Brazil sets forth conditions for tax settlements in goodwill disputes: multinationals take note

In Public Notice n° 9/2022, published on May 3, 2022, the Brazilian National Treasury Attorney's Office and Brazilian IRS set forth the conditions taxpayers must adhere to regarding tax settlement proposals in goodwill disputes.

Before detailing the most relevant requirements brought by the Public Notice n° 9/2022, it is important to step back and highlight the features of tax settlement in Brazil.

Tax settlement was introduced in Brazil by Federal Law n° 13,988/2020 which is applicable to tax and non-tax debts with the federal government and its autarchies and foundations.

Brazilian tax settlement is slightly different from tax settlement in other countries. Its granting is based on the convenience of the federal government and the process is more formal. For instance, under the limits to negotiate with taxpayers which are already set forth in Law n° 13,988/2020, taxpayers must waive the right to challenge further collections that may have the same matter included in tax settlements, and it is required that the taxpayer commit to provide, whenever it is requested, information regarding goods, assets, rights, values and transactions which might allow the tax authorities to better understand the financials or become aware of facts that could lead to the termination of the tax settlement.

In summary, there are two categories of tax settlement in Brazil: the tax settlement proposed by individuals or legal entities regarding debts enrolled as overdue federal tax liability or already in collection under the jurisdiction of National Treasury Attorney´s Office; and the tax settlement by adherence regarding other tax disputes ongoing at the administrative tribunal or in court.

It is important to stress that tax settlement by adherence entails the acceptance by taxpayers of all conditions and requirements listed in the Public Notice.

Under the category of tax settlement by adherence, there are two subcategories: tax settlement regarding relevant and widespread controversy and tax settlement regarding low-value controversies. Here, we focus on the first subcategory, which establishes the legal frame of the Public Notice n° 9/2022.

In a nutshell, tax settlement by adherence regarding relevant and widespread controversy is applicable to matters that represent high-value disputes assessed by the National Treasury Attorney´s Office as unclear, to foresee which understanding will prevail when decisions rendered by the administrative tribunal and the courts are dissonant. Thus, this subcategory of tax settlement assumes that debts in collection may be considered undue in view of the current scenario of jurisprudence.

Therefore, the National Treasury Attorney´s office, jointly with the Brazilian IRS, issued Public Notice n° 9/2022, addressing the opportunity for taxpayers to adhere to tax settlement related to debts resulting from the amortization of goodwill under the regime applied before the issuance of Federal Law n° 12,973/2014.

Eligible for tax settlement are the debts of corporate income tax and social contribution over net profits (jointly CIT) still in dispute at an administrative tribunal or in court up to May 3, 2022, that are related to the amortization of goodwill generated from the acquisition of equities, limited to mergers and spinoff transactions that took place until December, 31, 2017, whose equity interest has been acquired until December, 31, 2014  – the period of application of the rules established in Federal Law n° 9,532/1997.

According to information provided by the National Treasury Attorney's Office, the volume of debts now in dispute amounts to R$150 billion.

The deadline to adhere to the tax settlement sets forth in Public Notice n° 9/2022 is July 29, 2022.

The benefits of reduction applied over the amounts of principal, fine and interest vary from a range of 30 percent to 50 percent, depending on the conditions to pay the debts chosen by the taxpayer.

It is important to point out that Federal Law n° 13,988/2020 has not established that the reductions granted in tax settlement will not be considerable taxable income. Purely for CIT purposes, the reductions will be taxed at 34 percent.

The tax settlement set forth in Public Notice n° 9/2022 represents a unique opportunity to regularize debts derived from the amortization of goodwill. But despite that, it is worth mentioning that a case-by-case analysis must be carried out by taxpayers to decide whether the adherence to such a tax settlement is the best option.

As highlighted above, only debts which are tax-triggering events that took place in accordance with Federal Law n° 9,532/1997 are eligible to be enrolled in the tax settlement set forth in Public Notice n° 9/2022. That is why a case-by-case analysis by the taxpayer is important.

The majority of goodwill generated under the regime established by Federal Law n° 9,532/1997 was based on expectations of future profitability, which was attested by regular documentation or a technical report grounded on the discounted cash flow method.

Just to illustrate a few differences from the regime set out by Federal Law n° 12,973/2014, at the time Federal Law n° 9,532/1997 was in force, there was no restriction on amortizing goodwill generated in transactions with related parties and the law did not set out any deadline to provide documentation or a technical report attesting to the expectation of future profitability.

In view of challenging the amortization of goodwill and aiming to mitigate this benefit under the regime set by Federal Law n° 9,532/1997, the Brazilian tax authority developed understandings that were not formally set in the legislation; has tried to disregard transactions between related parties based only on assumptions, subjectivisms, or abstract concepts; and also has questioned documentation or technical reports due to such issues as formal mistakes.

Although some amortization of goodwill may had happened without solid grounds under the regime of Federal Law n° 9,532/1997, the Brazilian tax authority is not entitled to qualify every single transaction as harmful, conducted with abuse of form or with absence of business purpose, and disregard them without robust evidence.

Another element that must be considered before adhering to tax settlement concerns the tie-breaking vote rule also introduced in Federal Law n° 13,988/2020. Before the issuance of the law, tie-breaking votes were usually majority decisions which maintained tax assessments since  each was presented by the president of each Chamber of Administrative Tax Appeals Council  – this position is still reserved for tax agents. Very rarely were such votes favorable to taxpayers. Now, Federal Law n° 13,988/2020 sets forth that an interpretation favorable to taxpayers shall prevail when such votes are a tie. This modification has significantly increased the number of final decisions favorable to taxpayers in controversial matters such as amortization of goodwill.

Several administrative decisions rendered by the Administrative Tax Appeals Council dismiss the tax assessments issued by the Brazilian IRS regarding the amortization of goodwill under Federal Law n° 9,532/1997 when there was no evidence of illegality or based on the understanding that tax agents are not authorized to issue tax assessments that are based only on assumptions or subjectivisms. Furthermore, tax assessments that intended the backward application of the conditions to amortize goodwill established by Federal Law n° 12,973/2014 were also dismissed.

Courts have also rendered some decisions cancelling tax assessments whenever the taxpayer is able to attest that the requirements of Federal Law n° 9,532/1997 were observed.

In conclusion, we strongly recommend analyzing all the aspects (facts and evidence) of the transaction that has generated the amortization of goodwill under the regime of Federal Law n° 9,532/1997 to assess whether adherence to tax settlement set forth in Public Notice n° 9/2022 is the best alternative at hand.

*Renato Lopes da Rocha is a partner in the Tax group of independent Brazilian law firm Campos Mello Advogados, in cooperation with DLA Piper. Reach him here.