Among the world’s tax regimes, the tax authorities of Brazil, France and Russia are often perceived as some of the most difficult to deal with. So it may come as a surprise that there are plenty of options for working out tax issues at the administrative level in these countries. As the financial and reputational cost of litigating tax disputes for companies rises and as tax authorities seek to improve efficiency and reduce costs, going to court is becoming a matter of last resort in many countries. Companies with operations or holdings in Brazil, France and Russia stand to benefit as tax authorities in these countries embrace this global trend.
Among the world’s tax regimes, the tax authorities of Brazil, France and Russia are often perceived as some of the most difficult to deal with. So it may come as a surprise that there are plenty of options for working out tax issues at the administrative level in these countries.
As the financial and reputational cost of litigating tax disputes for companies rises and as tax authorities seek to improve efficiency and reduce costs, going to court is becoming a matter of last resort in many countries. Companies with operations or holdings in Brazil, France and Russia stand to benefit as tax authorities in these countries embrace this global trend.
In a recent webcast, Sharon Katz-Pearlman led a panel discussion on administrative alternatives for resolving tax disputes with the Tax Dispute Resolution and Controversy Services leaders from KPMG International’s network of firms in Brazil, France and Russia.
The latest developments in administrative tax settlement in these countries are summarized below. Of course, sometimes, litigation can become a taxpayer’s final recourse. Coming soon, Part 2 of this article will examine what happens when tax disputes reach the courts in these countries.
Despite Brazil’s notorious reputation for tax complexity, its tax system features highly developed mechanisms for settling disputes at the administrative level. That’s fortunate for Brazilian taxpayers, because sooner or later, a tax dispute is almost inevitable. Gray zones riddle the country’s tax laws, and the tax authorities are bound by legal provisions and administrative guidelines that give them no leeway for negotiation – regardless of legal points or discounts on penalties and interest.
During tax audits, face-to-face interaction with the tax authorities can be effective in raising business awareness and gaining agreement on factual information. Since negotiation of a tax law’s application isn’t possible at the audit stage, it’s important for your representative to show a strong command of the facts and interpretation of the law at the audit’s outset. Tax regulations can help anticipate the auditor’s position, and court decisions, while not binding, can offer important clarification of legal gray zones. Once the tax adjustment is issued, however, in-person interaction with the tax authorities becomes limited.
You can pursue dispute resolution in Brazil through two routes: either by pre-litigation administrative review and by judicial review. If you are unable to achieve resolution through the administrative review route, you can then apply to the courts for recourse under judicial review, but not vice versa. Under both routes, tax amounts in dispute continue to attract interest at the current, relatively high rate of 13.75 percent while the dispute is ongoing.
Brazil’s tax system provides three levels of administrative review:
This administrative review structure is in place in Brazil’s national, provincial and municipal tax system. Constitutional matters cannot be argued through this system. However, the panels’ higher degree of tax specialization relative to the courts makes administrative review the preferred route for resolving disputes based on tax planning and matters of fact and evidence.
The administrative review process can take 3 – 5 years. Cases where large sums are at issue are given priority, which usually results in a quicker resolution. However, administrative reviews are non-binding, so you could end up with the same disputed assessment in a later year and have to initiate the procedure all over again.
Recent developments are prompting change in Brazil’s tax resolution process. Judgments of Brazil’s second highest administrative-level tax body (Conselho Administrativo de Recursos Fiscais—CARF) have been suspended until further notice due to investigations involving allegations of a bribery scheme involving 74 multinational companies. CARF reforms announced in June 2015 will see fewer panels comprised of more taxpayer representatives. However, as lawyers will be banned from representing a taxpayer before CARF, the quality and independence of CARF proceedings may be compromised.
On a more positive note, even though aggressive tax audits are causing more disputes at the state and municipal levels, an increase in transparency and impartiality is easing tax authority relations.
Looking ahead, Brazil is introducing a new system of binding advance tax rulings and changing the administrative court rules to bind them to follow interpretations rendered by the Judicial Superior Courts. Brazilian tax authorities have also begun consultations with taxpayers on the development of new tax regulations. Together, these developments are expected to reduce the potential for tax disputes in Brazil in the future.
In its campaign against tax fraud, we noted that the French Tax Authorities became more forceful in the conduct of tax audits. Tax disputes are rising, and this rise is expected to continue due to assertive new tax authority practices. Further aggravating matters is the French Tax Authority’s (FTA) growing tendency to construe tax optimization as tax evasion. As more disputes have emerged, more administrative appeals and court proceedings have been launched in the past few years.
France’s tax administrative process is a lengthy one that involves a multi-level hierarchy of appeals. The system aims to reduce occasions for litigation by encouraging open dialogue between taxpayers and tax auditors and allowing for several different reviews of the same audit file. You can access the hierarchical appeal process any time before the FTA issues a tax collection notice, and then take your case through the hierarchy with a view toward reaching an agreement.
The five levels of appeal in the hierarchy are as follows:
Unfortunately, based on recent experience, this appeal process may be increasingly ineffective and often merely constitutes a step for negotiating the amounts at stake. Litigation on some issues seems inevitable, and the biggest benefit of taking part in the appeals process is to delay the issuance of the collection notice.
The introduction of the National Committee of Experts is a positive sign that the FTA is working to find ways to improve the process. However, only the FTA can consult the committee and taxpayers cannot raise their own arguments. Due to this lack of transparency, it remains to be seen whether the intended improvements will be realized in practice.
Russia has had in place administrative mechanisms for resolving disputes for many years but their use has been neglected. Now, as a result of government measures to encourage out-of-court resolution, administrative settlements are outpacing litigation. These measures include:
Russia has also taken steps to ensure administrative errors are fixed through the administrative process. These include errors made by tax auditors in calculating amounts, applying limitation periods and neglecting to review critical documents and evidence.
Additionally, with Russian tax authorities winning about 78 percent of tax court cases (by Russian ruble value), taxpayers are increasingly finding that litigation is not worth the effort1. With more disputes involving issues over transfer pricing and cross-border transactions, tax judges often lack the competence to handle the level of technical complexity or manage the large volume of documents produced in evidence. The tremendous publicity that results when taxpayers lose tax court appeals is another significant deterrent to litigation.
Russia’s administrative appeal process consists of three levels:
Of course, your best bet is to avoid tax disputes entirely, and you can encourage this result by managing your relationship with the Russian tax authority as your audit proceeds. Remember that you are only required to produce documents that have bearing on your tax affairs. Rules are in place to prevent auditors from embarking on fishing expeditions – though attempts to skirt these rules are common. You are entitled to object to unreasonable information requests or ignore them altogether, which is often your best way to avoid any chance of factual misinterpretation.
Additionally, the governments of Russia and many other countries are gaining broad new powers to collect evidence through cross-border exchange of information. Russia’s tax authorities are using these powers with increasing frequency to request taxpayer data from authorities in Cyprus, the United Kingdom, the United States and the Netherlands, to name a few.
Taxpayers have countermeasures at their disposal to influence how tax authorities respond to information exchange requests, and use of these measures will become increasingly important as tax authorities’ powers in this area continue to expand. For example, in the case of Russian source evidence, there is nothing in the law to prevent you from discussing the matter with third parties to ensure their disclosure is factually accurate. Regulations in place in Switzerland set special procedures for taxpayers in the country to respond to information requests from Russia’s tax authorities.
Finally, bear in mind that displaying a lack of confidence in your case could drive Russian tax auditors to dig more deeply into your tax affairs. On the other hand, by knowing your rights and asserting your position with confidence, you can gain respect and improve your relationships with the tax authorities, reducing your chances of a negative assessment in the future.
* FIDAL is an independent legal entity that is separate from KPMG International
and KPMG member firms.
* KPMG LLP (U.S.) does not provide legal services.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and do not necessarily represent the views or professional advice of KPMG.