Tax Disputes Guide in Brazil

In Brazil, the main reasons that trigger a tax audit are:

• inconsistencies between different tax returns submitted by taxpayers regarding the same event
• sudden changes in tax practices that result in a rapid reduction of the tax burden
• use of practices targeted by tax authorities due to their favourable tax effects, such as profit-sharing plans and tax incentives.

To mitigate these risks, it is important for taxpayers to report their tax operations consistently, with information provided by third parties, and to carefully assess the legal validity of any change in tax practices while monitoring developments in case law to align practices with prevailing guidance.

Brazilian tax authorities may review taxable events from the past 5 years to identify underpayments. In cases involving fraud or where no tax payment was made, this period may extend to 6 years. The statute of limitations is suspended while a dispute is pending in the administrative sphere. Additionally, once a tax assessment becomes final at the administrative level, authorities have 5 years to pursue judicial enforcement of the tax debt.

Certain events may suspend the statute of limitations in court, such as preliminary injunctions or judicial deposits, among others. Once these periods have elapsed, the tax liability is definitively extinguished.

Brazilian tax authorities have broad audit powers and may examine goods, records, files and documents belonging to taxpayers and third parties, including notaries, banks, brokerage firms and others. They are also authorised to conduct inspections, gather witness statements, monitor taxpayers’ assets and lift bank secrecy under specific circumstances. Raids may only be carried out with specific and reasoned judicial authorisation, and seizures may only occur following the filing of a specific lawsuit.

In Brazil, taxpayers may provide clarifications during a tax audit and submit defences and appeals, through administrative channels, against tax assessments. If the administrative challenge is unsuccessful, the taxpayer may seek judicial review. Taxpayers are required to disclose their own information, and refusal to do so may result in increased penalties. The duty to provide information does not extend to facts about which the informant is legally bound to maintain confidentiality due to their role, activity or profession.

In Brazil, tax penalties generally range from 20-100% of the amount due in cases without fraud. If fraud is involved, fines may reach up to 225% of the unpaid tax. For omissions or errors in tax returns, penalties can reach up to 20% of the reported amounts. Tax debts are subject to Brazil’s benchmark interest rate (SELIC). Criminal consequences may arise when non-payment is associated with fraud, sham transactions or the submission of false information. Penalties may be challenged and, in some cases, negotiated through tax settlement procedures, taking into account the taxpayer’s payment capacity, the likelihood of recovery by the authorities and other relevant circumstances.

In Brazil, tax assessments may be challenged by taxpayers through both administrative and judicial proceedings.

In the administrative sphere, taxpayers may file a defence at the first level, an appeal for review by a collegiate panel and, in cases involving conflicting precedents, a final special appeal. A taxpayer’s victory at the administrative level cannot be reviewed in court at the initiative of the tax authorities.

Judicially, tax disputes may be addressed through lawsuits filed by taxpayers, which are reviewed at both trial and appellate levels, and may reach the superior courts when constitutional issues, violations of federal law or significant case law divergences are involved.

In Brazil, taxpayers are not required to pay the tax while the dispute is pending in the administrative phase. In the judicial phase, payment may be deferred by providing guarantees – such as a judicial deposit or a surety bond – or by obtaining a preliminary injunction that suspends collection while the case is ongoing.

In Brazil, tax matters are handled by specialised courts at the administrative level. In the judicial system, although there are no courts exclusively dedicated to tax issues, there are specialised trial courts and judicial panels that address such cases. Both forums provide formal appeal mechanisms for tax disputes, which generally follow three levels of review: trial, appellate and a final stage before special or superior courts. On average, each stage takes 2-3 years to be resolved.

• Increase in taxes on foreign exchange transactions by executive decree.
• Revocation of tax incentives granted to the events sector before the legally established expiration date.
• Taxation of royalty remittances and other cross-border payments.
• Taxation of state-level tax incentives by federal corporate taxes.
• Limitation of the binding effects of res judicata in tax matters.
• Taxation of the mandatory vacation premium.
• Taxation of transfers of goods between branches of the same legal entity.
• Use of tax credits on business inputs.
• Exclusion of certain taxes from the calculation bases of revenue-based contributions.
• Legal debates over the maximum threshold for tax penalties.

The key to succeeding in Brazilian tax litigation involves proactively and creatively gathering evidence to demonstrate a company’s tax compliance in an engaging manner, along with continuous monitoring of case law and the identification of supporting precedents.