taxpayer discontentment with the ruling can later on be brought

before the Judiciary, which, as a general rule, does not occur in the event of a verdict contrary to

the understanding of the federal tax administration, obliged to comply with CARF administrative

decision - the ruling is then deemed definitive. Thus, arguing the system would fail to contribute to

the reduction of tax litigation - the Judiciary being called upon to act - is certainly not justified,

since there is undoubtedly, in the administrative level, a balance in post-ruling prerogatives and

processes, especially regarding the possibility of an end to a conflict in favour of the taxpayer at

the administrative level - definitively.

In figures, according to data provided by CARF itself9, decisions are increasingly unanimous

(71.1% in 2017, 76.6% in 2018, 81.5% in 2019, 89.3% between January and February 2020), while

the use of the “quality vote” is decreasing (7.2% in 2017, 6.8% in 2018, 5.3% in 2019, 3.2%

between January and February 2020)10. In this sense, any allegation that CARF, bearing in mind its

shared seats, would abuse the “quality vote” rule unfairly harming the taxpayer should be refuted.

On the contrary: the continuous effectiveness of CARF deliberations is visible, requiring less and

less the use of this deadlock solution mechanism, not to mention that even in the event of its use

the results not necessarily translate into a decision opposing the taxpayer view.

C – Advent of Law nº 13988/2020 and ending the “quality vote”

Provisional Measure nº 899, of 16 October, 2019, essentially dealt with what is referred to

in Brazil as “tax transaction”, id est, the opening to negotiations between the federal

administration and taxpayers concerning, in general, credits that the former holds against the

latter, contemplating the public interest in solving the bottleneck caused by the growing pending

tax issues. As its name suggests, a provisional measure is valid only for a short period of time, so

Provisional Measure nº 899/2019 was converted into federal Law nº 13988, of 14 April, 2020, after

being sanctioned without vetoes by the President of the Republic.

9 Available at: http://idg.carf.fazenda.gov.br/dados-abertos/relatorios-gerenciais/2020/dados-abertos.pdf. 10 Majority decisions were: 21.7% in 2017, 16.6% in 2018, 13,3% in 2019, 7.5% between January and February 2020.

http://idg.carf.fazenda.gov.br/dados-abertos/relatorios-gerenciais/2020/dados-abertos.pdf




During the legislative process of converting the provisional measure into law, a device was

inserted and came into force with the publication of the new norm (free translation):

Article 28. Law nº 10522, of 19 July, 2002, comes into force with the addition of the following art. 19-E: “Art. 19-E. In the event of a draw in rulings regarding definition and enforcement of tax credit, the quality vote referred to by Article 25, § 9º, Decree nº 70235, of 6 March, 1972, does not apply, resolving the conflict favourably to the taxpayer.”

With it, Article 28, Law nº 13988/2020, added Article 19-E to Law nº 10522/2002, which

does reference to a provision in Decree nº 70235, of 6 March 1972, in particular to Paragraph 9 of

Article 25, already cited (free translation):

Article 25. [...] § 9o The positions of President of the Panels of the Administrative Council of Tax Appeals, of chambers, its panels and of special panels are to be occupied by councillors representing the Fiscal Administration, who, in case of a stalemate, shall have the quality vote, and the Vice-President positions, by taxpayers representatives.

Thus, with the new article 19-E, of Law nº 10522/2002, introduced by the reform at issue

(the advent of Law nº 13988/2020, with its Article 28), not only the “quality vote” rule does not

apply in the event of a stalemate in CARF decision-making process anymore, as new draws shall all

be resolved in favour of the taxpayer. In other words, a complete turnaround in the logic

governing the process of administrative review of acts by the fiscal administration itself.

D – Bringing the matter before the Brazilian Supreme Court

The gravity of the situation caused its arrival before the Federal Supreme Court (STF), the

Brazilian supreme court, to be inevitable.

In April, the Attorney-General of the Republic (PGR) filed a lawsuit (ADI 639911) before the

STF questioning the constitutionality of said Article 28, Law nº 13988/2020, which added Article

19-E to Law nº 10522/2020 and brought to an end the “quality vote” under CARF. In his

allegations, the PGR stands for the formal unconstitutionality of the provision due to

inconsistencies in the legislative process of conversion of Provisional Measure nº 899/2019 into

the now Law nº 13988/2020. More precisely, by virtue of what is known in Brazil as “legislative

smuggling”, a practice that consists in inserting provisions that do not have thematic relevance

with the original rule, infiltrating the legal system with rules that may cause changes that are not

properly discussed in the legislative sphere. This practice has been repudiated since May 2016 by

11 The acronym “ADI”, in a free translation, stands for “Direct Unconstitutionality Action”, lawsuit applicable in the Brazilian legal system to directly call upon the Federal Supreme Court to assess the constitutionality or unconstitutionality of a certain legal rule.




the supreme court itself12 - by attributing “ex nunc” effects to its decision, STF ruled that as of the

date of its judgment, such practice was deemed unacceptable, and contrary to the 1988

Constitution of the Federative Republic of Brazil (CF), emphasising that the contested law was

introduced in the Brazilian legal system afterwards (2020).

Law nº 13988/2020, in essence, concerns the extrajudicial negotiation of existing and

consolidated tax credits aiming at the resolution of disputes between the Union (the federal

Government) and indebted taxpayers, nothing to do with the aforementioned Article 28, which

disciplines procedural aspects of judgments of administrative demands to fix and enforce tax

credits, specifically with regard to the tiebreaker rule in administrative decisions.

Additionally, the Brazilian Constitution entitles the President of the Republic to regulate

the structuring and functioning of federal public administration bodies, whether by proposing law

or issuing unilateral acts, such as decrees (Articles 61, Paragraph 1, “e”, and 84, VI, CF), therefore

including the Administrative Council of Tax Appeals in this spectrum.

Despite that, the adding of Article 28 to the conversion into law project13 that resulted in

the enactment of Law nº 13988/2020 was made by parliamentary amendment - an instrument

guaranteed to Brazilian members of Congress to improve the text targeted for legislative

deliberation, commonly used in budgetary matters -, thus disrespecting the constitutionally

entitlement of the President of the Republic to act in this regard. In perspective, the PGR highlights

that, although the procedure for converting a provisional measure into law has its peculiarities, it

cannot be an escape route from the ordinary legislative process.

Moreover, the PGR affirms the legitimacy (constitutional compatibility) of the “quality

vote” in CARF procedures, drawing parallels with the Administrative Court for Economic Defence14

- body of the Administrative Council for Economic Defence (CADE) - and with STF by-laws (Article

13, IX, CF), pointing that the supreme court has already ruled on other provisions allowing use of

the “quality vote” rule in specific situations, asserting then its legitimacy, minding that, as a

procedural option, the mechanism (Article 25, Paragraph 9, Decree nº 70235/1972) is in affinity

with the Brazilian Constitution, as well as a legitimate, proportional and reasonable criterion for

resolving impasse in judgment procedures under CARF.

It is important to notice that the PGR mentions, in his petition, the document forwarded by

SINDIFISCO NACIONAL to the Attorney-General's Office (PGR), stressing the risks of lessening the

fiscal administration ability to present its understandings on tax matters even in the administrative

(not judicial) domain, the serious and manifest unconstitutionality of the provision, the stimulus

that the legislative change might concede to harmful tax planning and to the abandoning of

spontaneous payment of taxes, as well as refusing to accept the idea that the CARF councillors

representing the fiscal administration would inevitably vote en bloc. In numbers, based on data

12 Ruling on ADI 5127/DF. 13 Conversion into Law Project 2/2020. 14 Responsible for ruling on offenses to the economic order.




from previous years, the fear of automatic (federal) revenue losses beyond USD 11 billion

annually.

Further ahead, the PGR requested the concession of urgency (preventive) measure in order

to halt the effects of Article 28, Law nº 13988/2020, highlighting that the abolition of CARF’s

“quality vote” rule would harm its performance markedly in the face of major tax planning

schemes, making big private interest prevail over public in the administrative level, and potentially

leading the federal revenue to suffer heavy erosion, especially in demanding Covid-19 times.

Apart from ADI 6399, two extra lawsuits in similar terms have been filed before the

Brazilian supreme court: ADI 6403, by the Brazilian Socialist Party (PSB), and ADI 6415, by the

National Association of Tax Auditors of the Federal Revenue of Brazil (ANFIP). The latter adds to its

arguments the violation of Article 62, Paragraph 9, CF, for the new provision (Article 28, Law nº

13988/2020) was not submitted to assessment by a mixed commission of members of Congress

(representatives and senators), competent to issue an opinion on the proposal - the text of the

amendment that resulted in the contested rule -, a legislative procedural rule that should have

been complied with.

In all three of them (ADI 6399, ADI 6403 and ADI 6415), although illustrating several

inconsistencies with the Brazilian Constitution, judge-rapporteur Marco Aurélio Mello opted to

bring forth his decision only when the court’s plenary delivers its ruling on merits, therefore

rejecting requests for preventive measures to halt the effects of Article 28, Law nº 13988/2020.

There’s yet no time frame set for the trial.

E – A systemic hazard

Since April 2020, SINDIFISCO NACIONAL has expressed its concern about the consequences

of abolishing the “quality vote” rule within the scope of the Administrative Council of Tax Appeals

(CARF).

Preceding the entry into force of Law nº 13988, on 14 April, 2020, the entity had already

addressed the General Secretariat of the Presidency of the Republic, requesting a veto on the

provision (Article 28, Law nº 13988/2020) which came to alter the voting dynamics at the

conclusion of rulings made under CARF in the event of a draw by revoking the “quality vote” rule.

Brazilian State bodies were unanimous on a veto recommendation. The Attorney-General of the

Republic (PGR), the Justice Minister, the Federal Revenue of Brazil (RFB) and the Attorney-General

Office (PGFN), all pointed out to the President of the Republic the far-reaching consequences

resulting from such legal innovation. The then Minister of Justice, Sérgio Moro, stressed concrete

examples of tax assessment notices - related to Operation Car Wash - which would have been




annulled had the new norm been in effect15. Notwithstanding these manifestations, Law nº

13988/2020 was sanctioned without vetoes.

Its astonishment in front of the legislative change has several reasons, as follows,

conferring itself the task of stressing that, in reality, the legal reform does not lend itself, even if

mistakenly, to taxpayers in general, but rather to a specific group of persons and companies,

mainly those with superior economic capacity, and sometimes involving cases of aggressive tax

planning, tax evasion, money laundering, among other criminal activities. Truly, criticism made for

the purposes of abolishing the “quality vote” rule usually is centred in misinterpretations and in

the reference of a model already abandoned worldwide, that is, of shared structure, aggravated

by the fact that taxpayers' representatives are appointed by business confederations, the latter

which evidently have an interest in resolving disputes under CARF’s competence.

Tiebreaker mechanism adopted since its inception, the “quality vote” in CARF ruling

procedure was never designed to favour the fiscal administration16. It is recalled that a triumph of

the taxpayer serves as a definitive ruling vis-à-vis the fiscal administration, which cannot take the

matter for review to the Brazilian Judiciary; on the other hand, in the event of a defeat, the

taxpayer has always guaranteed the right to call upon the Judiciary to examine the administrative

final decision.

And more: the “quality vote” rule is aligned with the general attribute of presumption of

legitimacy of administrative acts. Evidently, it is precisely in administrative review - basis of CARF’s

functions - that these administrative acts (as are those from the Federal Revenue of Brazil) are re-

examined, pondering about illegalities relative to the act itself or its interpretation as did the fiscal

administration. In a way, it is the last opportunity given to the public administration to externalise

its vox regarding relevant legal facts in tax matters, which could be compromised by presuming

error by the tax administration whenever a stalemate occurs. Then the reason Article 28, Law nº

13988/2020, caused an absolute distortion in the decision logic within CARF.

The Administrative Council of Tax Appeals is a body of the federal public administration,

and its decisions represent the understandings of the State with regard to the legality of

administrative acts originating from the same State - acts that have, it is repeated, presumption of

legitimacy. And they, once again, undergo administrative review. Despite that, in the current

scenario of inapplicability of the “quality vote” mechanism, if - and this is alarming - the final

decisions on administrative review, when a draw takes place, result from a “presumption of error”

in favour of the taxpayer, the administrative jurisprudence itself (id est, the legal interpretation of

the State on legal facts of tax relevance) shall become based on false “presumptions”,

compromising not only the res judicata but future deliberations on similar demands, thereby

consolidating interpretations that will prevent new readings, potentially leading to omission over

evidences of criminal behaviour, both in tax and criminal fields.

15 Some examples are presented in items F.1 and F.2, as well as are CARF’s rulings in full attached to this document. 16 Data already mentioned (http://idg.carf.fazenda.gov.br/dados-abertos/relatorios-gerenciais/2020/dados-abertos.pdf) indicates that in the first two months of 2020, around 40% of times the “quality vote” was used, it favoured the taxpayer.

http://idg.carf.fazenda.gov.br/dados-abertos/relatorios-gerenciais/2020/dados-abertos.pdf




Regarding the unconstitutionality of Article 28, of Law nº 13.988/2020, SINDIFISCO

NACIONAL has constantly stated its incompatibility with the Brazilian Lex Mater. Disregard for the

provisional measure thematic by the amendment that inserted the provision in the legislative

process of conversion into law of Provisional Measure nº 899/2019, as well as the indifference to

the competence of the President of the Republic to regulate the structuring and functioning of

federal public administration, justified the aforementioned communication to the Attorney-

General's Office, preceding the filing, by the latter, of the lawsuit before the Federal Supreme

Court (ADI 6399).

Of major relevance is the fact that, in 16 April, 2020, 144 (a hundred and forty-four)

councillors and specialists representing the fiscal administration in CARF signed a manifest17

against the legislative change that revoked the applicability of the “quality vote” rule in the

decision-making process within the administration body. They contest the constitutionality of the

legislative process that lead to the conversion of the provisional measure into law, for both formal

and material reasons, declaring their worry about impacts the measure in federal revenue, to the

stimulus to avoid compliance with tax obligations, and to the violation of public interest. They also

cite that taxpayers are already raising the question whether the new norm should affect past

rulings, a clear offense against any notion of legal certainty. Disregard to the presumption of

legitimacy of administrative acts - which are submitted to review by CARF - would lead, under the

new system, to a takeover of tax administrative process by private interests, a scenario without

precedent in the world. After all, as explained above, this legislative change runs contrary to the

efforts of developed countries, which see aggressive tax planning, especially transnational ones, as

the biggest challenge for tax revenue and tax justice. In addition, this change does not affect all

taxpayers equally, since low-value cases will no longer have access to the second instance of

judgment. Furthermore, it is recalled that the taxpayer has the power to take demands before the

Judiciary when not agreeing with interpretations consolidated by the administrative decision-

making body. They conclude by highlighting the risks to public finances, mainly due to large

taxpayers, reaffirming their discontent with the abolishment of the “quality vote”, while hoping

for the measure to be reversed.

Members of Congress have also manifested their disapproval to the new system. Senators

Álvaro Dias (Podemos-PR), Marcos do Val (Podemos-ES) e Eduardo Girão (Podemos-CE) are among

those who publicly opposed it, worrying about potential consequences of ending the “quality

vote” rule, particularly attentive to public finances, impunity and distortion of the system in its

entirety. The same political party (Podemos) had its request to join ADI 6403 as amicus curiae

accepted by judge-rapporteur Marco Aurélio Mello, lawsuit which was - as cited - filed by the

Brazilian Socialist Party (PSB).

The risk of falling revenues and of damage to public reserves, especially in emergency

times of a global pandemic, are alarming. One should bear in mind that many stalemates in the

context of the Administrative Council of Tax Appeals occur when large values are at the discussion

17 Available at: https://www.conjur.com.br/dl/fim-voto-qualidade-carf-ira-reduzir.pdf.

https://www.conjur.com.br/dl/fim-voto-qualidade-carf-ira-reduzir.pdf




table and cover precisely the cases involving the most sophisticated aggressive tax plans and the

finest structured harmful practices.

Still, the long-term effects within the scope of CARF decision-making process may be even

more perverse: relative to criminal prosecution and on the very core of the Federal Revenue of

Brazil.

E.1 – Criminal Prosecution from tax matters

In carrying out their duties, the Tax Auditors of the Federal Revenue of Brazil may

encounter evidence of criminal behaviour - covering crimes such as tax evasion, corruption,

money laundering, financing of terrorism and other criminal organizations, smuggling and

embezzlement, administrative improbity, among others. On these occasions, the Tax Auditor

formulates what is called a “Tax Representation for Criminal Purposes” (RFFP)18, addressed

directly and administratively to the Federal Public Attorney Office (MPF), kicking-off the criminal

prosecution of suspicious activities. The purpose for this communication is quite simple: only

Public Attorney Offices (federal19 and state-level), Federal Police, and state judicial polices

(civilians) have “police power” in criminal matters, i.e., tasked with investigating criminal

behaviour and bringing it before the Judiciary.

Even in the case of legal entities, the RFFP also serves as an instrument to indicate the

possible involvement of natural persons, related to these companies, in behaviours deemed

criminal. As the rule is for the proof of intent in criminal practice, it is up to the MPF to

demonstrate it for the continuation of criminal prosecution against such persons. In any case, tax

representation for criminal purposes is essential in communicating to the competent body to

assess doubtful conduct, which otherwise would possibly not even be noticed, notably in cases of

organized crime (individuals and companies).

With the advent of Law nº 13988 - and its Article 28 -, on 14 April, 2020, the reversal in the

voting system logic when facing draws within CARF decision-making process brings even more

concern to the fact that, according to this board of appeals procedure rules, cases that contain

circumstances indicative of crime, object of tax representation for criminal purposes, have priority

in processing and judgment20. This means that administrative disputes that include indications of

criminal practices will be appreciated even more rapidly and their results may prove beneficial to

offenders simply by the occurrence of a stalemate in the voting phase, concealing, therefore,

crimes that might have been perpetrated.

Even though CARF is not entitled to analyse tax representations for criminal purposes per

se, its interpretation in tax terms affects possible criminal consequences - the notion that the

18 Currently regulated by RFB Ordinance nº 1750, of 12 November, 2018. 19 The PGR is part of the Federal Public Attorney Office. 20 Article 2, Paragraph 1, III, CARF Ordinance nº 57, of 4 April, 2016.




accessory (criminal) follows the principal (tax) -, impairing many criminal prosecutions from birth.

In fact, the RFFP will not even be forwarded to the MPF, which, therefore, will never be made

aware of elements of evidence of crime collected during the course of tax inspection. In this sense,

the extinction of the “quality vote” rule and the reversal of the decision logic in the event of draws

within CARF may lead the latter to resolve impasses automatically in favour of the private interest

despite as administrative review of acts originating from the federal public administration itself.

And worse: the enforcement of new understandings can cause a reinterpretation of rules

and activities in such a way that evidence of criminal tax and financial practices - detected by the

Tax Auditors of the Federal Revenue of Brazil - never reach the Federal Public Attorney Office for

analysis and further processing. This shall strongly impact Brazil’s capacity to face crimes such as

tax evasion, corruption, money laundering, among many others.

E.2 – Undermining Federal Revenue of Brazil efforts in the fight against corruption, tax crimes

and the financing of terrorism and of criminal organizations

SINFISCO NACIONAL hereby vehemently expresses its concern about the grave

consequences to the optimal performance of the Federal Revenue of Brazil (RFB) of the repeal of

the “quality vote” rule and the reversal of the decision-making logic within CARF scope when

facing draws, as brought by the aforementioned Article 28, of Law nº 13988/2020.

As previously indicated, a potential takeover by big private interest, opposing the

legitimate (and democratic) protection of the public interest in the administrative review of acts

originating from the public administration itself - as is the role of CARF -, may lead to consolidation

of reinterpretative understandings on tax rules in a manner that the very performance of the Tax

Auditors of the Federal Revenue of Brazil could be severely impaired.

Apart from the depletion of tax representation for criminal purposes as an able instrument

to communicate the competent authority (MPF) to investigate and bring to Justice criminal

practices, new readings on the Brazilian legal tax system made by CARF have a devastating

potential on the performance of the Federal Revenue of Brazil - as provided by its functions - at its

roots.

Considering that CARF is a body of the federal public administration competent to resolve

tax disputes in the administrative level in terms of administrative review of acts originated from

the public administration itself, its decisions may establish new paradigms in the interpretation of

legal rules and relevant facts. Its understandings have the ability to influence procedures of the tax

authority (the RFB), since the latter will be reprogrammed adopting as valid - because, if not, it

would be in contradiction to the positioning of the tax administration itself - such understandings

emanated by the administrative ruling body (CARF).




The meaning of this to the Federal Revenue of Brazil is that all its internal planning (in a

formal sense) would be adapted to the newly consolidated standards, from procedures to detect,

assess and report tax and financial crimes within its competence, to the non-processing of certain

acts and facts that knowingly will be rejected when taken before administrative courts. All of this

based on decisions merely made by the occurrence of an impasse in decision-making process and

not by the active review (and enforcing) of the inadequacy of tax and criminal relevant acts and

facts by the public administration.

The apprehensiveness with the imminent restriction of the ability of Tax Auditors of the

Federal Revenue of Brazil to act in the face of practices harmful to public finances and criminal per

se becomes the new reality, leading to both a limitation and a significant discouragement of

procedures for investigation, processing and communication of these harmful and criminal

practices, directly affecting the capacity of the Federal Revenue of Brazil - and, consequently, of

the Federative Republic of Brazil - in its efforts to combat tax and financial crimes, including, as has

been said, tax evasion, corruption, money laundering, financing of terrorism and criminal

organizations, etc., in absolute contradiction to the principles that govern Brazilian public

administration, such as legality, morality and efficiency.

F – Hindrances to harmonization with international standards

The Organization for Economic Cooperation and Development strives to promote

international cooperation and, among its many missions, to fight tax evasion as well as tax

avoidance. OECD work emphasises the identification of trends in international tax planning and

the dissemination of this information so that governments can more quickly and effectively

address risks to the tax system.

Within the scope of the OECD, the BEPS Project (Base Erosion and Profit Shifting) brings a

set of strategies to combat tax planning that exploit loopholes in the international tax system to

artificially shift profits to locations with very low or no taxation, the so-called “tax havens”.

Following is participation in various Organization committees, working groups and forums,

the Brazil increased its level of engagement with the actions developed within the OECD in 2017,

by expressing its interest in formalising its accession process as a member of the Organization for

Economic Cooperation and Development.

However, contrary to this, the Brazilian government has just approved a new law (Law nº

13988/2020), which in its Article 28 establishes that in the event of a stalemate in administrative

ruling processes regarding the definition and enforcement of tax credit, the “quality vote” no

longer applies, automatically resolving the dispute in favour of the taxpayer.

The legislative change means, in practical terms, that the taxpayers’ legal theses on various

themes shall prevail, being most sensitive those concerning tax planning and its legitimacy.




Aggressive tax planning structures, as so viewed by the OECD - and which have always been

censored by the Administrative Council of Tax Appeals (CARF), acting on behalf of the tax

administration -, may be deemed legitimate from the perspective of taxpayers representatives at

the administrative tax-ruling body, designated to office by business confederations, who might

then have the final say in these matters. This, since several disputes anent to aggressive tax

planning were decided by the “quality vote”, many comprising categories of more privileged

taxpayers - as a rule, large companies that have specialized tax consultants.

As follows, a few examples of tax planning regarded as aggressive by CARF - which were

decided with the use of the “quality vote”, before the new norm (Law nº 13988/2020) - are

presented. The first of them concerns income tax on indirect transfers; the second is about the

treaty aimed at preventing double taxation signed by Brazil and Austria.

F.1 – Income tax on indirect transfers

The OECD, together with the International Monetary Fund (IMF), the World Bank (WBG)

and the United Nations (UN), participated in the drafting and publication of “The Taxation of

Offshore Indirect Transfers - A Toolkit”21, a document addressing the taxation of indirect transfers

between entities located abroad. It recognises that this issue is especially significant for

developing countries22, and that there is a concern about the possibility that, by indirectly

transferring equity interests, investors may avoid taxation of capital gains in the country where the

assets transferred indirectly are in fact located23.

In Brazil, the matter has been subject to assessments by the tax authority, in cases where

there is use of aggressive tax planning, through manoeuvre structures for the sole purpose of tax

avoidance in the country, particularly taxation on the capital gain on those transferred assets. It is

of remark the example of administrative proceeding nº 16682.720343/2013-25, ruled by CARF’s

Ordinary Panel in decision nº 2201-002.666 (Annex nº 1) - using the “quality vote” mechanism to

settle a stalemate in its decision-making process -, transcribed below the relevant excerpts (free

translation):

“SUBJECT: WITHHOLDING INCOME TAX IRRF

Accountable Period: 30/11/2001 to 30/12/2001

21 Available at: https://www.tax-platform.org/sites/pct/files/publications/PCT_Toolkit_The_Taxation_of_Offshore_Indirect_Transfers.pdf. 22 Executive Summary (p. 7): The tax treatment of ‘offshore indirect transfers’ (OITs) - in essence, the sale of an entity owning an asset located in one country by a resident of another - has emerged as a significant issue in many developing countries. It has been identified in IMF technical assistance work and scoping by the OECD but was not covered by the G20-OECD project on Base Erosion and Profit Shifting (BEPS). In relation to the extractive industries, OITs are also the subject of work at the UN. 23 As provided in one of the draft documents, particularly dedicated to feedbacks from 1 August to 20 October, 2017 (available at https://www.oecd.org/tax/discussion-draft-toolkit-taxation-of-offshore-indirect-transfers.pdf, p. 9): It is prompted by concerns with the possibility that by selling interests indirectly (that is, by selling entities that own assets which have risen in value, rather than the assets themselves), investors can avoid capital gains taxation in the country where those underlying assets are located.

https://www.tax-platform.org/sites/pct/files/publications/PCT_Toolkit_The_Taxation_of_Offshore_Indirect_Transfers.pdf

https://www.tax-platform.org/sites/pct/files/publications/PCT_Toolkit_The_Taxation_of_Offshore_Indirect_Transfers.pdf

https://www.oecd.org/tax/discussion-draft-toolkit-taxation-of-offshore-indirect-transfers.pdf




IRRF. CAPITAL GAIN. DISPOSAL OF GOODS AND RIGHTS SITUATED IN BRAZIL. ALIENANT SOCIETY ABROAD. INTERPOSITION OF FOREIGN ENTITIES. It is the responsibility of the acquirer, as a taxable person, to withhold and pay the Withholding Income Tax (IRRF) on the capital gain of residents or domiciled abroad in the sale of assets located in Brazil. The interposition of entities abroad must be disregarded, which by means of planned conduct simulate a situation different from the actual sale, with the capital gain being determined at the moment when the purchase or sale was definitively constituted.

[...]

EX-OFFICIO FINE. QUALIFIED. INTERPOSITION OF FOREIGN ENTITIES. BUSINESS VENTURE. SIMULATION. APPLICABILITY. A “qualified” (aggravated) fine is applied when the parties, acquirer in Brazil and seller abroad, use, in a planned manner, structured operations to simulate a situation different from reality, to avoid the taxation on Capital Gain earned by the foreign entity in the disposal of an entity based in Brazil.”

In the aforementioned ruling, CARF decided, by “quality vote”, a case that dealt with

income tax on indirect transfers (specifically over capital gain) when an economic group

restructuring plan is undertaken through the interposition of an entity resident abroad, to avoid

tax on capital gain on the (indirect) sale of an asset located in Brazil.

Although the administrative court judgment was favourable to the tax administration,

similar conclusions usually make use of the “quality vote”. In this sense, abolishing the mechanism

will most likely result in plaguing the tax administration's ability to oppose this type of tax planning

and to avoid a significant loss of tax revenue.

F.2 – Conflict between Worldwide Tax System legislation and Article 7 of “Model Tax Convention

on Income and on Capital”

Currently, a significant number of countries have rules applicable to the taxation of

controlled foreign companies (emphasis given to the “CFC Rules”), rules that have become

internationally recognized as legitimate mechanisms for the protection of countries’ domestic

taxable bases. However, the application of this type of standard has often been challenged by

taxpayers who understand that, based on the interpretation of Article 7 present in bilateral tax

treaties, as well as other provisions of the conventions, the CFC Rules would be incompatible with

the application of said provisions.




Paragraph 14 of the Commentaries on Article 7 of the “OECD Model Tax Convention on

Income and on Capital”24 explains that this provision (specifically in its Paragraph 1) aims to limit

the right of a contracting State to tax the profits of entities resident in other Contracting States.

Thus, the text clarifies that Article 7 (1) does not limit the right of a Contracting State to tax its own

residents under controlled foreign companies [CFC] provisions found in its domestic law even

though such tax imposed on these residents may be computed by reference to the part of the

profits of an enterprise that is resident of the other Contracting State that is attributable to these

residents’ participation in that enterprise25.

In the same sense, in Paragraph 81 of the Commentaries on Article 1 of the Model

Convention, there is an express understanding that, given that the CFC regulation results in a State

taxing its own residents, there would be no conflict between this rule and the conventions to

avoid double taxation - which would be (only) reinforced by the existence of Paragraph 3 of Article

1 of the Model Convention26 in a bilateral tax treaty, heeded that the same understanding can be

derived from agreements that do not have the beforementioned clause27.

Whilst this understanding is internationally observed, taxpayers’ claim that Brazilian tax

legislation - a worldwide tax system - is incompatible with Article 7 of the treaties aimed at

preventing double taxation entered into by Brazil, in an attempt to render the referred legislation

inapplicable and to make the taxation of profits earned abroad through controlled entities

domiciled in a country with which Brazil has been in force unfeasible. In many cases, the tax

assessments have only been maintained by means of the “quality vote”, which indicates that part

of the tax revenue due as a result of the application of the taxation rules on a worldwide basis will

no longer be collected since the voting system logic reversal when facing draws within CARF

decision-making process.

As an example, when the administrative court was faced with such a tax planning,

proceeding nº 16561.720035/2012-95, ruled by CARF’s Superior Chamber (CSRF) in decision nº

9101-004.763 (Annex nº 2), transcribed below the relevant excerpts (free translation):

“SUBJECT: CORPORATE INCOME TAX (IRPJ)

Calendar year: 2007, 2008

PROFITS ABROAD. TAXATION ON A WORLDWIDE BASIS. Profits, income and capital gains earned abroad will be computed in determining the actual rate of profit [Actual Profit is a tax regime within Brazilian tax law] corresponding to the balance sheet drawn up on December 31 of each year (Law nº 9.249/95, arts. 25 e 26, and MP [Provisional Measure] 2.158-35/2001, art. 74)

24 Available at https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-condensed-version-2017_mtc_cond-2017-en. 25 OCDE (2017). Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing, p. 177. 26 The provision brings forth the so-called “saving clause”, which establishes that, with the exception of some situations, the taxation of its own residents by a Contracting State should not be affected by the convention aimed at preventing double taxation. 27 OCDE (2017). Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing, p. 78.

https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-condensed-version-2017_mtc_cond-2017-en

https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-condensed-version-2017_mtc_cond-2017-en




BRAZIL-AUSTRIA TREATY. There is no incompatibility between international treaties to prevent double taxation and the application of art. 74 of Provisional Measure nº 2.158-35/2001. In the specific case, the treaty signed between Brazil and Austria does not prevent taxation at the parent company in Brazil of profits earned abroad, especially when this taxation falls on profits generated in places where there is no income / profit taxation, places that are not covered by the Brazil-Austria Treaty. The fact that the taxpayer consolidated the profits of the indirect subsidiaries into the direct subsidiary (located in Austria), by itself, does not neutralize Brazilian taxation, especially when there is no payment of tax abroad, which would constitute an evident misuse (abuse) of the treaty to prevent double taxation.”

In this particular case, the claim was that the treaty with Austria would have a proviso

similar to that of the treaty with Denmark, object of RFB Internal Consultation Solution nº

18/2013, abdicating from taxing its residents. But the fact is that the tax was levied on the profits

from Madeira (Portugal) concentrated in the Austrian parent company. And these profits were not

recognized in Austria, due to the accounting rules of the European country, and thus they would

not be subject to the dividend exemption. The taxpayer alleged that as there would be no tax to

be compensated in Brazil, the taxation of profits could not be verified here, that is, they would not

be recognized in Austria and for that reason the non-taxation was intended in Brazil. Therefore,

here is an example of tax planning which seeks “double non-taxation”. And, despite being a simple

case of application of CFC Rules (to avoid deferral or non-taxation), the decision was made only

through the “quality vote”.

Another example, ruled in part by the “quality vote” and in part by majority - which would

nowadays, due to current seats, much likely be decided in full by the “quality vote”. In proceeding

16561.720021/2016-03, goodwill amortization expenses and financial charges in tax planning was

addressed. Transcribed below relevant excerpts of decision nº 9101-004.500 (Annex nº 3) (free

translation):

“SUBJECT: CORPORATE INCOME TAX (IRPJ)

Calendar year: 2012, 2013

GOODWILL FROM ACQUISITION WITH USE OF OTHERS’ FINANCIAL RESOURCES. AMORTIZATION. NON-DEDUCTIBILITY. Tax incidence of the possibility of deducting the goodwill amortization expenses, provided for in Art. 386, of RIR/1999 [Brazilian Income Tax Regulation], requires the actual investing legal entity to participate in the ‘equity confusion’, that is, the one that actually trusted in the ‘added value’ of the investment, did future profitability studies and disbursed the amounts for the acquisition. It is not possible to benefit taxwise on goodwill if the actual investor transferred funds to a ‘vehicle company’ for the specific purpose of its application in the acquisition of equity interest in another company and if the ‘equity confusion’ arising from the merger




process does not involve the legal entity that effectively disbursed the amounts that led to the emergence of goodwill, even though the transaction that originated it was entered into between independent third parties and with effective payment of the price.

UNNECESSARY EXPENSES. FINANCIAL CHARGES ON LENDING AGREED TO FINANCE OWN ACQUISITION. As it is unnecessary to carry out transactions or operations required by the company’s activities, and for not contributing to the maintenance of its production sources, the loan contracted by the new parent entities to finance the acquisition of the legal entity does not produce deductible financial expenses when determining its taxable income.”

The tax assessment notice relative to the aforementioned proceeding dealt with the

disallowance of the taxwise benefit use of goodwill paid by a foreign (French) buyer, with the filing

of a “vehicle company” without economic substance, shifting to Brazil the deduction not only of

the goodwill amortization, but also of expenses with the financing of this acquisition. The

disallowance of expenses was decided by the “quality vote”. Since current CSRF (CARF’s Superior

Chamber) taxpayer seats admit “vehicle companies” without any economic substance, the

disallowance of goodwill amortization would most likely also be left to be decided by the same

“quality vote” mechanism.

F.3 – Repercussions at the international level

Tax consultants have sought to identify and explore interpretive opportunities, producing

increasingly sophisticated tax planning, sometimes exceeding the limits of tax planning deemed

acceptable to most OECD countries.

The Organization has already stated that fundamental changes are necessary to effectively

prevent double non-taxation, as well as cases of very low or no taxation, associated with practices

that artificially segregate the taxable profit from the activities that generate it.

Moving away from what is continually publicised by the OECD, the Brazilian government

has been bringing about changes, such as the advent of Law nº 13988/2020 (on 14 April, 2020),

the consequence of which will be favouring the taxpayer (notably large groups and multinational

enterprises) in cases similar to the ones abovementioned; and that in the administrative sphere -

of the State while reviewing its own acts -, giving vent to the prevalence of legal theses that enable

the consolidation of aggressive tax planning, the same fought at the international level, with shall

impact not only the Brazilian public funds, but also other jurisdictions - though aligned with OECD

standards -, given the uncertainty to transnational operations that measures such as the one

debated here.




G – Final remarks

In view of all the above, SINDIFISCO NACIONAL, as an entity representing the Federal

Revenue of Brazil Tax Auditors, expresses its deep concern to the Organization for Economic Co-

operation and Development (OECD) and the Financial Action Task Force (FATF), requesting

support in opposing potential effects of the legislative change - unconstitutional, that is -

prompted by Law nº 13988, of 14 April, 2020, more precisely by its Article 28, which eliminated

from the scope of the Administrative Council of Tax Appeals (CARF) the “quality vote” rule and

distorted the voting and decision system in the face of impasse, which in turn could seriously

affect detection, assessment, communication, investigation, processing and sentencing of crimes

such as tax evasion, corruption, money laundering, financing of terrorism and criminal

organizations, particularly with regard to the Federal Revenue of Brazil, and in a broad sense

regarding Brazil in its entirety, contrary to international commitments made by the Federative

Republic of Brazil to the fight against the aforementioned crimes.

Sincerely,

Kleber Cabral President - SINDIFISCO

Documents

Dear Mr. Secretary, - JOTA Info