It is not news that globalization and internationalization of companies are phenomena that need to be considered by modern tax administrations. In many situations, such as tax evasion, harmful tax competition and money laundering, domestic statutes seemed to be ineffective in a global dimension. To cope with that, new forms of regulation have emerged.
While in the past fiscal policies were established in each country solely for domestic troubleshooting, with globalization and the free movement of capital there is a sensitive change in how different tax systems and tax administrations interact with each other.
Under this view, an effort in signing new international treaties, conventions and agreements seem to be a feasible solution to adopt common and harmonized standards. Considering this scenario, one realizes the importance of supranational bodies in the study of Exchange of Information (EOI) on tax matters and the formulation of proposals that can be implemented jointly by the international community.
Brazil is engaged in implementing an international standard of transparency and exchange of information in tax matters by means of its domestic legislation and institutional framework to support the EOI policies, allowing availability, access of reliable information and powers to obtain information under civil, commercial, tax, regulatory, and criminal laws, where necessary.[1]
The country continues to expand its network and its infrastructure of exchange of information instruments and some new international agreements are under different stages of negotiation and ratification.
This article examines some topics of the Brazilian legal and institutional framework on the tax exchange of information, such as the Common Reporting Standards, Country-by-Country Report, Brazilian Voluntary Disclosure Program, Multilateral Convention on Mutual Administrative Assistance in Tax Matters and other EOI agreements, and the Brazilian Supreme Court rulings under bank secrecy and the rights of Brazilian taxpayers regarding EOI.
Enactment of the Common Reporting Standard
The Common Reporting Standard (“CRS”) calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions periodically and through standard data.
The CRS is lined up with the current international scenario, which seeks to establish efficient mechanisms for fiscal transparency and information exchange with a view to curbing tax evasion, money laundering and terrorist financing practices.
Recently, Brazilian tax authorities issued Normative Ruling No. 1,680/2016 which has established the CRS under the Brazilian tax regulation, defining the due diligence procedures to be followed by financial institutions and other reporting entities. The compliance with Normative Ruling No. 1,680/2016 should be done by delivering to Brazilian Revenue Service (“RFB”) certain information on taxpayers´ financial operations by presenting the “e-Financeira” statement.
For Brazilian tax purposes the automatic exchange of information with other jurisdictions under de CSR will take place from 2018, with data referring to the year 2017.
Country-by-Country Reporting
The Country-by-Country (“CbC”) reporting from provides a template for Multinational Enterprises (MNEs) to inform annually to the Brazilian tax authorities several data related to each tax jurisdiction in which they do business via controlled or related entreprises.
The Brazilian Normative Ruling No. 1,681/2016 regulates CbC report and, in essence, large multinationals have to provide an annual return that breaks down key elements of the financial statements by jurisdiction, including information regarding revenue, income, tax paid and accrued, employment, capital, retained earnings, tangible assets and the company activities.
The annual return will be presented through the completion of the Fiscal Accounting Bookkeeping ("ECF") which replaced the Corporate Income Tax Return. The ECF statement submission should be done through the Public System of Digital Bookkeeping ("Sped") which replaced the companies’ accounting books by digital files.
During 2017 the Brazilian tax authorities will collect the CbC report information for the year 2016 and this information will be exchanged with other jurisdictions as of 2018 (base year 2016).
Brazilian Voluntary Disclosure Program
Brazilian authorities issued Law No. 13,254/2016 and Normative Ruling No. 1,627/2016, which provided a special amnesty for the undeclared assets held abroad by Brazilian taxpayers (“RERCT”).
In short, the program aimed to encourage taxpayers to disclosure their assets transferred or held abroad that until then were not properly reported to local tax authorities. It was put in place before the country has put in place all its exchange of information instruments.
Individuals or legal entities that were resident or domiciled in Brazil on 31 December 2014 were able to enrollment. Those participating in RERCT were subject to the payment of income tax and finesequivalent to 30% (thirty percent) of the amount to be regularized.
Aside from tax and other regulatory penalties, the RERCT introduced an amnesty for crimes related to holding unreported assets abroad (such as tax evasion and ). Participation in the program was the only way to avoid criminal sanctions.
The deadline for reporting and paying tax and fines due was 31 October 2016. Notwithstanding, another bill shall be voted by Brazilian Congress in 2017 to establishes a second opportunity to Brazilian taxpayers to regularize their undeclared assets.
Multilateral Convention on Mutual Administrative Assistance in Tax Matters and other EOI agreements
Brazil continues to expand its network of exchange of information instruments and some new Tax Information Exchange Agreements (“TIEA”) are under different stages of negotiation and ratification.
The agreements between Brazil and United States of America was brought into force by Decree No. 8.003/2013 and by the Intergovernmental Agreement (“IGA”) entered into force by Decree No. 8,506/2015 in the context of the Foreign Account Tax Compliance Act (“FATCA”). However, agreements between Brazil and, United Kingdom (28/07/2012), Uruguay (24/10/2012), Bermuda (29/10/2012), Jersey (28/01/2013), Guernsey (06/02/2013), The Cayman Islands (19/03/2013) and Switzerland (23/11/2015) are still pending ratification by the Brazilian Congress.
In addition, Brazilian Decree No. 105/2016 was published approving the Multilateral Convention on Mutual Administrative Assistance in Tax Matters signed in November of 2011. The purpose of the Convention, includes: (i) the exchange of information, such as: (i) by request; (ii) automatic; (iii) spontaneous; (iv) simultaneous tax audits and (v) tax audits abroad; (ii) collection of tax credits, including precautionary measures and (iii) document notification.
The ratification of the Multilateral Convention allows Brazil to develop its network of exchange of financial and tax information to over 90 countries and therefore to strengthen the fight against tax evasion and aggressive tax planning.
Brazilian Supreme Court Previous Decision on Bank Secrecy
Early 2016 the Supreme Court (“STF”) ruled in favor of the constitutionality of the Brazilian tax administration´s (“RFB”) right to access the taxpayers’ bank information without a judicial order. The decision, with binding effects for all the country's courts, was granted in favor of RFB and is expected to have major impacts on related tax issues, such as compliance with tax international agreements, the rules regarding regularization of undeclared assets held abroad, the “e-Financeira” statement and the potential disclosure of banking information for States and Municipalities.
Since 2001, two complementary laws directly influenced the debate regarding access to Brazilian taxpayers’ bank information by the RFB, which are the Complementary Laws No. 104/2001 (LC 104) and 105/2001 (LC 105).
LC 104 amended certain provisions of the National Tax Code (“CTN”), which included, among them, tax secrecy disclosure possibilities and permission for the international exchange of tax information. Moreover, LC 105 introduced new rules on bank secrecy prescribing confidentiality and protection of the operations carried out by financial institutions (which, for the purposes of the mentioned law, are not limited to banks), authorizing the request, the access and the use of Brazilian taxpayers’ information by the tax administration related to operations and services provided by financial institutions and similar legal entities.
At the time LC 105 was enacted, it caused a strong reaction among taxpayers, because the delivery of banking information to the Federal tax administration without any court order could represent a breach of bank secrecy, a right assured by the Brazilian Constitution. In this context, a set of lawsuits seeking the declaration of unconstitutionality of LC 105 were brought before the Brazilian Supreme Court.
Since 2010, in Extraordinary Appeal n. 389.808, the plenary of the Supreme Court ruled that the provision granting the RFB with powers to directly access bank records for tax purposes violated constitutional rules provisions regarding privacy protection, and shall only be enforced by means of a court order authorizing the disclosure of such information.
Notwithstanding, the decision was taken in an individual suit, and, therefore, has no binding effects with respect to any other Brazilian courts or persons not a party in the specific case. It was also the latest position of the highest Brazilian Court on the matter. However, recently, STF overturned its position and assured to RFB powers to directly access bank information of taxpayers.
STF Ruling on the Possibility of direct access of Taxpayers Bank Information
In the plenary session held on February 24 of 2016, the Supreme Court ruled that the provision granting the RFB with powers to directly access bank records for tax purposes, regardless of any Court order, does not violate constitutional rules provisions regarding privacy protection[2].
As per the court decision, in order for that bank information access to be possible the following requirements must be present: the adoption of security certificates systems and public official access log to prevent tampering the data and the existence of a prior administrative proceeding that respects the due process of law.
Since the decision was taken in a representative suit, it has binding effects with respect to any other Brazilian courts.
The Supreme Court's binding decision, albeit indirectly, involves other related tax issues in Brazil, as follows:
- International Tax Agreements: Brazil is entering into international agreements and adopting policies to develop its tax transparency network. The country has already entered into agreements for the exchange of information, signed up the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, and made commitments to transparency policies, such as FATCA and the OECD Common Reporting Standards, which are based on direct access to taxpayers’ banking information. The Supreme Court's decision will make it possible for Brazil to honor these international obligations. However, it is important to note that Brazil needs to reconcile compliance with these international duties with Brazilian taxpayers' Constitutional rights and within the grounds presented in the Supreme Court ruling;
- e-Financeira: Brazilian tax administration issued Normative Ruling No. 1,571/2015, which established a mandatory bi-annual reporting obligation, under which financial institutions, must to delivery to RFB certain information on financial operations by presenting the e-Financeira statement. This regulation assumes the automatic disclosure of banking information from taxpayers to RFB and it will be the means by which the Brazilian tax administration will report information to the tax authorities of other countries. However, as mentioned above, in this case, the recent Supreme Court decision prescribes the need of a prior administrative proceeding including due process of law and the adoption of certain security mechanisms by the authority, in order to allow the disclosure of banking information from taxpayers. In this sense, it is possible that the Supreme Court's grounds hinders compliance with this new obligation;
- Brazilian Voluntary Disclosure Program: In the context of the STF decision allowing the disclosure of banking information and the exchange of tax information agreements, mentioned above, it is important to taxpayers enrolled in the disclosure program since the legislation does not prevent the exchange of information with other countries. In other words, there is no obstacle for the information provided by the taxpayer under the RERCT to be forwarded to other countries;
- Disclosure of Banking Information for States and Municipalities: The ruling issued by the Supreme Court could also be applied by States and Municipalities in order to access taxpayers banking information. In light of this possibility, the Supreme Court decision emphasizes that States and Municipalities should establish specific regulation for this purpose, as did the Federal Government in Decree No. 3.724/2001;
- Public Agent Liability: Supreme Court decision makes it clear that the possibility of direct access by the RFB to taxpayers’ banking information does not exempt tax authorities from complying with any other applicable legal requirements and conditions to access such data. The duty of confidentiality protecting tax taxpayers' information is provided in the CTN and non-compliance with such duty is considered violation of privacy, as defined by the Criminal Code and entails the public official civil liability. In addition, LC 105 imposes personal penalties for data mismanagement when proven that the official acted at odds with official guidance. Thus, actions by tax authorities that are taken in violation of the conditions imposed by law regarding access to banking information provided by financial institutions can be challenged in court.
[1] Decree-Law n. 486/69, article 4; National Tax Code, articles 173, 174, 195, and 197; Complementary Law n. 123/06, article 26, II; Normative Instruction RFB n. 983/09, article 27; Law n. 9.613/98.
[2] Direct Actions nos. 2390, 2386, 2397 and 2859 and the Extraordinary Appeal chosen as representing the controversy no. 601314.
