The Tax Authority’s new superpower to file for the Taxpayer’s bankruptcy

There is no discussion that the lion, as king of the jungle, has privileges. In Brazil, the Tax authorities (who is also referred to as “Lion”) has numerous “powers” to inspect and collect taxes. And the pocket of every Brazilian feels the effects of this power on a daily basis.

Studies by the Brazilian Institute of Planning and Taxation (IBPT) demonstrate – and, as always, scare us – that in 2020, each Brazilian had to work an average of 151 days – of the total of 365 days in a year! – to be able to pay all their taxes (federal, state and municipal). Stop and think: from January 1, 2020 until May 30, 2020, the Brazilian worked for the “Lion”. All the money received in that period was only to pay taxes. This number represents 41% of the Brazilian’s usual earnings. With 2021 just beginning, Brazilians need to be prepared for what lies ahead! The scenario could be even worse!

To carry out this collection endeavor, the Tax Authorities already have numerous “powers”: electronic inspection, cross-checking, tax assessment, enrollment of the debt in federal tax liabilities to guarantee liquidity, tax enforcement with summons of the debtor to pay or guarantee the debt, preference in the collection of tax debts, with the exception of labor and collateralized debts.

Now, Law nº 14,112 / 2020, which was published at the end of 2020 and came into force at the end of the month of January, changed Laws nos. 11,101/2005 (Bankruptcy Law) and 10,522/2002 (known as CADIN Law  that provides the enrollment of debts not paid with federal agencies), brought yet another important power to the Tax authorities: the right to file for the bankruptcy of the taxpayer that is in judicial recovery that fails to meet the conditions provided in tax installments or that disposes of its assets.

This is the so-called “Superpower”, much feared by Brazilian society. The criticisms are numerous, mainly because such novelty can cause serious damage to the judicial recovery of companies, not allowing the maintenance of business activities to preserve jobs and fulfill obligations.

The Tax authorities is not a creditor like the others in the judicial recovery. It does not sit at the negotiation table like other creditors in creditors general meetings. It makes no demands nor loses money. It only grants the possibility of tax installments in up to 120 months (before it was 84 months). Now there is also the possibility of using tax losses to pay off 30% of the debt (not the full amount), but in this case, the installment payment is reduced to up to 84 months. Would it be reasonable to expect anything from the tax authorities in a major negotiation with several creditors in a judicial recovery? It seems not.

After living one of the most difficult years of our lives, in a country plagued by a pandemic, the economy “walking” sideways, starting 2021 with the news that the Tax authorities have now such a deadly power, the bankruptcy of companies in judicial recovery, seems to be a complete absurdity.

We hope that this superpower can be exercised with responsibility and conscience so that good taxpayers in judicial recovery are not harmed by the extinction of their activities caused by the improper exercise of this mere discretion by the Tax Authorities.

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