INSIGHT: Brazil—Corporate Tax-Related Initiatives in Response to Covid-19

Not even the most pessimist projections could ever have considered the catastrophic effects a virus could cause to the global economy in a few months. Pre Covid-19, several legislative measures and tax policy developments that took place in Brazil, some of which were summarized in my previous article, seemed to indicate a new phase of economic growth. Now, with a projected deep global recession, not only Brazil but other countries worldwide are struggling to determine how many digits to consider in their GDP decline forecasts.

For companies facing revenue reductions of over 90% and a significant decline in economic activity, “survival” is the new business. The level of uncertainty caused by the pandemic is so high that companies are investing their efforts to figure out how to manage cash flow, reduce costs (while preserving jobs) and to be prepared for a recovery following the end of lockdowns.

The Brazilian government has adopted several, insufficient, measures to help companies survive the crisis, including deferral of tax payments and wage subsidies. At the same time, the “new normal” imposed by Covid-19 will force companies to review their tax positions and explore interesting opportunities that are sometimes overlooked, particularly by multinationals that do not understand the specifics of the Brazilian litigation-driven environment.

This article summarizes the legal measures that have been adopted by the Brazilian government in the context of Covid-19 and, most importantly, discusses alternatives in the tax and social security areas that could help companies in preserving cash, with particular reference to favorable cases already examined by our higher judicial courts.

Overview of Brazilian Legal Measures Related to Covid-19

Despite the relatively late arrival of Covid-19 in Brazil, the introduction of certain legal measures has been strongly forced by circumstances. One good example is the postponement of tax obligations, which was an obvious government policy to preserve companies’ cash positions and, indirectly, save jobs. Before the government’s formal reaction to this matter, there were already over 3,000 individual lawsuits filed by companies to claim the deferral of tax obligations.

In contrast, Covid-19 has forced the government to introduce more flexible regulations on labor matters, including the possibility to have temporary salary reductions and suspensions. The government has also proposed regulations on remote work, granting of collective vacations and suspension of requirements related to health and safety at work.

In this scenario, the instrument called the Provisional Measure (PM) has been extremely helpful. The PM is a legal act for urgent and relevant matters through which the President can enact laws with immediate effect, subject to subsequent approval by the Congress. Most of the legal measures that have been adopted in the context of Covid-19 will therefore require future Congress consent.

Below is a summary of the most relevant legal measures adopted by Brazil.

Salary Reduction and Suspension of Employment Contracts

• Companies are authorized to introduce temporary salary reductions or to suspend employment agreements, subject to individual or collective agreements and provided that fringe benefits are preserved.
• Reductions and suspensions are (partially) compensated by state subsidies calculated on percentages of the unemployment insurance amount and varying according to company size, level of salary, etc.
• Employers may be required to complement such subsidies by paying allowances to the employee. Allowances may also be paid voluntarily by employers to ensure no actual reduction of monthly earnings.

Deferral of Tax Obligations

• Federal government has introduced a three-month deferral on payment of social security contributions (PIS/COFINS), payroll-related charges and the Severance Indemnity Fund (FGTS).
• For small and medium-sized businesses, there is a six-month deferral on the payment of the taxes under the simplified regime known as “Simples Nacional.”

Tax Reductions and Exemptions

• Allowances granted by employers in the context of salary reduction/suspension are exempt from usual payroll taxes.
• Temporary reduction on payroll-related third parties social security charges.
• Exemption of financial tax (IOF-Credit) on loans and other financing arrangements, including intercompany transactions.
• Temporary import duties and VAT exemptions on imported and local goods manufactured to prevent Covid-19 (including items for medical and hospital usage).

Corporate Matters

• The government has extended the deadline for the mandatory annual shareholders’ meetings that should be held by companies to deliberate on the approval of the previous year’s financial statements, election of management, etc. Such measures have also extended the terms in office of the current management until the date of the annual meeting.
• The Brazilian Securities Exchange Commission has regulated virtual meetings for publicly held corporations.
• Legal measures are under discussion to postpone the coming into effect of the Brazilian General Data Protection Law (LGPD) to 2021.

In addition to the above rules, almost all areas of law were impacted by the introduction of legal or administrative measures, including consumer protection, international trade, insurance, insolvency, etc. On the litigation front, deadlines were suspended with respect to the great majority of ongoing disputes. Furthermore, during the quarantine, several judicial and administrative bodies are regulating the introduction of virtual hearings.

As far as contractual arrangements are concerned, the pandemic has obviously increased the number of disputes and triggered price reduction and postponement claims. While Brazilian courts admit that pandemics represent force majeure and unforeseeable event, there is still controversy as to how such position can trigger termination or review of contracts. In many cases, application of force majeure and hardship doctrines will require the demonstration of changes to the initial balance of the agreements.

In the field of contractual disputes, given the long-lasting court disputes and the relatively high costs of arbitration procedures in Brazil, mediation and pre-litigation activities tend to be relevant alternatives while the effects of Covid-19 are still present.

Opportunities in Tax and Social Security Areas to Preserve Cash

Brazil is well known for the complexity of its tax and social security systems and, to a certain extent, the non-cooperative approach adopted by tax authorities. So it comes as no surprise that the level of litigation is extremely high. Companies are often required to discuss the validity of tax rules in courts and, in most cases, not to be part of certain tax disputes represents a loss of their competitive position in the marketplace.

At the same time, most of the favorable decisions rendered by Brazilian courts have no binding effects on all taxpayers, which usually requires each company to file its own individual claim. For obvious reasons, tax authorities will not voluntarily recognize the existence of a (tax) over-payment if they are not forced by a judicial order or a new law. As a result, it is common to have companies adopting tax positions that contrast with the consolidated view of Superior Courts.

This (conservative) approach overlooks the specifics of the Brazilian legal environment. As the American proverb says: the squeaky wheel gets the grease, that is, if you do not ask, you do not get. And sometimes the recognition of tax over-payment is possible regardless of any judicial claim. This explains why tax planning in Brazil is so important and why companies should follow very closely the development of tax disputes.

The following chart summarizes some of the matters that have already been consolidated by decisions from either the Superior Court of Justice (STJ) or the Federal Supreme Court (STF), with reference to business sectors that can take advantage of such decisions through tax recovery plans.

Recovery of tax over-payments based on the list above could have a huge impact for companies, but other specific matters can be further examined, with or without the adoption of judicial remedies. The list of opportunities is vast and may be extended to other topics depending on the business sector.

In the context of Covid-19, companies are also relying on theories related to force majeure to seek judicial protection on other tax matters, including the possibility to postpone tax obligations not covered by the existing government measures (e.g. income tax, State/Municipal taxes) and to eliminate bureaucratic restrictions on the use of tax credits. While those cases are still in the early stages, judges seem to be more sensitive to the companies’ claims.

What to Expect in the Future?

Governments move slowly by nature and this is particularly true for a country with over 211 million people and decentralized government bodies like Brazil. While Federal, State and Municipal governments are still figuring out how to have a coordinated approach to Covid-19, important legal measures were adopted to help companies survive the crisis.

However, there is a general feeling that such measures are still insufficient, particularly in view of their very short-term effects. In this scenario, companies should be sensitive to the specifics of the Brazilian tax environment.

A review of tax positions to identify opportunities represents a key element to manage cash flow. In many circumstances, the existence of consolidated case law from Superior Courts will ensure enough legal support for companies not only to adjust their tax calculations for the future, but most importantly to recover and monetize credits from the past, with immediate and positive cash impact.

Ricardo Maitto is a Tax Partner in TozziniFreire Advogados, Brazil. He can be contacted at: rmaitto@tozzinifreire.com.br.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.