Taxwise, when due diligence is carried out, it is interesting to consider the existence in progress and/or possibility of entering a tax debt reduction program (Refis). In Brazil, it is very common that taxpayers use installments to pay back their tax and non-tax debts with reduced sanctions and interest rates. Therefore, Refis can greatly influence the company’s valuation, not only by offering better payment options and modalities (installments), but also reducing tax and non-tax debts.
The importance of tax debt reduction programs has intensified because of the Covid-19 pandemic and the financial challenges faced by companies. There is a recent bill that aims to reopen the deadline for taxpayers to enter the “Special Program for Tax Regularization” (PERT), known as “new Refis”.
When it comes to Refis, there are some key points to pay attention:
1. Specific criteria: to closely analyze the specific law is essential and must be done very carefully because the criteria can vary. For example, requirements and conditions may change depending on the company’s characteristics (gross income, tax loss, etc.). In the “new Refis” proposal, loss of gross income means more discount;
2. Reduced sanctions and interest rates: besides taxpayers being allowed to pay in installments when entering the program, there is usually a considerable reduction in interest and/or sanctions (but never related to the main duty – taxes). The discount is usually relevant, considering the heavy fines in Brazil: the fine is 75% of the unpaid taxes;
3. Sanctions for non-compliance: once the company has entered the program, it is crucial to keep track of the payments to make sure they are always regular. The sanction for non-compliance is to be removed from the program, losing the benefits. Therefore, the original debt will be charged. The rule for the “new Refis” is that if the installments are not paid for 3 (three) consecutive months or 6 (six) alternate months, the taxpayer is removed;
4. Repeat debtor: it is important to check the company’s tax and business practices, mainly because the aforementioned bill includes a proposal to banish repeat debtors from Refis. The proposed legislation aims to prohibit taxpayers who were excluded from entering new debt reduction programs. So, there is a possibility that those who repeatedly fail to pay taxes will be excluded even from being candidates to Refis;
In such context, when a tax due diligence is carried out and the Brazilian company to be invested has tax debts, debt reduction programs become a real and hidden opportunity to positively influence the business. If the company has already entered a program and is paying in installments, it is crucial to monitor whether the obligations are being kept up to date and check the company’s ability to meet all its cashflow obligations.