Retroactive tax collection: Brazil – Where even the past is uncertain

Several companies received favorable court rulings that considered law 7,690/1988, which established the social contribution on net profit (CSLL), as unconstitutional, meaning that these companies were not obliged to pay this tax, resulting in a reduction in the costs for this .

In recent news, where the Federal Supreme Court formed a majority to uphold the retroactive collection of taxes from companies, the STF understood that the 1988 decision lost its validity due to the change in understanding on the constitutionality of the CSLL, where the rapporteur of the case, Minister Marco Aurélio stated that Refis (Tax Recovery Program) was a tax benefit granted by the State that could be withdrawn or modified based on the public interest.

The intention is to retroactively levy taxes on companies that have not paid taxes in the past five years, which will cause billions in losses for companies that have joined Refis as they will have to pay billions of reais in back taxes, with fines. and interest.

In addition to the above-mentioned loss, this insight also discourages compliance with future tax programs that the government could set up to boost revenues, and as argued by the ministers who disagreed with the decision, Ricardo Lewandowski, Gilmar Mendes, Dias Toffoli and Cármen Lucia: “The change in the Refis rules created legal uncertainty and respected the good faith of the companies that joined the program.”

Before elaborating on this issue, highlighting the threat to the economy that this measure poses, I believe it is relevant to explain an idea that is superficially contradictory and that refutes the reasoning used by those who support these types of proposals: Excessive tax collection can lead to a reduction in revenue.

The simplistic and ambiguous reasoning that the increase in taxes leads to a proportional increase in state revenues is an almost spontaneous idea that does not take into account the fact that the increase in the tax burden leads to a decrease in incentives for companies and individuals to generate income and wealth.

In practice, this means that the state can collect less money than if it were to collect taxes at a lower level.

a Laffer curve theory explains this phenomenon. According to her, there is an “optimal” level of taxation at which revenues are maximized and as a result, revenues above this level tend to decline as companies and individuals stop generating revenues to avoid taxes.

In other words, assuming that tax and revenue are perfectly symmetrical for illustrative purposes, we can use the following example for better understanding: If a country charges zero taxes on an individual’s work, his revenue will also be zero.

But what if taxes increase? To some extent, the higher the tax, the more the government collects. What this economic theory explains is that raising taxes beyond a certain point would lead to the loss of income incentive, creating less work and therefore less income.

Similarly, and looking at the other end of the curve, let’s imagine that the government taxes the individual’s work 100%. In this case, the collection would not be 100% of the income, after all, an incentive for the employee, which is reward and because no one would work for free, it would be easier for the individual not to work, thus not generating wealth and this results in 0% revenue from the state.

We leave the illustration and return to our reality. In Brazil, the tax burden is one of the highest in the world: according to the World Bank, Brazil’s tax burden is equivalent to 33.7% of GDP, one of the highest levels among emerging economies.

Therefore, retroactive tax collection is a measure that could lead to a reduction in revenues and further encourage companies to evade taxes, in addition to contributing to the current problem of legal uncertainty in Brazil.

Looking at this legal aspect, I cannot fail to mention the possible violation of several basic principles of the Brazilian legal system, which are guidelines that guide the interpretation and application of laws, which aim to ensure the stability of the legal order and to provide for a fairer and more efficient application, impartially.

Principles such as the principle of fiscal legality, legal certainty, and especially the principles enshrined in Article 150, III, of the Federal Constitution of Brazil, which refers to the principle of tax priority and the non-retroactivity of taxes.

Demanding payment of an unpaid amount goes against several legal presumptions aimed at protecting taxpayers, in addition to a recurring practice of introducing measures that violate the right to private property.

The truth is that these indefensible tax increases act as an incentive for capital flight. Companies and individuals choose to transfer their resources to countries with more favorable tax regimes.

An example is the Brazilian scenario in 2016, the year in which the government adopted a reform that increased the tax burden on companies and the result was the migration of several Brazilian companies to countries with more favorable tax regimes, such as Uruguay and Paraguay.

Knowing that this article is not intended to frighten taxpayers or merely criticize the measure in question, I emphasize that looking for countries with measures that are more favorable to the individual, that protect their assets and reduce their tax burden is not only legal is, but also a reality that applies to different companies and individuals.

These not only transfer their resources to countries with a more simplistic and advantageous tax regime, but, and I cannot fail to mention, employ crypto-economy strategies, when the company’s activities allow it, such as the adoption of crypto- assets that the The decentralized mode of transactions from one country to another allows them to transfer their resources without the need for the intervention of financial institutions.

I emphasize that the solution to a problem is always simpler than the problem itself. The proof of this is the Liberationa company specialized in crypto assets that devises strategies to significantly reduce the tax burden, through the internationalization of assets, and that directly aims to protect its resources against these types of measures.