WHY DO BRAZILIAN TAXPAYERS SUE THE STATE?
“We do not sue the State.”
It is very common to hear this phrase from lawyers, controllers, CFOs, CEOs or partners of Brazilian companies controlled by foreign companies.
The reason for that is quite simple: in the latter companies’ countries of origin, suing the State is unnecessary.
Such individuals should perhaps be aware that, in Brazil:
1) We do not trust the Brazilian government in general, and have thus added several rights and guarantees to our Constitution that the Federal Union as well as all states or municipalities must take into consideration whenever they increase existing taxes, or create new ones. We were ultimately right to be suspicious, of course, given how frequently we are burdened with illegal or unconstitutional taxation.
2) As things stand, there are countless opportunities for mistakes to occur: a) the Constitution could be irregularly amended; b) laws enforced in the Federal Union as well as in any of its 27 states, its 5570 municipalities or its Federal District might be unconstitutional; c) the government has the authority to issue decrees not in compliance with the law; d) ministers or government secretaries can issue normative instructions that go against previously enacted decrees or laws, and even against the Constitution itself; e) accountants, as well as any and all departments responsible for the payment of taxes, have to keep themselves constantly updated concerning any changes in tax law, such changes being very easily interpreted in ways that differ from their application by fiscal authorities; f) it is very common for fiscal authorities to issue unwarranted infraction warnings.
3) There are occasions when taxpayers will feel disrespected even when the Constitution is being followed to the letter: there are instances of double taxation, for example, deemed constitutional merely because the funds in question are allocated to social security or other constitutionally-mandated programs. Good examples of this are, at the state level, the ICMS (IVA) taxation of goods and, at the federal level, the Pis and Cofins taxation on revenue and the IPI taxation of industrialized goods.
4) Unfortunately, there have been several instances where corrupt fiscal authorities have attempted to involve unwilling taxpayers in illicit schemes, or, conversely, unethical taxpayers have attempted to sway fiscal authorities through bribery.
5) The Brazilian Supreme Courts – Supremo Tribunal Federal, or STF, and Superior Tribunal de Justiça, or STJ – have repeatedly ruled in favor of taxpayers. An example of this is the STF’s favorable ruling on an extraordinary appeal that claimed the ICMS (IVA) taxation (levied by the states as well as the Federal District) ought not to be included in the calculation base of Pis and Cofins (levied by the Federal Union), as it is not a part of taxpayers’ gross revenue, but the State’s. The decision was sensible, given how, according to the Brazilian Constitution, the calculation base for Pis and Cofins should invariably be a taxpayer’s gross revenue.
6) Due to rulings of this sort, it is very common for the Brazilian government to alter existing laws and increase taxation to all taxpayers, in an attempt to maintain revenue levels.
7) Another consequence of this type of ruling is that it may benefit taxpayers in the future, although not to the point of granting them retroactive reimbursements. Some rulings, in addition, restrict any benefits to those who sue the State.
8) We know that in the U.S.A., for example, suing the Federal Union is a very expensive endeavor. Fortunately, things are different in Brazil, and suing the State is not expensive. We can also avail ourselves of an instrument known as Mandado de Segurança, by means of which we can ask for and obtain a court order preventing fiscal authorities from issuing infraction warnings against a taxpayer who wishes to attain compensation for unconstitutional or unwarranted taxes paid within the past five years by withholding current contributions.
9) The filing of a tax lawsuit will not attract undue attention from fiscal authorities. Its success, however, ultimately depends on all fiscal statements being correctly and properly filled-out, with the aid of a specialized tax lawyer.
It is for the reasons listed above – as well as, perhaps most importantly, to preserve their constitutional rights – that Brazilian taxpayers often feel compelled to sue the municipalities, the states and the Federal District of Brazil, as well as the Federal Union itself.
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*Marcos Osaki is a partner attorney at OSAKI Advogados. Doctor (2010) and Master (2005) in Tax Law by (PUC-SP). Invited professor of postgraduate courses. Member of CESA’s Tax Committee and Committee on Legal Education and Relations with Law Faculties. Author of the book Withholding Tax in Social Security: Retention of 11%, published by Editora Quartier Latin, 2008.