Substance over Form in Brazil (and LA) In International Tax Cases. Prof. Dr. Marcos Aurélio Pereira Valadão (BRAZIL)

Transcription

1 Substance over Form in Brazil (and LA) In International Tax Cases Prof. Dr. Marcos Aurélio Pereira Valadão (BRAZIL) 1

2 Presentation Plan Theoretical approach: Common law vs. Civil law Brazil: Substance over Form (SoF) - historical perspective leading to introduction of GAAR (?!!) Brazil: Some important cases Latin America snapshot 2

3 The (SoF) approach is more suitable to common law systems, because the judge is allowed to innovate in cases that are not clearly described in the statutory law. Brazil and Spanish speaking countries are civil law countries (Panama is mixed ). In Central and South Americas 95% is civil law. 3

4 In the last few decades businesses have diversified a lot. Innovative financial schemes, creative business restructurings, innumerous derivative instruments, etc., provide current businesses with almost unlimited opportunities. Consequence: traditional normative systems are no longer sufficient to cope with the problem of aggressive tax planning. 4

5 TAX PLANNING --TSUNAMI 5

6 BRAZIL Since the 1960s judicial courts applied the (SoF) doctrine to tax cases on a very limited basis. Mostly, when case was pretty clear, and in terms of Private Law it was considered an unlawful action (civil wrong). Later in the 1980s, there was an important decision by the Fed. Court of Appeals in the case of Grendene (1987), where the court decided that the transaction was abusive (SoF). 6

7 BRAZIL In 2001, Complementary Law n. 104 introduced a GAAR rule in the National Tax Code (which is applicable also to States and Local Governments). In 2003, a new Civil Code (2002) entered into force with a clear notion of illegality of fraud against imperative law, and of abuse of rights. 7

8 BRAZIL Civil Code (2002) Art The holder of a right also commits a tort when, in exercising such right, clearly exceeds the limits imposed by its economic or social purpose, good-faith or morals. 8

9 BRAZIL Art. 116 National Tax Code (2001) states: Tax authority may disregard acts or legal acts performed for the purpose of dissimulating (disguising) the occurrence of the event giving rise to the tax or the nature of the elements that compose the tax liability, subject to procedures to be established in statutory law. 9

10 BRAZIL This paragraph demands other laws to establish the procedure. In 2002 the Congress did not approve the procedural law bill. However, since then, the decisions regarding tax planning matters rely more on substance over form. 10

11 Jurisprudence of Administrative Court of Tax Appeals (CARF) 1) Legal? >> YES 2) Simulation? >> NO 3)There is a economic rationality on business restructurings? >>YES Valid transaction However, the jurisprudence is not plain and predictable. 11

12 CASE I : CARF (2005) 4) B makes a dividend distribution do C C (CAYMAN) B (BERMUDA) 1) A owns 100% of B s shares; 3) 50% of B s shares was sold to C A (BRAZIL) 2) C was created by Taxpayer (100%). TAXPAYER (BRAZIL) Taxpayer owns 49,99% of A s shares CARF found that the taxpayer was liable regarding taxable dividend distributions from B to C (ac. B>A). SoF. 12

13 CASE II : CARF (2008) Case Marcopolo MIC Corp. (BVI) 3rd Country Final destination ACTUAL TRANSACTION MARCOPOLO Exporter (BRAZIL) Supplies VOLVO Supplier (BRAZIL) 13

14 CASE II : MARCOPOLO - FACTS MIC Corp is 100% controlled by Marcopolo. Transactions between Marcopolo and MIC Corp. (BVI) were correctly performed considering transfer pricing regulations. No CFC rules applicable at this time. There are similar transactions with offshore jurisdiction of Uruguay (ILMOT). 14

15 CASE II : Marcopolo Case Decision CARF found no business purpose for establishing MIC Corp. in BVI, based on lack of economic substance. All steps of the transactions were deemed to be legal, however the substance over form (SoF) approach was applied finding Marcopolo liable to tax. 15

16 ADDITIONAL COMMENTS -- CARF, in an similar case (Marcopolo, different years, CFC rules applied), decided in a different way. Under appeal, the Upper Chamber, did not reverse the decision. -- However, in another similar case (Arcelor Mittal, 2012) the same chamber adopted the SoF doctrine. 16

17 CASE III : CARF (2008) Eagle 2 EAGLE (AMBEV) (BRAZIL) 100 % Indirect control JALUA (SPAIN) 100% MONTHIERS (URUGUAY) & CCBA (ARGENTINA) 17

18 Case Eagle 2 What is at stake in Eagle 2 Case? Application of the Brazilian CFC regulations towards the subsidiary in Spain (that owns a subsidiary in Uruguay). Application of the Brazil-Spain DTA (arts. 7, 10, 23, IV, or none). Concept of indirect control (which here means SoF). 18

19 Eagle 2 -- Decision The lower chamber of CARF decided that, in this case, EAGLE Co. through an indirect control scheme would have wrongly avoided to apply the CFC rule and that the DTA would not apply. (SoF doctrine and tax transparency were applied, thus EAGLE was liable to tax). 19

20 LATIN AMERICAN SNAPSHOT Argentina has applied the disregard of legal entity doctrine for a long time. Mexico Article 109 (iv) of the Tax Code contains a provision that allows substance over form, but of limited application. Reforms? Colombia formal approach (one exception for transactions with shares), no GAAR. Venezuela - Following the trend (new law since 1999 allows substance over form). 20

21 THANK YOU FIT CONFERENCE