On December 6, 2018, the Federal Revenue Service published Interpretative Declaratory Act No. 5 of 2018, updating the Agency's understanding regarding the application of the Special Regime for Exchange and Tax Regularization (RERCT) in relation to the proof, through documents, of the origin of undeclared resources abroad. Brazilians will be summoned to prove such resources, and those who do not demonstrate that the assets originate from lawful economic activity may be excluded from the program.

These summonses will not be made ex officio to any taxpayer who has adhered to the aforementioned regime, in one of the two phases, according to the Undersecretary of Inspection of the Federal Revenue, Iágaro Jung Martins. According to him, the summonses will be related to indications of irregularities.

The Undersecretary compares the situation in question with what happens in the Individual Income Tax return. Thus, if the taxpayer files an income tax return without submitting documentation, the Tax Authorities may later request the document if they deem it necessary. According to the Undersecretary, this proof of resources related to the RERCT would occur in the same way, with the justification being that the adhesion to the regime was done digitally and there was no way to attach any documents.

This update to item 40 of the “Decart Questions and Answers” in the legal context was classified as an “unfair act” towards the taxpayer. This is because the original text that instructed taxpayers on how to interpret Law No. 13,254/2016, which served as the basis for formalizing adhesions in the two phases of the regime made in 2016, established that the taxpayer should declare the origin of the asset, but without the obligation to prove it, with the burden of proof being on the Federal Revenue Service.

The fact that taxpayers are not required to prove the source of the funds is still included in Act No. 5. However, three new supplementary notes were added. In the first, the IRS states that the exemption from the obligation to prove the source, by means of documents, corresponded to the moment of adhesion. In the second note, it establishes that entry and permanence in the regime may be subject to inspection and, finally, in the third note, it states that it will grant a reasonable period for the taxpayer to present the documents after being summoned.

It is therefore clear that this update violates the good faith of the established Regime, since taxpayers who adhered to the program based on the guidelines outlined in the original text of the “Questions and Answers of Decart” that instructed Law No. 13,254/2016 do not foresee this condition of proof, but rather the declaration. Furthermore, Article 4 states that they cannot be used “as the sole indication or element for the purposes of investigative proceedings or criminal proceedings”.

In addition to the update not being provided for in the original text that instructed the aforementioned Law that provides for the regime, there is the temporal issue, as many taxpayers will not be able to prove the origin of the resources, either because some assets have been diluted over time in different sales, bank accounts, succession planning, among other reasons.

The Mazzucco e Mello Advogados tax team is available to provide any clarification on these topics.

By Camila Friaça