On May 3, 2022, the Brazilian tax administration announced it was offering taxpayers the opportunity to enter into a tax settlement agreement to end a long-lasting dispute. Taxpayers have until July 29, 2022 to decide whether they want to adhere to the terms and conditions of a tax settlement proposal to end ongoing goodwill amortization tax disputes.
Goodwill Amortization Tax Disputes
Brazilian legislation provided that the difference between the price paid for the acquisition of equity interest in a Brazilian company and the company’s net equity book value was considered “goodwill.” The goodwill generated under this circumstance could be amortized over at least five years, provided certain conditions were met.
Goodwill amortization reduces corporate income tax, thereby generating income tax savings equivalent to 34% of the amortized goodwill amount. Given the potential tax benefits associated with it, tax planning structures to generate goodwill followed by corporate reorganizations that allowed its amortization were very common in Brazil, particularly in the early 2000s.
Tax authorities, however, challenged taxpayers’ tax planning arrangements under different arguments, including the economic justification for the goodwill. A number of tax assessments were issued and litigation between taxpayers and tax administration ensued. That was the beginning of what has become one of the most important tax disputes in past decades.
Brazilian legislation has since been amended to limit some aspects of goodwill amortization. However, tax disputes involving pre-amendment corporate restructurings abounded. Today, hundreds of cases involving this matter are pending before administrative and judicial courts. More important than the actual caseload, however, are the amounts they represent.
The amounts involved are considerable. Goodwill amortization tax cases represent tens of billions of dollars. It has recently made the headlines that seven of the country’s top 10 biggest publicly held companies, including the Brazilian oil company Petrobrás, have goodwill amortization cases in Brazilian courts, involving an estimated total amount of $10 billion (see Beatriz Olivon, Valor Econômico, May 4, 2022, available here).
Tax Settlement Proposal by Tax Authorities
It is in this context that the Brazilian tax authorities have launched a tax settlement agreement proposal. The Brazilian tax code had laid out provisions dealing with tax settlement agreements for more than 50 years, yet they have only recently been regulated, thus providing guidelines for federal tax authorities and taxpayers to settle tax disputes.
Currently, according to Law No. 13,988/2020, federal tax authorities and taxpayers can enter into tax settlement agreements on three different grounds: overdue or unpaid tax debts that are considered “irrecoverable” or “difficult to recover”; low-value tax disputes; and relevant and widespread tax litigation concerning specific matters in dispute with multiple taxpayers.
The first two types of tax settlement agreement have been extensively used to end disputes between the federal tax authorities and taxpayers since their implementation a couple of years ago. For instance, tax settlements involving overdue or unpaid tax debts have exceeded one million agreements to date, resulting in more than $75 billion of back taxes being renegotiated.
Until now, however, tax settlement agreements involving relevant and widespread tax litigation were restricted to a sort of a “trial run” implemented last year to end disputes regarding the taxation of profit-sharing payments to employees. However, cases that qualified for this type of agreement involved much lower amounts when compared to goodwill amortization tax cases.
Tax settlement agreement regarding relevant and widespread litigation is a valuable tool to resolve economic or otherwise important disputes affecting multiple taxpayers: In particular, where ambiguous legislation can give rise to different interpretations, leading to disputes between taxpayers and tax authorities, as in goodwill amortization tax cases.
To qualify for the newly announced tax settlement agreement, taxpayers have to satisfy certain conditions, such having a pending dispute involving goodwill paid for the acquisition of equity interest before 2015 to the extent that the reorganization event that triggered goodwill amortization occurred before 2018. Taxpayers also have to renounce any pending appeal. For all the terms and conditions applicable for the tax settlement agreement offer, see here.
Taxpayers who are eligible can benefit from a reduction of up to 50% of the total tax debt (which includes back taxes, penalties, interest and recovery fees). The amount after the reduction is payable over a period of up to 55 months (plus a 5% down payment over 5 months). The sooner taxpayers choose to pay their tax debt, the higher the reduction to which they are entitled.
In short, this is an opportunity for taxpayers to resolve once and for all a longstanding dispute of large-scale value with the tax administration. To what extent taxpayers will effectively jump at the opportunity and accept the offer is still unclear—their decision may depend on the likelihood of their arguments prevailing in Brazilian courts if they continue to litigate instead.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Phelippe Toledo Pires de Oliveira is a tax attorney at the Office of the Attorney General for the National Treasury in Brazil (PGFN) and a postdoctoral researcher at the Institute for Austrian and International Tax Law (WU).
The author may be contacted at: [email protected]