Dear Readers: This publication Tax Bulletin # The Administrative Council of Tax Appeals is to inform our clients and interested parties on the main issues being discussed and decided in this court. In this 79th edition of our newsletter, we comment on the decision of the Tax Appeal Board (Câmara Superior de Recursos Fiscais, “CSRF”), which understood that, in an operation where shares have been issued at a premium, followed by the partial split in favor of the subscriber, a simulation occurs, and an ex-officio entry is required to tax the capital gain. We also comment on the decision in which the Tax Appeal Administrative Council (Conselho Administrativo de Recursos Fiscais, “CARF”) ruled for applying the provisions of the Supreme Federal Court (STF) decision issued under the ADIN (Direct Unconstitutionality Action) No. 2,588, in addition to adhering to the provisions contained in the International Double Taxation Avoidance Treaty. In order to access directly the text for each theme, click: Corporate Restructuring – Simulation – Aggravated Fine Earnings Abroad – Double Taxation Avoidance Treaties – Adin No. 2,588 Souza, Schneider, Pugliese e Sztokfisz Advogados law firm is available to its clients should they have any questions on the decisions commented on in this newsletter. Enjoy your reading! 79 Specific tax report n° 79 • Year VII • October 2014
Transcript
Dear Readers:
This publication Tax Bulletin # The Administrative Council of Tax Appeals is to inform our clients and interested parties on the main issues being discussed and decided in this court.
In this 79th edition of our newsletter, we comment on the decision of the Tax Appeal Board (Câmara Superior de Recursos Fiscais, “CSRF”), which understood that, in an operation where shares have been issued at a premium, followed by the partial split in favor of the subscriber, a simulation occurs, and an ex-officio entry is required to tax the capital gain. We also comment on the decision in which the Tax Appeal Administrative Council (Conselho Administrativo de Recursos Fiscais, “CARF”) ruled for applying the provisions of the Supreme Federal Court (STF) decision issued under the ADIN (Direct Unconstitutionality Action) No. 2,588, in addition to adhering to the provisions contained in the International Double Taxation Avoidance Treaty.
In order to access directly the text for each theme, click:
Corporate Restructuring – Simulation – Aggravated Fine
Souza, Schneider, Pugliese e Sztokfisz Advogados law firm is available to its clients should they have any questions on the decisions commented on in this newsletter.
Enjoy your reading!
79Specific tax report n° 79 • Year VII • October 2014
“SUBJECT: GENERAL TAX LAW STANDARDSCalendar Year: 2000AGGRAVATED FINEUpon verifying the simulation practice, which has been performed by orchestrating operations in order to avoid the Income Tax taxable event, enforcing the tax - plus aggravated penalty - is applicable. AGGRAVATED FINE. SPECIAL APPEAL. NON-ACKNOWLEDGMENT. LACK OF JURISPRUDENCE DISSENSION. In cases where no factual similarity between the compared judgments exists, the Special Appeal should not be acknowledged because jurisprudence dissension – a prerequisite for admissibility – does not apply.ESTIMATES – NO COLLECTION – INDIVIDUAL FINE – INDIVUDUAL FINE CONCURRENCY Enforcing an individual fine related to CSLL (Social Contribution on Net Earnings) based on a non-collected estimate is not applicable when the ex-officio fine has been entered after of the calendar year has been closed, under the settled jurisprudence of this Panel of the CSRF, for taxable events occurred prior to the enactment of the Provisional Measure No. 351/2007 (converted into Act No. No. 11,488/2007), which contains new wording to address the matter. Special Appeal from the Prosecutor dismissed.Special Appeal from the Prosecutor dismissed”.
It relates to an Assessment Notice issued to collect the Corporate Income Tax (Imposto Sobre a Renda da Pessoa Jurídica, “IRPJ”) due to the disallowance of costs or expenses by not evidencing the need thereof, as well as capital gains arising from the divestiture of investments evaluated based on the shareholders’ equity at its affiliate (“Affiliate”), since the taxpayers’ actions have been disregarded, plus individual fine, aggravated fine, and ex-officio fine.
In the case at hand, the Taxpayer and two additional companies held shares of the Affiliate (“Shareholders”), which, in turn, was the holder of a wholly-owned subsidiary (“Subsidiary”), which owned a supermarket chain.
Under an Extraordinary General Meeting (“EGM”), the Shareholders resolved to convert the Affiliate into a public company. Subsequently, a new EGM was convened, where the Shareholders approved the increase of the Affiliate’s capital by means of the subsequent issuance of 12 new shares at a premium, based on future profitability, corresponding to 0.06 percent of the share capital of the Affiliate. Such shares have been subscribed and fully paid by the Investor Group for the amount of R$ 48,500,000.00.
On the same date, a new EGM has been held, approving the partial spinoff of the Affiliate and executing the Shareholders’ Agreement, to which the “Association Commitment Agreement Based on the Purchase and Sale of Shares and Miscellaneous Agreements” entered into between the Shareholders and Investor Group (“Agreement”) has been appended, setting forth the terms for the realization of such corporate transactions.
Given the facts, the Inspection Office has understood that the corporate restructuring transactions have been planned by the Taxpayer to conceal the capital gain upon divesting the ownership interest of the Affiliate - the indirect holder of the supermarket chain. Therefore, an Assessment Notice has been issued to collect the IRPJ due on the capital gain arising from the divestiture of the aforementioned investment, as well as on non-substantiated costs or expenses with legal advice services.
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Challenging the Assessment Notice, the Taxpayer claimed that the expenses disallowed by the Tax Authorities are regular, usual and necessary to its business, being also properly evidenced by the appropriate documentation. Regarding the claimed purchase and sale simuilation, the Taxpayer said that association between companies is lawful and that the corporate reorganization effected, in turn, had sound economic grounds, and that all transactions have been duly evidenced, recorded and accounted for.
Upon reviewing the documents submitted, the Federal Revenue Office - Judgment (Delegacia da Receita Federal de Julgamento, “DRJ”) found two documented versions of the same transaction, i.e. the Shareholders’ Agreement and the Agreement. In this case, it should be determined whether the transfer of a portion of the Affiliated to the Investor Group “has been conducted by virtue of a thread of valid, enforceable transactions (individually considered); or whether such thread consists merely of simulated transactions devoid of any economic content”.
In view of the foregoing, the judges concluded that the aforementioned corporate transactions were intended to divest 50 percent of the Affiliate’s shares in favor of the Investor Group, being engineered only to conceal the capital gain achieved with the sale of the ownership interest in question.
This is because the payment of a premium by the Investor Group on the purchase of 12 shares of the Affiliate was based on the expected future profitability of the company. However, after the aforementioned shares have been issued, the Affiliate’s spin-off has been decided. Thereafter, the Shareholders held 50 percent of the Affiliate, and the Investor Group held the remaining 50 percent, which demonstrates, in fact, that the Investor Group had no intention to join and stay with the company, much less wait for any future profits that could be yielded by the company.
Furthermore, the judges have not found any documents justifying the Affiliate’s capital increase or the amount paid by the Investor Group for the negligible ownership interest that had been purchased. Thus, it became clear that the only intention of both the Shareholders and the Investor Group was to divest and purchase, respectively, 50 percent of the Affiliate’s shares.
Based on the foregoing, the DRJ concluded that all inconsistencies pointed out by the Inspectors unequivocally demonstrate that the corporate transactions were conducted only on paper, and that disregarding the taxpayer’s actions is applicable, with the consequent recovery of the IRPJ due on the capital gain related to the divestiture of the equity interest, plus aggravated fine, by virtue of tax fraud. Regarding the disallowance of expenditures, the judges considered that enforcing an individual fine and an ex-officio fine was applicable, but aggravation has been not applied.
After becoming aware of the decision issued by the DRJ, the Taxpayer filed a Voluntary Appeal, dwelling on the arguments presented in the challenge. The members of the First Chamber of the former First Taxpayer Board, after reviewing the case and the relevant documentation, understood that the tax documents submitted by the taxpayer evidence the actual provision of services and decided, by majority vote, to rule out such requirement. Further, they have ruled out the requirement of an individual fine and the aggravation of the ex officio fine, since the Taxpayer has submitted to the inspectors the requested documents and responded to the summonses.
On the other hand, the members of the Board have upheld, by majority vote, the requirement concerning
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the capital gain and the aggravation of the ex-officio fine, since they understand that the operation carried out by the Taxpayer was simulated in order to conceal the transaction actually conducted and, thus, to avoid paying the taxes due on capital gains that would be earned thereupon.
The National Treasury has filed a special appeal against this decision, which has been partially acknowledged, for follow-up and review, by CSRF, only of the arguments relating to the dismissal of the individual fine and the aggravation of the ex officio fine.
The taxpayer, in turn, submitted counterarguments to the National Treasury’s appeal, along with a special appeal; the CSRF has reviewed only the matter related to the classification of the ex officio fine.
Regarding the application of the aggravated fine, the reporting member clarified that, when simulation aimed at reducing or eliminating the payment of taxes occur, this is a case of tax evasion, and the application of an aggravated fine applies. Additionally, in the case at hand, the tax evasion has also been characterized by collusion, since more than two entities contributed to the outcome of the transaction.
Given that, in the case at hand, the corporate transactions intended to conceal the actual business intended by the parties – i.e., the purchase and sale of shares – which itself denotes simulation, as well as tax fraud, the board members have decided by majority vote to uphold the aggravated fine.
Finally, the Board Members have, by majority vote, dismissed the special appeal filed by the National Treasury regarding the aggravation of the ex officio fine, since the jurisprudence dissension raised has not been characterized (an admissibility prerequisite), and upheld the decision handed down by the Members of the First Chamber of the First Taxpayer Board, which ruled out the application of an individual fine.
“Subject: Corporate Income Tax – IRPJCalendar Year: 2004, 2005SUBSIDIARY IN ARGENTINA. ASSUMED DIVIDENDS. DISTRIBUTION TO THE AFFILIATE IN BRAZIL. TAXATION.Article 74 of MP [Provisional Measure] No. 2,158-34/2001 sets for the fictitious assumption for taxation of dividends received by beneficiaries established in Brazil, related to the availability of profits earned by affiliates or subsidiaries abroad. The Treaty between Brazil and Argentina does not eliminate the applicability of taxation to the Parent Company headquartered in Brazil, regarding the dividends made available by the Argentinian subsidiary and not taxed in this country.AFFILIATES IN ARGENTINA AND PARAGUAY. TAXATION OF INCOME MADE AVAILABLE. ARTICLE 74 OF MP No. 2,158-34/2001. UNCONSTITUTIONALITY.The Federal Supreme Court (STF), upon reviewing the Adin (Direct Unconstitutionality Action) No. 2.588 regarding the applicability of article 74 of MP No. 2,458-34/2001, ruled for the unconstitutionality of the provision as applied to Brazilian companies affiliated to entities headquartered in countries without tax benefits”.
The decision in question refers to an Assessment Notice issued for the collection of Corporate Income Tax (Imposto de Renda da Pessoa Jurídica, “IRPJ”) and Social Contribution on Net Earnings (Contribuição Social sobre o Lucro Líquido, “CSLL”) on profits earned by foreign subsidiaries and affiliates of a Brazilian
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Taxpayer, relating to calendar years 2004 and 2005.
In short, the Tax Authorities understood that the profits of subsidiaries and affiliates located in Bolivia, Paraguay and Argentina should be fully open to taxation by the Brazilian Taxpayer, pursuant to article 74 of the Provisional Measure (“MP”) NO. 2,158-35/2001, which states that, when determining the IRPJ and CSLL calculation basis, the profits earned by subsidiaries or affiliates abroad should be considered available to the parent company or affiliate Brazil at the balance sheet date when these have been calcu-lated, irrespective of when the results have actually entered in Brazil.
Challenging the decision, the Taxpayer argued that (i) the Inspection failed to consider their tax losses, as well as the negative CSLL (social contribution) calculation basis; (ii) regarding the affiliate and subsidiary located in Argentina, the Double Taxation Avoidance Treaty signed between Brazil and Argentina eliminates the applicability of article 74 of the aforementioned the MP, either by applying article 7 or article 10 com-bined with article 23, which provides that dividends distributed to the Brazilian company shall be exempt from taxation in Brazil whenever such dividends have been taxed in Argentina, and if the Brazilian company holds more than 10 percent of the share capital; (iii) only companies whose ownership interest is valued by the equity method are subject to the taxation system provided for in article 74 of the aforementioned MP, based on the provision of article 8 of the Normative Instruction (“IN”) No. 213/2002; and (iv) the Tax Authori-ties failed to consider the taxes paid abroad, as provided for in article 26 of Act No. 9,249/95 and article 14 of the IN 213/02.
The Federal Revenue Office - Judgment (Delegacia da Receita Federal de Julgamento, “DRJ”) partially upheld the challenge, acknowledging the claims (i), (ii) and (iii) above, giving rise to the filing of volunteer and ex officio appeals.
When reviewing the ex officio appeal, CARF has seen fit to uphold the decision issued by DRJ regarding the impossibility of taxing earnings arising from the ownership interest valued at acquisition cost, applying article 8 of the Normative Instruction (“IN”) No. 213/2002, as well as the requirement of taking into consideration the Taxpayer’s tax losses and negative calculation basis (items i and iii).
Regarding the applicability of the Treaty signed between Brazil and Argentina, although CARF has understood that the fictitious distribution of earnings, addressed by article 74 of the MP corresponds to the dividends distribution addressed by article 10 of the aforementioned Treaty, the decision held that article 23 of the Treaty, which provides that “dividends paid by a company established in Argentina to a company established in Brazil - which holds in excess of 10 percent of the capital of the payer company, which are taxable in Argentina under the present Agreement - shall be exempt from taxes in Brazil” could not apply to the matter, since the records show no evidence of payment of the tax in Argentina.
Further, regarding the Argentine affiliate company whose earnings have not been actually distributed, CARF applied the STF ruling issued during the trial of ADIN No. 2,588, under which, considering that Argentina is not a country that provides tax benefits, article 74 of MP No. 2,158-35 should not apply, and the earnings arising from this company should not be taxed.
When reviewing the voluntary appeal, the same understanding of the Supreme Federal Court mentioned above has been applied to preclude the application of article 74 of MP 2,158-35 on the earnings of the affiliate in Paraguay, a country also considered as a “regular taxation country.” Finally, with respect to
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crediting the tax paid abroad, CARF understood that, since such tax would have been applied to the profits earned by companies abroad - not on the remittance of dividends -, the claimed credit could not become effective, since this taxation applies to different types of income.
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Team responsible for preparing The Administrative Council of Tax Appeals Bulletin:
