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Brazil’s Approach Towards The Exchange of Information

Publicado originalmente em novembro/2017, por Matheus Bueno de Oliveira and Frederico Silva Bastos

The Globalization and internationalization of companies are phenomena that must be considered by modern tax administrations. In many situations, such as tax evasion, harmful tax competition and money laundering, domestic statutes seem to be ineffective in a global dimension. To cope with these issues, new forms of regulations have emerged.

In the past, fiscal policies were established in each country solely for domestic troubleshooting. With globalization and the free movement of capital, there has been a push towards the interaction between different tax systems and tax administrations.

Due to this movement, an effort in signing new international treaties, conventions and agreements seems 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 the 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 the exchange of information on tax matters by means of its domestic legislation and institutional framework to support 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 on its tools for the exchange of information, including specialized networks and infrastructure along with some new international agreements which are under varying stages of negotiation and ratification.

This article examines some relevant topics of Brazil`s legal and institutional framework with regards to the tax exchange of information, such as the Common Reporting Standards, Country-by-Country Report, the Brazilian Voluntary Disclosure Program, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and other EOI agreements, 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) requires jurisdictions to obtain information from their local financial institutions and automatically exchange that information with other jurisdictions periodically by standardized data formats.

The CRS is aligned with the current international scenario, which seeks to establish efficient mechanisms for fiscal transparency and the exchange of information with the goal of curbing tax evasion, money laundering and terrorist financing practices.

Recently, Brazilian tax authorities issued the Normative Ruling No. 1,680/2016 which established the CRS under Brazilian tax regulations, postulating due diligence procedures which must be followed by financial institutions and other reporting entities. Compliance with the Normative Ruling No. 1,680/2016 must be done by delivering certain information on financial operations of taxpayers to the Brazilian Revenue Service (“RFB”) by presenting the “e-Financeira statement.

For Brazilian tax purposes, the automatic exchange of information with other jurisdictions under the CSR will take place in 2018, with data referring to the year 2017.

Country-by-Country Reporting

Country-by-Country (“CbC”) reporting provides a template for Multinational Enterprises (MNEs) to annually inform Brazilian tax authorities comprehensive data related to each tax jurisdiction in which they do business via controlled or related enterprises.

The Brazilian Normative Ruling No. 1,681/2016 regulates the CbC report. Large multinationals have to provide an annual return that breaks down key elements of their financial statements by jurisdiction, including information regarding revenue, income, taxes paid and accrued, employment, capital, retained earnings, tangible assets and company activities.

The annual return will be submitted by completing the Fiscal Accounting Bookkeeping statement (“ECF”) which recently replaced the Corporate Income Tax Return. ECF statement submission should be done by accessing the Public System of Digital Bookkeeping (“Sped”) which replaced companies’ physical accounting books with digital file submission.

During 2017 the Brazilian tax authorities will collect the CbC report information for the 2016 fiscal year and this information will be exchanged with other jurisdictions from 2018 on (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 disclose their assets transferred or held abroad that, until that point, were not properly reported to local tax authorities. It was put in place before the country started its exchange of information protocols.

Individuals or legal entities that were residents or domiciled in Brazil on specific dates were able to enroll. Those participating in RERCT were subject to the payment of income taxes and fines in the amounts to be regularized.

Aside from tax and other regulatory penalties, the RERCT introduced an amnesty for crimes related to holding unreported assets abroad (as in tax evasion). Participation in the program was the only way to avoid criminal sanctions.

Multilateral Convention on Mutual Administrative Assistance in Tax Matters and other EOI agreements

Brazil continues to expand its network of tools for the exchange of information and some new Tax Information Exchange Agreements (“TIEA”) are under various stages of negotiation and ratification.

The agreements between Brazil and the United States of America were brought into effect by Decree No. 8,003/2013 and by the Intergovernmental Agreement (“IGA”) enacted under Decree No. 8,506/2015 in the context of the Foreign Account Tax Compliance Act (“FATCA”). However, agreements between Brazil and, the United Kingdom, Uruguay, Bermuda, Jersey, Guernsey, The Cayman Islands and Switzerland 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: (1) the exchange of information, such as: (1a) by request; (1b) automatic; (1c) spontaneous; (1d) simultaneous tax audits and (1e) tax audits abroad; (2) collection of tax credits, including precautionary measures and (3) document notification.

The ratification of the Multilateral Convention allows Brazil to develop its network of the exchange of financial and tax information to over 90 countries and therefore strengthens the fight against tax evasion and aggressive tax planning.

Brazilian Supreme Court Previous Decision on Bank Secrecy

In early 2016, the Supreme Court (“STF”) ruled in favor of the constitutionality of the Brazilian tax administration´s (“RFB”) right to access 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 international tax agreements, the rules regarding the regularization of undeclared assets held abroad, the “e-Financeira” statement and the potential disclosure of banking information for states and municipalities.

Since 2010, in the Extraordinary Appeal n. 389.808, the plenary of the Brazilian Supreme Court ruled that the provision granting the RFB powers to directly access bank records for tax purposes violated constitutional rules regarding privacy protection, and could only be enforced by means of a court order authorizing the disclosure of such information.

Notwithstanding, that decision was made based on an individual suit, and therefore, had no binding effect with respect to any other Brazilian courts or people not  party to that specific case. It was also the last position of the highest Brazilian Court on the matter. However, STF recently overturned its position and assured the RFB powers to directly access the banking information of taxpayers.

STF Ruling on the Possibility of direct access of Taxpayers Bank Information

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 regarding privacy protection[2].

As per the court decision, in order for banking information access to be granted, the following requirements must be present: the adoption of system security certificates and the public official access log to prevent data tampering and the existence of a prior administrative proceeding that respects the due process of law.

Since the decision was made in a representative suit, it has binding effects with respect to all other Brazilian courts.

The Supreme Court’s binding decision, albeit indirectly, involves other related tax issues in Brazil, as follows:

  1. 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. 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 regarding Brazilian taxpayers’ Constitutional rights and within the grounds presented in the Supreme Court ruling;
  1. e-Financeira: The Brazilian tax administration issued the Normative Ruling No. 1,571/2015, which established a mandatory bi-annual reporting obligation, under which financial institutions must deliver certain information on financial operations to the RFB by presenting the e-Financeira statement. This regulation assumes the automatic disclosure of banking information from taxpayers to the 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, the recent Supreme Court decision postulates the need of a prior administrative proceeding including the due process of law, 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;
  1. Brazilian Voluntary Disclosure Program: The program is important for 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;
  1. Disclosure of Banking Information to States and Municipalities: The ruling issued by the Supreme Court could also be applied to states and municipalities in order to access taxpayers banking information. In light of this possibility, the Supreme Court decision emphasized that states and municipalities should establish specific regulations for this purpose, as the federal government did in Decree No. 3.724/2001; and
  1. Public Agent Liability: The Supreme Court`s decision makes it clear that the possibility of the direct access by the RFB to taxpayers’ banking records does not exempt tax authorities from complying with any other applicable legal requirements and conditions to access such data. The duty of protecting the confidentiality of tax taxpayers’ information is provided for in the CTN and non-compliance with this obligation is considered a violation of privacy, as defined by the Criminal Code of Brazil and which then allows for civil liability directed towards the offending public official. In addition, LC 105 imposes personal penalties for data mismanagement when proven that the official acted contrary to official guidance. Thus, actions by tax authorities that are taken in violation of the conditions imposed by law regarding access to banking records which are 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.