substance over form in brazil (and la) in international...
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Prof. Dr. Marcos Aurélio Pereira Valadão
(BRAZIL)
Substance over Form in
Brazil (and LA)
In International Tax Cases
1 FIT Conference 2012
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 FIT Conference 2012
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 FIT Conference 2012
• 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.
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TAX PLANNING --TSUNAMI
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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).
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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”.
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BRAZIL
Civil Code (2002)
Art. 187. 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.
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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 FIT Conference 2012
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 FIT Conference 2012
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.
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CASE I : CARF 104-20749 (2005)
CARF found that the taxpayer (Case Mario
Frering) was liable regarding taxable dividend
distributions from B to C (ac. B>A). SoF.
TAXPAYER
(BRAZIL)
A
(BRAZIL)
C
(CAYMAN)
B
(BERMUDA)
Taxpayer owns
49,99% of A´s shares
1) A owns
100% of B´s shares;
3) 50% of B´s
shares was sold to C
2) C was created by
Taxpayer (100%).
4) B makes a dividend
distribution do C
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CASE II : CARF 105-17.083 (2008)
Case Marcopolo
MARCOPOLO
Exporter
(BRAZIL)
VOLVO
Supplier
(BRAZIL)
MIC Corp.
(BVI)
3rd Country
Final destination
Supplies
ACTUAL TRANSACTION
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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 FIT Conference 2012
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.
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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.
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CASE III : CARF 101-97070 (2008)
Eagle 2
EAGLE
(AMBEV)
(BRAZIL)
MONTHIERS
(URUGUAY) &
CCBA
(ARGENTINA)
JALUA
(SPAIN)
100 %
100%
Indirect control 17 FIT Conference 2012
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 FIT Conference 2012
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 FIT Conference 2012
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 FIT Conference 2012
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