BEPS in the Brazilian Supreme Court

The OECD’s BEPS initiative (base erosion and profit shifting), a hot issue throughout the world, has just made it to the Brazilian Supreme Court. Last week, the Brazilian Socialist Party filed a direct action for the declaration of unconstitutionality (ADI No. 5.366 ), in which it aims at overruling Provisional President Decree No. 685, July 21st, 2015 (PPD). It is not exactly an international law dispute, though. The Brazilian Federal Government tackled Action 12 of the BEPS' work by passing domestic legislation requiring taxpayers to disclose their tax planning arrangements to the Federal Revenue Service. No decision has yet been reached - a perhaps fortuitous state of affairs (as the OECD is due to publish a report next month), if not for the fact that Brazilian taxpayers are expected to comply with the new rule precisely by September 30th.

Some formalistic issues of this case may overshadow the wider discussion such mandatory report entails. Claimant argues that the PPD lacks urgency and that it rules on criminal and criminal procedure law. Both of those are supposed to be constraints for this kind of legislation, under article 62 of the Brazilian Constitution. On the one hand, it is argued that no proper reasoning is given to justify why the new legislation could not have gone through the normal legislative procedure. That, it is said, would have been more suitable, considering its purpose of creating a new standard of relationship between taxpayers and tax authorities, something Congress might take its time to mull over. On the other hand, a case is made that the PPD affects the rule of culpability set forth by Federal Law No 8.317, December 27th, 1990. This statute punishes the act of suppressing, reducing, omitting information or falsely stating facts for the purpose of not paying taxes; but, in doing so, is governed by the constitutional principle of presumption of innocence.

Quite a number of substantial reasons are also given. The scheme is thought to infringe the principles of legal stability, free enterprise, presumption of innocence, due process, strict tax legality and prohibition of confiscation, all of which are frequently construed by Supreme Court in many tax disputes.

A word, however, on the scope of PPD. According to the OECD, there is no uniformity among countries as to which taxes the legislation is meant to cover. In the U.K, for instance, companies are to report arrangements with implications in the income tax, corporation tax, capital gains tax, national insurance contributions, stamp duty land tax and inheritance tax. The U.S has focused on federal taxes, specially the income tax and the estate and gift tax. Ireland follows the U.K more closely, but adds on the VAT. In Portugal, the VAT is also included, as well as the immovable property tax and the immovable property tax. Canada stands alone in going with just the income tax.

Since the PPD was enacted only by the Federal Government, the concerned taxes are: customs duty, income tax (and its correspondent social contribution on net income), industrialized products tax (VAT-like), tax on financial transactions and rural real estate tax.