STF decisions: firm as a nail in sand?

The year has just begun, and taxpayers are already anxious about the cases pending judgment by the Brazilian Supreme Court (STF). And the curious thing is that the views of taxpayers who turn to the Supreme Court are being monitored by the Finance Ministry, since many of these lawsuits can have significant impacts on the country’s financial health.

How will be the “power” or “interference” of STF’s decision in tax matters in 2020? These decisions will directly influence the Union’s budget.

A long-awaited decision is one that discusses the possibility of levying PIS/COFINS tax (tax on revenue) on the revenues of financial institutions that result from its corporate purpose (operating revenues), which are dissociated from the simple “sale of goods and rendering of services” .

After so many comings and goings in relation to the definition of basis of the PIS / COFINS calculation during the last twenty years, at the end of 2019, CARF (Brazil’s administrative fiscal court) demanded the inclusion of operating revenues in the concept of the turnover of financial institutions.

It turns out that, contrary to what was included in CARF’s decision, this issue has not yet had a final position from the STF. It is expected that the matter will be ruled this year as a general repercussion decision, especially in relation to these operating revenues of financial institutions (i.e., judgment of RE No. 609,096).

CARF’s decision represents yet another uncertainty for the taxpayer. Could CARF assume this position that has not yet been defined by the STF?

It is necessary to wait for the STF’s judgment to have something concrete as to whether financial revenues include the basis calculation of the PIS / COFINS due by financial institutions.

Also, there is a huge expectation as to the temporal definition that can be brought in this judgment. Will the decision be used only in cases before 2014 or also include future situations? 2020 promises more doubts. We must wait!

By Maria Paula Carvalho Molinar, lawyer at Candido Martins Advogados

A new hope…

One of the firm’s initiatives is to encourage lawyers to write articles for the monthly newsletter. The subject is free, but it needs to be something current and that stimulates the reader. In my last article entitled “End Game”, I left a provocation that some measure needs to be taken so that the private equity market is not wiped out. At the end of last year, specifically December 17, 2019, the Brazilian Tax authorities (“RFB”) published Interpretative Declaratory Act No. 5. In summary, the RFB should look only at the direct shareholders of the vehicles used by the private equity funds (the “FIPs”), without escalating the corporate structure (except, of course, in cases of wilful intent, fraud or simulation). At first, this measure gives a certain degree of comfort that the RFB will observe only the direct shareholder to verify that it is not in a jurisdiction with a favoured taxation or with a participation greater than 40% (equity or revenue) for the purpose of taking advantage of the tax benefit of the zero rate of income tax on the capital gains (in the case of foreign investors). However, this measure has not yet been tested.

That is the reason for naming the article “A New Hope”, which refers to the first (or fourth) film in the “Star Wars” saga.

Are we witnessing a change in the perception of the RFB in relation to FIPs, reflecting a greater legal security (and thus stability)?

I would like to say yes. But what we are witnessing is the opposite. What counts most are deeds and not words. The tax administrative courts’s (“CARF”) latest decisions reflect a change in caselaw on a number of issues. I highlight here the most controversial and which directly affect the appetite for investment in the country: amortization of goodwill, incentive plans for administrators (SOPs) and, finally, the use of capital reduction for tax optimization. In our weekly internal technical meetings, I always ask my partner Alamy, “can we go ahead with this structure?”, For example, goodwill amortization or capital reduction. The answer always used to be yes, since its provided for in the legislation, i.e., it has legal protection (of course, always with the caveats of risk, etc.). Today, my partner replies (to paraphrase) “while the representatives of the RFB in the CARF continue to legislate, legal uncertainty will prevail”. He continues to say… “nevertheless, we have the expertise and confidence to suggest a defensible structure to the client”.

What is the purpose of the RFB releasing an interpretative declaratory act (we can ignore for now any discussions on the definition of the name of the act – “declaratory and interpretive”) if in its decisions they ignore all the consolidated caselaw of the last years and the legislation itself? How will the RFB behave in relation to the FIPs with this act? What about the tax assessment notices that have already been drawn up against investors and FIP managers alleging breach of the 40% tax benefit rule or the failure to identify the final beneficiary? What about the recent decisions that affect sellers in capital reductions?

I go back to the title of my article … “a new hope” (when rereading the article I was dubious as to whether I should in fact change the title to “the empire strikes back”). However, I maintain my conviction that this legal uncertainty created by the RFB can be attacked head on by several means, which I include some below:

  • The assessment of alternatives and risks involved in an investment, including, without limitation, how to bring funds from abroad, the vehicles to be used and the quality of the assets to be invested; and
  • Monitoring of legislative and jurisprudential changes.

Investors (buyers) and sellers seek solutions to their issues. In principle, they do not consider the size of the law firm, the field in which the law firm operates or the positioning of the law firm in the market. They need professionals they can trust and who will provide solutions to their problems. For this reason, having professionals who understand all these issues in depth and are prepared to propose adequate solutions is of paramount importance. We are facing a scenario of renewed hope in which we need to surround ourselves with good professionals who have elements to counter the legal insecurity that currently haunts us.

By Henrique Martins, partner at Candido Martins Advogados