Brazilian taxpayers now required to disclose tax planning structures

The July 21 edition of the Brazilian Official Gazette contained provisional measure 685 (PM 685), which creates an obligation on taxpayers to formally report to tax authorities certain transactions that result in tax benefits.

The requirement is supposedly in line with the OECD’s base erosion and profit shifting (BEPS) project – specifically Action 12 on mandatory disclosure rules.

In general terms, PM 685 requires taxpayers to submit to tax authorities, up to September 30 of each year, any information involving transactions that were concluded in the immediately preceding year and that result in suppression, reduction or deferment of
taxes – namely,

(i) transactions that lacked
any relevant purpose other than a tax-driven purpose;
(ii transactions that were structured in an unusual manner, involved abuse of form or were structured in a way that to avoid the typical effect of a contract; and
(iii) transactions that involve activities to be further specified in regulations to be issued by the Brazilian Federal Revenue.

Even though PM 685 limited the obligation to file a report for certain transactions that result in some type of tax benefit (even on a temporary basis), the wording of the regulation is vague, particularly sections (i) and (ii). This lack of clarity raises doubts as to what transactions need to be disclosed to tax authorities.

Pursuant to PM 685, a taxpayer who has the obligation to collect taxes that result from the above mentioned qualified transactions also has the obligation to submit an information report to the tax authorities. Such information must be reported on an individualised basis (that
is, per transaction) if more than one transaction was conducted in the previous year.

Furthermore, the information report on pending transactions must be treated as a request of formal consultation. If the tax authorities disagree with the taxpayer in the analysis of the tax impact resulting from a reported transaction, the taxpayer will be required to collect the outstanding taxes in cash or in installments, plus applicable interest but no penalty, within 30 days of being notified of the decision. Taxpayers should note that a fine will apply if the transaction was already under scrutiny by tax inspectors at the time the report is filed.

The new regulation also points out that the report will be considered defective if it contains formal defects, such as a report filed by a person other than the taxpayer; information defects, for example whenever core facts are not fully disclosed; fraudulent misrepresentation; or fraudulent representation of third parties.

Once the obligation of filing a report arises and the taxpayer fails to file a report or files a defective report, the taxpayer’s omission will be deemed to be a willful omission committed with the intention of defrauding and evading taxes. In this case, the total amount of tax due will be subject to interest and a fine of 150% of the amount due.

Given the above, it is crucial that Brazilian taxpayers (individual or legal entities) carefully review the tax implications of pending transactions to adequately decide on whether or not a particular transaction should be reported to the tax authorities.

A point of immediate controversy is whether or not taxpayers are required to report transactions implemented in 2014, when PM 685 was not in effect- and even transactions performed in 2015 before the PM was released. The contemplation is that if, on the one hand, the new rule does not retroactively create a tax (which would be
forbidden under the Brazilian tax rules), on the other hand it creates a disclosure obligation that could be harmful to the
taxpayer.

PM 685 now requires further regulation to be issued by the Brazilian authorities and will still be reviewed by the Brazilian Congress within 120 days of its publication. It is, however, valid as of the date of its publication.