CARF: House approves bill that gives US$10 billion to Lula, shaping the future of tax litigation in Brazil

On Friday, the Brazilian House of Representatives approved the CARF (Administrative Council of Tax Appeals) bill, which reintroduces the casting vote in CARF decisions (read below).

The return of this provision is part of the anti-deficit package proposed by Minister Fernando Haddad in January.

Despite changes made to casting votes, Haddad expects to collect R$50 (US$10) billion in 2023.

The bill’s approval is seen as a victory for President Luiz Inácio Lula da Silva’s government and demonstrates the influence of Chamber President Arthur Lira and the Centrão voting bloc (a group of center-right political parties).

The bill proposes the return of the casting vote in CARF decisions, following an agreement between the Ministry of Finance and the Brazilian Bar Association.

The model is less punitive towards companies defeated with this type of vote. They must pay their debts without fines or interest within 90 days in up to 12 installments.

Failure to comply with the installment payments will result in additional interest charges.

The bill also includes provisions for extended payment deadlines, reduced fines for companies participating in compliance programs, and a transition period for cases judged by Carf during the effectiveness of provisional measure 1,160 of 2023.

The minimum limit to access CARF was not expanded as initially proposed by Beto Pereira, ensuring access for cases considered to be of small value.

The approval of the CARF bill marks a significant development in tax legislation, impacting the Brazilian government and its fiscal policies.

WHAT IS CARF

The Administrative Court of Tax Appeals (CARF) division of the Ministry of Economy in Brazil handles taxpayer appeals against federal tax assessment notices.

CARF has judges appointed by both the tax administration and taxpayer associations, leading to a perception of fairness.

In 2016, CARF underwent reforms to increase transparency following Operation Zelotes, which uncovered the need for structural changes.

One consequence of the reform was a shift in judges’ positions on important matters such as the deductibility of goodwill amortization and penalties for fraud.

Previously, taxpayers had a higher chance of winning cases, but since 2016, victories became scarce, particularly at the Superior Chamber of Tax Appeals (CSRF).

Many cases decided against taxpayers were the result of tied disputes between judges representing the tax authorities and taxpayers.

The tie was resolved by the casting vote of the panel’s head, always appointed by the tax administration.

In recent years, the casting vote gained significance, favoring restrictive interpretations by the Brazilian Internal Revenue Service.

However, a law effective April 14, 2020, introduced a new tiebreaker rule at CARF. According to this law, if there is a tie vote in a tax dispute, the case must be decided in favor of the taxpayer.

This change allowed taxpayers to win cases previously considered lost at the administrative level, potentially avoiding lengthy and costly judicial proceedings.

The elimination of the casting vote sparked controversy. Some experts and scholars welcomed the new rule, seeing it as a shift away from cases heavily favoring the tax administration.

However, others challenged its constitutionality, arguing that it was unrelated to the subject of the law and was not originally part of the legislative discussion.

The Ministry of Economy also issued an ordinance stating that the new tiebreaker rule only applies to taxes to be collected and not to other types of proceedings.

This led to further opposition from Congress, as they believed the Ministry exceeded its regulatory powers.

Due to the COVID-19 pandemic, CARF has conducted virtual judgment sessions primarily for less controversial cases or those with lower amounts involved.

Therefore, applying the new rule to significant cases previously resolved by the casting vote is yet to be seen.

In the coming months, the Supreme Court will determine the law’s constitutionality, Congress will address the Ministry’s ordinance, and CARF will apply the new rule to more complex cases.

These developments will shape the future of tax litigation in Brazil.

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