December 3, 2020
The Brazilian media has been, as of late, thoroughly reporting news reflecting novel and controversial topics regarding the domestic Estate and Gift Tax (“ITCMD”). In order to clarify and understand these up-and-coming changes and discussions regarding the ITCMD, we have prepared below a brief description of the most relevant discussions currently surrounding this matter.
Generally, these most recent news consist in reports on three separate issues, all of which arise from recent case law revisions, brought about by new administrative and judicial jurisprudence (i.e., the São Paulo State Inquiry Solution No. 22,070/2020; and the ongoing debate on the Extraordinary Appeal No. 851,108 at the Brazilian Supreme Court), as well as from the onset of major investigations on ITCMD tax evasion by the São Paulo State Tax Authority (i.e., operations Vaisyas and Antares).
On the matter of case law, the first relevant topic of discussion is the recent São Paulo State Administrative Inquiry Solution No. 22,070/2020, under which the State Treasury decided that the transfer of Real Estate at “cost-value” for the purposes of up-payment of corporate stock would now be subjected to ITCMD taxation. According to said Inquiry Solution, taxpayers who use real estate to pay in the capital of a limited liability company may be taxed in São Paulo, based on the assumption that the property’s excess value, arising from a cost and market value comparison, would comprise a type of donation from the shareholder (subscriber) to the remaining shareholders. This decision is a case law reversal, which goes against the common practices, and which many deem illegal.
It should be noted that, in its very decision, the Tax Authority recognized that this up payment of company shares is not a ITCMD tax triggering event, which serves to further denote the questionability of such decision, as per free translation below:
“… it is necessary to clarify that, in principle, the transfer of properties from the shareholders’ equity to the limited company for payment of the company’s share capital is not a hypothesis of incidence provided for in the ITCMD legislation.
7. However, it is noteworthy that the up payment of company share capital above the amount that befits each partner (without the corresponding increase of the respective shares) may comprise a donation of assets or rights and, therefore, be subject to ITCMD, as per the understanding of this Tax Authority.”
Moreover, at the judicial level, the judgment of the Extraordinary Appeal No. 851,108, pending at the Brazilian Supreme Court (“STF”), is posed to solve one of the most vexing discussions on ITCMD taxation: whether the Brazilian States are competent to create laws to tax donation and inheritance cases in which the donor is domiciled or resident abroad. This discussion is centered on the fact that the Brazilian Constitution prescribes that the taxation of such donations and inheritances abroad would be legal once they were regulated by a specific “Complementary Law”, which never came to pass. In spite of the lack of this necessary regulation, state governments have attempted to tax such transactions alleging that the absence of the Complementary Law should not jeopardize their right to collect ITCMD on such cases.
The reporting judge, STF Justice Dias Toffoli, proposed an atypical resolution, attempting to subside the will of both tax authorities and taxpayers. The Justice sought to recognize in his vote the unconstitutionality of the attempted taxations, as expected, preventing the tax collection of ITCMD over future triggering events abroad (so long as the aforementioned Complementary Law is not enacted), whilst however, not cancelling or refunding taxpayers for ITCMD collections in the past (i.e., the censor of the illegal practices would only affect future taxations, while acquiescing to past collections).
On this, please find a direct quote (freely translated) of the Reporting Justice’s vote:
“I propose the modulating of the effects of the decision, establishing that it produces effects only with regards to operative facts that may occur after this decision is duly published”
In Brazil, the modulation of the effects of a “Declaration of Unconstitutionality” has been provided for in the legislation (Law No. 9,868/99, article 27) and jurisprudence, thus allowing the effects of a decision to be modulated as to only apply over events succeeding said decision, with the so-called ex nunc (non-retroacting) effects, as opposed to the ex tunc effects which allow the results of a decision to retroact and affect past events.
The STF Reporting Justice justified the choice of modulating the effects thereof with economic arguments, referring to the negative consequences of reimbursing all taxpayers for the State Treasuries, should the decision be provided with ex tunc effects:
“In the State of São Paulo alone, the consequence of the decision, including the projection for the next five years, would be an estimate negative budgetary impact of BRL 5,418,145,428.86, with the majority of this loss being considered as immediate.”
As previously mentioned, this STF Extraordinary Appeal No. 851,108 is still under appraisal by the Supreme Court, and both the final decision and the modulation of effects are still subject to change, as other Supreme Court Justices have yet to render their decisions on this case.
Moreover, outside of the Brazilian administrative and judicial courts, ITCMD has also been highlighted in the news as a consequence of the São Paulo State Treasury’s renewed investigations on tax evasion schemes that have been widely adopted as of late. The new investigations have been named operations Vaisyas and Antares.
The Vaisyas operation targets some 895 company share donation transactions made extrajudicially, amounting to over BRL 16 billion, which have purportedly been done underhandedly, without the full and proper collection of ITCMD. In turn, under the Antares operation the State Tax Authority seeks to audit over 500 extrajudicial “causa mortis” transmissions of assets exceeding BRL 1 billion, which have also been allegedly under taxed.
Leonardo Balthar, who is the ITCMD supervisor of the Debt Collection, Levy and Recovery Department (Dicar), has explained that the Vaisyas and Antares operations mark the beginning of a new approach by the São Paulo State Tax Authority, which supposedly will sponsor a crackdown on tax avoidance and evasion. In his view, moving forward, the State Tax Authorities will start to operate in a broader way, with further attention to “non-costly” out-of-court transfers, where the country’s greatest fortunes are transferred.
In light of these operations by the São Paulo State Tax Authority, as well as the previously described new and “questionable” jurisprudence, we cannot help but feel that the Executive and Judiciary branches of the government have been adopting new uptakes on ITCMD taxation, all of which do not bode well for law-abiding taxpayers. In and all, we see that, as these new collection attempts are made, the taxpayers are left with more and more transactional risks and uncertainties.