Cecilia Machado: Litigation Zero does not attack the causes of tax litigation

One of the first economic measures taken by the new government was to establish a fiscal recovery plan to deal with the significant expansion in expenses resulting from the Transition PEC: an adjustment on the revenue side, with emphasis on the newly created “Zero Litigation Program”.

According to Carf’s statistics —the body that assesses and judges taxpayers’ non-compliance with tax requirements—, there are 93,000 lawsuits and more than R$ 1 trillion in dispute. The government estimates that the program should expand collection by R$50 billion on an extraordinary basis and by R$20 billion on a permanent basis, which would reduce the primary deficit by 0.7 percentage points (of GDP) in 2023.

In general terms, the program proposes two actions. First, it seeks to bring more agility to the processing of processes by establishing the end of the ex officio appeal and increasing the authority for access to the CARF. Taken together, these measures should reduce litigation time and allow CARF to focus efforts on the larger cases and are largely successful.

Ex-officio appeals do not add much value to the trial, as the decision remains upheld in 90% of cases (IDB, 2022). In addition, the vast majority of cases (86,000) concentrate just over 10% of the stock of values ​​under judgment at CARF, while only 162 cases concentrate almost 50% of them (managerial data from CARF, 12/2022).

Secondly, the program seeks to increase revenue both through incentives for companies to regularize (with a 100% discount on fines due) and through debt renegotiation, with discounts on the total amount of the debt (including taxes, interest and arrears). ) for individuals, micro and small companies and discounts on interest and arrears for legal entities in higher value cases.

Put in these terms, the Zero Litigation Program is similar to a Refis, since it provides some benefit to the taxpayer in dispute with the Union. And this is where the new program fails in its design. Granting benefits to taxpayers who enter into an agreement and renegotiate their debts with the Union stimulates litigation itself: whoever contests a tax gains time and even receives a discount.

In other words, taxpayers are expected to make strategic use of tax litigation over time. If, on the one hand, collections can increase with the renegotiation of debts and with the end of disputes existing at present, on the other hand, they can fall when other taxpayers start to question the payment of their taxes, waiting for the reissue of a new program like this in the future.

A study on Refis conducted by the Federal Revenue Service in 2017 corroborates this view, showing that few opting for special installment schemes are able to settle their debts and that many roll over their debts in new Refis. In addition, a 2022 IDB study documents that taxpayer behavior responds to the economic, financial and business incentives of the tax process, thereby increasing tax litigation.

Finally, the eligibility criteria for discounts on renegotiating the debts of larger legal entities —only irrecoverable or difficult-to-recover credits qualify for the program— raise the question whether discounts should be given to companies that fall into this category, such as that are in judicial recovery. If the credit profile is related to the company’s productivity, would it make sense to amplify the distortions of the tax process to facilitate the renegotiation of the tax debts of the less productive companies just to maximize the collection of the Union?

The causes of excessive Brazilian tax litigation are known. They involve the high complexity of tax legislation, with special regimes and frequent changes in rules and rates, something that only a broad tax reform will be able to solve.

Granting benefits to taxpayers in the renegotiation of their debts, as established by the new government program, only attacks the symptoms —and not the causes— of the excessive judicialization of tax debts. The “Zero Litigation” has unclear tax impacts and may, contrary to what is desired, further stimulate the dispute between taxpayers and the Union.