Brazil Court OKs New Tax Debt Guarantee

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By Ed Taylor

A Sao Paulo court has ruled that companies can use their assets to suspend a tax debt protest, a tax collection process effective since 2012 involving seizing assets and emptying bank accounts.

The unprecedented Dec. 13 ruling by judge Kleber Leyser de Aquino of the Justice Tribunal of Sao Paulo—the state’s principal court—is an important victory for companies in their struggle to deal with a controversial tax collection method.

In Brazil, debt payment protests can be filed with public notary offices and credit-rating services that have the power to place companies on bad credit lists, restricting their access to bank loans and blocking them from bidding for government contracts.

Tax officials at all levels of government—municipal, state and federal—routinely use the standard procedures set by Brazilian law to force companies to pay tax debts. Seizing assets and emptying bank accounts, both of which can only be done through the courts, are among the standard procedures permitted by Brazil’s rules for tax debt collection.

Brazil’s congress passed a law in 2012 that altered a 1997 law establishing which debts can be protested, adding to the list debts that are registered with the federal debt roster, including tax debts.

Congested Court System

Debt collections through the court system have proven to be a major problem for both the revenue service and the courts. Companies have proven to be adept at hiding assets and draining bank accounts, leaving tax agents empty-handed. Cases drag on for years, congesting the court system where an estimated 40 percent of cases involve the collection of tax debts.

The situation has led tax officials to turn to the tax protest system since 2012, which they say is faster and more efficient. According to federal tax officials, from 2013 to July of this year, 1.8 billion Brazilian reais ($530 million) of tax debts were collected through protests.

However, companies have charged that by avoiding the judicial system, tax officials are imposing a political decision on them, which the courts have largely rejected in the past.

The National Confederation of Industry challenged the constitutionality of the 2012 law which permitted the protest of tax debts registered with the federal debt roster. The confederation argued that by avoiding the courts, tax officials were depriving companies of due process and restricting their right to an ample defense.

The confederation further charged that the tax protest method constitutes unwarranted and excessive punishment for companies and limits free initiative.

On Nov. 9, the Supreme Federal Court ruled against the confederation and upheld the law. The court’s majority said that tax protests don’t interfere with the functioning of companies or restrict their constitutional rights. The majority also stressed the effectiveness of protests compared with traditional collection methods.

The court didn’t deal with the question of how companies can suspend a tax protest, maintaining the existing option—the deposit of guarantees that the debt will be paid. At present these guarantees are limited to cash payments, debt insurance which is available in Brazil and bank contracts guaranteeing payment.

Judge Gives Companies Leeway

But in his Dec. 13 ruling, Aquino added company assets to the list of acceptable guarantees. According to Aquino, his decision was based on the fact that Brazil is currently in the depths of its largest recession since the 1930s and everything should be done to preserve companies.

Aquino said that for Sao Paulo’s tax department, “the survival of the company is also more interesting.”

The unnamed company in the case is an industrial tube manufacturer with a state tax debt of 2.4 million reais.

“We showed that the company is not a constant debtor but this was the consequence of financial difficulties that prevented it from paying the state tax in recent months,” said the company’s attorney, Eduardo Correa da Silva of Correa Porto Advogados.

In a Dec. 14 e-mail to Bloomberg BNA, Correa said the company lost suppliers because it was facing a tax debt protest and the suppliers were concerned they wouldn’t be paid.

Correa said the ruling should serve as a precedent for other companies that are facing similar difficulties because of the recession and have no other means to provide guarantees to suspend the protest. He added that Aquino’s ruling didn’t specify what type of asset could be used, leaving open all possibilities including buildings, machinery and equipment.

For attorney Diogo Ferraz of Freitas Leite Advogados, after the Supreme Court’s ruling, “the minimum the courts can do to give some protection to taxpayers is to guarantee accessible ways of suspending the protest.”

Although Aquino suspended the tax protest, he made it clear that the company’s tax debt remains registered with the federal debt roster.

To contact the reporter on this story: Ed Taylor in Rio de Janeiro at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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