Many little strokes fell great oaks

The collection of default interest over VAT tax by the State of São Paulo

Are we finally able to prevent the State of São Paulo from collecting exorbitant default interest rates on VAT (ICMS) tax debts?

For almost a decade, the São Paulo State abused its power by charging exorbitant default interest on VAT (ICMS) Tax debts. Since 2009, with the enactment of Law No. 13,918, default interest has been charged at a rate of 0.13% per day (approximately 47% per year), far above the Selic rate (Bank’s overnight rate in Brazil) that was less than 11% in that year.

The taxpayers rebelled themselves. There were numerous administrative and judicial claims to dismiss the collection of such interest.  In February 2013, São Paulo Court of Appeals analyzed the matter and ruled unconstitutional the collection of default interest rates above the Selic rate.

Only four years later, in July 2017, the State of São Paulo enacted Law No. 16,497 recognizing that, as of November of 2017, the default interest rate over VAT tax debts should be the Selic rate.  The law, however, prevented taxpayers from getting refunds for the overpayments made before that date.

The discussion reached the Supreme Court (STF) that, last month, finally ruled (with binding effect to lower courts) that Selic rate is the limit!

Was this the end of discussions? Well, not quite.

Surprisingly, STF decisions can only be followed by authorities of the São Paulo State upon a declaration in a Direct Action of Unconstitutionality (ADIn), a binding precedent, or when its effects are suspended by the Senate.

Thus, it is necessary to wait for a position from the State of São Paulo and the State General Attorney authorizing the end of discussions in order to apply the STF decision and prevent the collection of interest higher than the Selic.

Until then, for those who need to pay their debts subject to the interest provided in the legislation of 2009, they still need to file a lawsuit requesting that STF decision be applicable. At the administrative level, it is not possible to rule out abusive interest. But in the judicial level, taxpayer´s victory is now certain.

Taxpayer should stand up! After all, “many little strokes fell great oaks”. The State of São Paulo, sooner or later, will solve this issue and end this discussion with only one possible ending: interests must observe the limits set by the Selic rate.

By Tatiana Del Giudice Cappa Chiaradia, partner at Candido Martins Advogados
tributario@candidomartins.com.br

Leaving quietly: the redemption of shares as an exit event

When we talk about equity investments, one of the subjects that has been keeping the investors and managers up at night is the exit strategy.

And with reason. When successful, the exit strategies ensure investors, managers and other stakeholders, the earnings from years of strategy work and resources allocation, directly influencing the success of the investment.

When the investment meets the expectations, it is common for investors to exit through an equity sale to another player in the market or even through an IPO, achieving good returns to their investments.

The question remains: what if the invested companies do not met expectations and/or there are difficulties in executing exit strategies like the above? For some investors, it is a risk worth taking and the premium received for some investments compensate the lack of liquidity of others. For others, especially those in search for returns closer to a fixed income and less interested in big exit premiums, the lack of liquidity may be a big problem. To these investors, in a market with no liquidity, the redemption of shares may be a good alternative.

The redemption of shares is nothing more than the payment, by the invested company itself, of the value of its shares held by one or more shareholders to permanently cancel them, using for payment part of the company’s results or its capital reserve.

However, for the redemption of shares to be a quick and efficient exit strategy, it needs to be thoroughly studied by the investor. We can highlight some precautions that must be taken from the beginning of the investment, such as the setup of a specific class of shares, the formation of capital reserve in the contributions made throughout the investment period, the rules to calculate the redemption price – which can take many forms such as discounted cash flow and book value – and the procedures for implementing the redemption.

It is important to note that since the redemption of shares depends on the invested company’s cash and accounting results, it may be that the situation of the company does not allow the redemption to be made at the time the investor intends to leave the company. In addition, as a rule, redemption is a company’s option and not an obligation. When the company is contractually bound by the redemption, it becomes an obligation and, most likely, a liability on its financial statements.

Therefore, the redemption is an exit possibility, but contains uncertainties. Thus, it is important to verify the structure of each transaction to assess the viability of this alternative and tax aspects for the company and the investor.

By Raphael Pereira Arantes Pires, associate at Candido Martins Advogados
societario@candidomartins.com.br