The complexity of the Brazilian tax system generates a volume of tax litigation that is unparallel when compared to other countries.
The cases include both enterprises seeking tax credit against government from all levels (municipality, state and federal) and the other way around – the government demanding tax from enterprises.
When due diligencing opportunities in Brazil, it is not uncommon that foreign lenders and investors feel uncomfortable or find hard time to assess the actual tax risk of a particular deal due to such a large number of lawsuits.
To give foreigners some guidance, consider the two points below:
1. When companies are sued by tax authorities. Pay special attention to passive lawsuits Brazilian companies face (the ones the government is filing against) and the actual tax amount involved for two reasons:
(i) tax is qualified as a senior debt with statutory priority in Judicial Recovery and Bankruptcy, and
(ii) companies with overdue taxes are in general restricted from contracting with government and have difficulties to do business with private sector also, although they seek court relief to continue doing business with such parties in case the particular tax is being subject to litigation.
2. When companies sue the Government. Unlike other jurisdictions, it is common that small to large size companies challenge certain taxation in courts based on mainly two factors:
(i) Brazilian tax system is highly complex. In certain situations, similar taxes are levied by the municipality, state and the federal government, causing overlapping or over(double) charge. In others, companies understand that the tax authority applied wrong criteria to calculate a specific tax; and
(ii) It is not generally expensive (compared to US for example) to file tax lawsuit in Brazil. So, companies feel encouraged to seek reduction on their tax burden in the courts.
Based on the above, the complexities of Brazilian tax system and the existing high volume of litigation highlight the importance of tax due diligence when assessing a potential financing or equity investment in Brazil.