The Brazilian Supreme Federal Court (STF) is close to reaching a consensus on the constitutionality of article 116 of the Brazilian Tax Code (CTN), which establishes the anti-tax avoidance rule. The discussion is long-standing and began to be debated in the STF in 2001, with the filing of ADI 2446. The core of the Direct Action of Unconstitutionality is based on the thesis that art. 116 of the CTN leaves taxpayers without guarantees for the transactions carried out.
This is because the sole paragraph of the aforementioned article provides for the possibility that the Tax Administrative Authority may disregard acts or legal transactions carried out with the purpose of simulating transactions and which, consequently, result in the omission of collection or reduction of the tax burden involved. In short, the objective of the rule is to provide legal support for the disregard of simulated transactions.
However, in general, taxpayers end up being fined based on the provision when they are unable to demonstrate to the Federal Revenue Service the existence of a business purpose capable of justifying the tax planning carried out. There is always a fear, on the part of the taxpayer, that at any time the tax authority may disqualify the transaction, interpreting that there was an abuse in the use of a legal norm aimed solely at tax savings.
The rapporteur of the case, Minister Cármen Lúcia, cast her vote last year, understanding the constitutionality of art. 116 of the CTN. However, the minister recognized the legitimacy of seeking to reduce the tax burden, as long as it is implemented within legal parameters. In the words of the minister: “The rule does not prohibit the taxpayer from seeking, through legitimate means and behaviors consistent with the legal order, tax savings, carrying out their activities in a less onerous manner, and thus not paying taxes when a taxable event has not been configured whose occurrence has been lawfully avoided.”
Furthermore, Cármen Lúcia highlighted that the sole paragraph of art. 116 is pending regulation by ordinary law in order to be fully effective. This statement will have the effect of obliging CARF to review its jurisprudence regarding the interpretation and application of this legal provision.
Another point highlighted by the rapporteur was that the sole paragraph of art. 116 cannot be considered as a general anti-avoidance rule: “the term 'anti-avoidance rule' is to be considered inappropriate, as the device is a rule to combat tax evasion.” It also added the mandatory compliance with the provisions of art. 110 of the CTN (which ensures compliance with forms of private law by tax legislation) and is not “authorized the tax agent to use analogy to define the taxable event and, becoming a legislator, apply tax without legal provision”, nor to resort to “economic interpretation“.
Despite the understanding of the reporting minister in recognizing the “freedom” of the taxpayer to lawfully opt for less onerous taxation, the delivery of the vote, followed so far by the majority of ministers, does not resolve the complexity surrounding the interpretation of art. 116. Many questions remain pending, especially regarding the criteria to be observed by the tax authorities to identify legal acts and transactions subject to disregard.
However, with 5 votes to 1, it is likely that the vote will be concluded today, confirming the constitutionality of art. 116 of the CTN.
