Considering the complexity of the Brazilian legal system there are several tax controversies.
The Federal Constitution is highly elaborate: it grants rights to taxpayers and also establishes the basic rules for the imposition of taxes by the Federal Government, States and Municipalities. The tax system is founded on certain general principles, such as legal certainty, due process of law, non-retro activity, and horizontal and vertical equity60 , which gives consistency and coherence. As per Brazilian Federal Constitution61 , general rules on taxation shall be introduced through complementary law, being consolidated in the Brazilian Tax Code - "CTN"
For many years the interpretation of Brazilian tax law was based on positivism, in a way that the form had priority over substance. Brazilian Courts and the great majority of academics agreed that the interpretation of tax law should be strict, almost literal, respecting the form adopted, in spite of the economic effects. Brazilian law did not admit analogy62 or presumptions to impose tax liability.
However, this traditional view is changing, especially due to the introduction of a general anti-avoidance rule by Complementary Law n. 140/2001, which amended article 116 of CTN , authorising the tax authorities to disregard acts and transactions carried out with the purpose to conceal the triggering event or modify the characteristics of elements on the tax liability. This general anti-avoidance rule has provoked controversy among renowned tax lawyers and academic community.
A clear distinction shall be made between the treatment of tax avoidance and tax evasion under Brazilian law: (i) tax evasion has a narrow scope and refers to illegal behavior such as "fraud", "understatement" and "simulation" to conceal a taxable event that has already occurred, which has always been prohibited by article 149 of CTN64 , even before the enactment of the general anti-avoidance rule; and (ii) tax avoidance65 which consists in tax planning structures formally in compliance with the law, but performed exclusively to reduce the tax burden, thus lacking a legal cause. Anti-avoidance measures are enacted to counteract such tax planning acts.
Due to the rigid tax system established in the Federal Constitution, it is crucial to identify one specific criterion to guide the tax authority’s activity, distinguishing between transaction that should be fully preserved, with its respective tax effects; from others that might be disregarded or re-qualified.
Broadly accepted anti-avoidance doctrines such as abuse of rights66 , abuse of form, business purpose or substance over form are rejected by the rigid Brazilian legal system, due to the prohibition of analogy and absolute presumptions. In our opinion, the legal cause is the precise criterion to justify the application of the general anti-avoidance rule, disregarding and re-qualifying the acts and transaction of taxpayers67 .
Law-abiding taxpayers are free to perform any legal business activity and to organize their business in a tax efficient way, adopting any form and type allowed by private law, even if they are unusual. Tax authorities might disregard or re-qualify their acts only in case of (a) simulation or fraud (tax evasion) or (b) absence of a legal cause, a rationale to justify the structure, that should not aim exclusively at tax reduction.
60Common consolidate corporate tax base working group of the European Commission. General Tax Principles. Working document. Meeting held on November, 23, 2004. http://ec.europa.eu/taxationcustoms/resources/documents/taxation/companytax/commontaxbase/CCTBWP1FinalREV1_en.pdf.
61Art. 146, III, da CF.
62FANTOZZI, Augusto. Corso di diritto tributario. Torino: UTET, 2003. p. 106.
63XAVIER, Alberto. Tipicidade da tributação, simulação e norma antielisiva. São Paulo: Dialética, 2002. 175p.
64“(...) Article 149. The assessment is made and reviewed by the administrative authorities in the following cases: (...) VII – when it is proven that the debtor or third party in benefit thereof, acted in wilful misconduct, fraud or simulation intent; (...) Sole Paragraph. The review of the assessment may only be started while the Public Treasury’s right is not extinct”.
65“L’elusione si concretizza in un comportamento attivo ‘voluto (e quindi non simulato), non vietato dall’ordinamento e consistente nell’impiego abnorme di un istituto consentito, al fine del risparmio d’imposta”. In his opinion, the difference between tax avoidance and simulation is that the latter is characterized by “unavolontàdiversa di quellamanifesta”. FANTOZZI, Augusto. Diritto Tributario, Torino: UTET, 1992, v. 1, p.120; NOVOA, Cesar Garcia. La elusion fiscal y los medios para evitarla. In: Memorias de las XXIV jornadas latinoamericanas de derecho tributario. tema I: la elusión fiscal y los medios para evitarla. Instituto Latinoamericano de Derecho Tributario, 2008. p. 47-190.
66LUPI, Raffaello. Elusione: esperienze europee tra l’uso e l’abuso del diritto tributario. In: PIETRO, Alessandro di (Coord.) L’elusione fiscale nell’esperienza europea. Milano: Giuffrè, 1999, p. 272 e ss; GANZÁLEZ, Luis Manuel Alonso. Cláusula general antielusión. Experiencia española y europea. Ultimas tendencias jurisprudenciales. In: TÔRRES, Heleno Taveira (Coord.). Direito tributário internacional aplicado. São Paulo: Quartier Latin, 2004. p. 145-176;
67TÔRRES, Heleno Taveira. Derecho tributario y derecho privado: autonomía privada, simulación y elusión tributaria. Madrid: Marcial Pons, 2008. p. 159.