There are specific tax-wise aspects when a due diligence is carried out in Brazil. Besides looking for tax debts and liabilities, it is extremely important to consider judicial actions filled by the company and its current state (“active” litigation):
Lawsuits filed to recover unduly paid taxes can profoundly influence the company’s valuation and potently can make a difference when closing the deal. That is for all sorts of reasons:
(i) to discuss tax issues in Court is commonplace for companies in Brazil. If they do not discuss, the recovery of unduly paid taxes may be in jeopardy even if the Court recognizes it later by setting a precedent, which means the company will be in disadvantaged compared to its competitors;
(ii) in Brazil, a company can only recover taxes unduly paid from the last 5 years prior to filing the lawsuit. This means that every month it takes to file it, one month of tax recovering is lost;
(iii) the Brazilian Supreme Court (STF) has been using a judicial technique called “modulation of effects of the rulings”. This means, strictly speaking, that if a tax law is rendered unconstitutional, only companies that filed lawsuits can recover the taxes unduly paid (the others will not be able to claim the past, buy only benefit from the precedent to stop paying from that point on);
(iv) judicial deliberations can influence each other. For instance, taxpayers who are entitled to the recover unduly taxes paid since the victory for taxpayers in the “thesis of the century” (exclusion of ICMS from the PIS/COFINS calculation basis) will be taxed under Corporate Tax on Income (IRPJ) and the Social Security Contribution on Profits (CSLL).
However, there is another tax discussion before the Brazilian Supreme Court that aims to rule out the aforementioned taxes on default interest (SELIC) when recovering taxes. The ruling is set to happen in early August/2021 and the outcome is likely to be favorable to taxpayers. If so, that will mean another important victory to companies, but it is to be expected that only the companies that are discussing the matter in Court will be benefited.
In such context, when a due diligence is carried out, tax-wise it should not only focus on the debts and unrevealed liabilities of companies, but also on the hidden opportunities that can impact the business.