Tax Disputes and Controversy Update - Tax Litigation in Brazil, France and Russia

Tax Litigation in Brazil, France and Russia

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.


Global Head of Dispute Resolution & Controversy

KPMG in the U.S.


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Tax litigation can entail considerable time, cost and adverse publicity, so many taxpayers seek to avoid it at all costs. As we saw in Part 1 of this 2-part article, disputes with tax authorities can often be worked out through administrative programs, even in Brazil, France and Russia – three countries with tax regimes that are perceived as particularly difficult. But when administrative measures fail, tax litigation can be the only route left for achieving relief from tax assessments.

But taxpayers should not let the challenges involved stop them from litigating tax disputes when the situation warrants. While the costs and benefits of litigation should be carefully weighed, litigation offers a final means to win a favorable outcome – or at least closure regarding the issues concerned. As importantly, taxpayers’ willingness to engage in litigation can help tax authorities bear in mind that their interpretations and decisions may be put to the test in a court of law.  

In a recent webcast, Sharon Katz-Pearlman led a panel discussion with the Tax Dispute Resolution and Controversy Services leaders from KPMG International’s network of firms in Brazil, France and Russia on the practical aspects of pursuing litigation in these countries. Their insights are summarized below.

Brazil – Marcos Matsunaga, Partner, KPMG in Brazil

In Brazil, it’s almost inevitable that taxpayers will face tax litigation at some point. Not only is the country’s tax system riddled with complexity and ambiguity, tax litigation is a constitutional right and part of the tax culture. Engaging in litigation in Brazil does not carry the same stigma and potential for reputational harm as it does elsewhere. 

Rather than a measure of last resort, taking tax matters to court is seen as one of many valid strategies for gaining an optimal tax audit outcome and for minimizing penalties and interest. Because tax authorities are bound to follow tax court decisions for the specific taxpayers concerned, future tax audits can be easier for successful litigants.

Of course, tax litigation in Brazil still presents challenges. Proceedings are highly formal, and legal representation is required for both the taxpayer and the tax authority. Currently, the litigation process is conducted almost entirely electronically without traditional hearings, although legal representatives can present oral defenses at trial. The courts are not specialized in tax, so it’s critical to ensure your position and facts are clearly explained and well supported.

Three levels of courts

Tax litigation in Brazil can progress through three judicial levels:

  • At the first level, cases are decided by single judges in separate courts for state taxes (ICMS, ISS) and federal taxes (Income tax, IPI, PIS/COFINS).
  • At the second level, judgments at the first level can be completely overturned by panels of senior judges at separate state and federal regional courts.
  • At the highest level are the Superior Court of Justice, which rules on issues of federal law, and the Supreme Court, which considers constitutional matters only. 

Tax litigation in Brazil takes two forms, depending on how the litigation is initiated: defensive litigation and proactive litigation. Each form entails different obligations and strategic considerations.

Defensive litigation

A taxpayer can launch defensive litigation to challenge a negative assessment or adjustment proposed during a tax audit. There is no requirement to go through Brazil’s administrative appeal route first, even though this can be beneficial option (as explained in Part 1 of this article). 

At the first level of court appeal, you can provide any kind of evidence, arguments and expert opinions to support your case. It’s important to air all of your relevant facts and arguments at this stage, because the higher courts will not accept new evidence or information.

When litigation commences, the taxpayer must post a guarantee (e.g., deposit, bank bond, real estate) to cover the tax amount in dispute, along with an additional 20 percent of this amount for litigation costs, including legal fees. Until the case is settled, the tax debt amount accrues interest at Brazil’s official short-term interest rate (SELIC), which is currently 14.25 percent. Potential interest charges can run high since defensive litigation can take from 4 to 10 years to complete depending on the location, especially in busier courts in regions like São Paulo. 

Defensive litigation can offer advantages even if the grounds for your appeal are weak. For example, Brazil may launch one of its periodic tax amnesty programs during the time your case is pending, opening an opportunity for you to settle your dispute with substantial discounts and other benefits.

Proactive litigation

Launching litigation proactively is useful for resolving gray areas in the law and controversial issues in cases where it is not clear whether a position of a tax authority is open to challenge. Proactive litigation takes less time to complete (3 – 5 years), entails less legal costs, and requires no deposit, although you have the option to post one against potential taxes owing. You can win an injunction from the court that allows you to stop collecting or remitting the disputed taxes until the case is resolved. You can also choose to continue to collect and remit the taxes as before, and, if your case succeeds, you can recover or offset these amounts for the entire litigation period and the preceding 5 years. In any event, posting a deposit will eliminate any potential penalties and interest if the court decides in the tax authority’s favor.

Proactive litigation has produced some recent significant wins for taxpayers on the following issues:

  • Social contribution on payroll taxable basis – indemnity or compensatory amounts
  • Social contribution on payroll – services provided by cooperatives
  • IPI (a form of state sales tax) on resale of imported products
  • IPI on discounts and commercial bonus (unconditional)
  • PIS/COFINS on imported goods – exclusion of ICMS of its taxable basis
  • State and municipal taxes interest rates – limitation to SELIC.

However, except for the limitation on state and municipal tax interest, the tax authorities continue to apply these taxes as they did before the courts’ decisions. Since it’s possible to gain an injunction that exempts you from collecting taxes in dispute while your case is pending, the above cases highlight the importance of proactive litigation as a strategy for protecting your tax interests and reducing your Brazilian tax burden.

France – Audrey-Laure Illouz

Tax Partner and Head of Tax Audits & Litigation, Fidal, Direction Internationale

Tax litigation continues to rise in France, fuelled by increasingly aggressive audit and enforcement efforts by the French Tax Authority (FTA). In particular, international corporate groups in France face greater suspicion over potential tax evasion, resulting in higher assessments, more systematic application of penalties for willful non-compliance, and even tax raids. Aggravating the situation are the FTA’s forceful directives to tax auditors and a recently published set of de facto ‘abusive’ tax schemes, which mixes examples of clear tax evasion with other arrangements that could be reasonably interpreted as tax optimization plans rather than tax abuses.

Previously, taxpayers in France avoided litigation due to the time, complexity and costs involved. The current climate makes steering clear of the courts less of an option. As discussed in Part 1 of this article, France’s administrative appeal route increasingly ineffective and often merely constitutes a step for negotiating the amounts at stake. On the other hand, airing matters in courts can clear open questions and resolve interpretational differences, building more certainty for both taxpayers and the FTA alike. Also, as noted earlier, undertaking litigation also signals that international corporate groups are not prepared to compromise on all tax reassessments and proposed settlements.

Contentious claims

Unlike Brazil, France requires you to take your tax dispute through the FTA’s administrative appeals process (described in Part 1 of this article) before filing an appeal with the French tax courts. As an intermediate step, the audited company must file a contentious claim before the Direction des Services Fiscaux. The claim must describe the appeal procedure, the FTA’s reassessments and the taxpayer’s counterarguments. Contentious claim documents can also be used outside the audit process, for example, to recover taxes overpaid by mistake or to access favorable tax treatment due to a new tax court precedent.

FTA staff from a department not previously involved in the file must rule on the claim within 6 months (with a possible 3-month extension). If they don’t, the appeal is considered rejected and the court appeal can proceed. Taxes in dispute remain payable at this stage, but a deferral may be granted, subject to the provision of security. 

Administrative Courts

At the first judicial level, tax disputes related to corporate income tax, value added tax (VAT) and withholding tax are handled through the Administrative Courts. (Registration tax and customs disputes are handled through Judicial Courts, which have different rules and procedures). France’s 42 Administrative Courts also handle matters of public and administrative law. While there are some dedicated tax judges, the level of tax expertise varies widely among these courts.

Administrative Court procedures are conducted electronically in writing through a dedicated website, which has dramatically improved the ability to access to information. Tax judges base their decisions on the comments of a reporting counselor (“rapporteur”). Taxpayers are allowed to make brief comments during the hearing. Attending the hearing is highly recommended so you can ensure the rapporteur and judges understand your argument and correct any misperceptions through your comments if needed. Further, since the tax court judges will not be privy to any contextual information about your file, such as your business, its operations and its size, it’s important to include this in your written submission, even if it does not relate directly to the tax issue being decided.

Administrative Court decisions are usually rendered 2 or 3 years after the statement of claim is filed. If you have paid the taxes in dispute and your claim succeeds at this level, the FTA will reimburse you, potentially with interest. But if the court finds against you, you must then pay any deferred taxes in dispute, even if you intend to take your case to the next court level. 

Administrative Court of Appeal

France’s eight Administrative Courts of Appeal are highly specialized, and tax judges are highly skilled. Procedures at this level are also conducted electronically and in writing, and legal representation is required. A panel of judges will conduct a complete second review of the facts and issues, and this will be your last opportunity to add new information to your claim, as the Supreme Tax Court will only consider points of law. 

These courts will only grant you the ability to defer paying taxes in dispute in extreme circumstances (e.g., where paying the amount could lead to insolvency). As with the lower courts, appeals at this level are generally decided within 2 or 3 years and, if you succeed, the FTA may be liable to pay interest on any taxes reimbursed.

Superior Tax Court

At the highest level of tax appeal, the Supreme Tax Court adjudicates the application of the tax law only, and you must retain a specialized tax lawyer to plead your case. The Supreme Tax Court has the option to either accept or reject your claim. The court can also choose to judge the case directly or send the back to the Administrative Court of Appeal for retrial.  It usually takes about 3 or 4 years to obtain a decision at this level.

Weighing litigation’s costs and benefits

While tax litigation in France carries the same burdens as many other jurisdictions in terms of cost, time and possible adverse publicity, the benefits may outweigh the costs. Tax litigation allows you to advance new arguments in your favor and to have your issues re-evaluated by independent and knowledgeable judges. Decisions favorable to taxpayers are common, and the precedential value of a favorable court decision can help improve certainty and ease tax audits for all taxpayers. This is especially the case in contentious areas such as transfer pricing, permanent establishment determinations and financing structures. 

As an extra benefit, the publicity stemming from successful litigation in these areas could help dispel some of the public confusion over the difference between tax evasion and tax optimization.

Russia – Anton Zykov

Director, Tax Resolution and Controversy, KPMG in Russia

In the past, the chances of winning a favorable outcome through tax litigation in Russia were so good that going to tax court was almost a matter of routine. But taxpayers’ success rate has plunged in recent years, dropping from a high of 76 percent in 2007 to 57 percent in 2013, to a new low of 22 percent in 2014.1  

These odds are still slightly better than your chances of gaining a reasonable resolution through Russia’s administrative appeal system (discussed in Part 1 of this article). Within Moscow, for example, taxpayers’ administrative appeals succeeded in only 17.7 percent of cases in 2014.

While you must complete the administrative appeal route before launching a court claim, litigation is essentially the only way to get disputes on complex tax issues resolved in your favor. Tax disputes are resolved by commercial courts, which handle all types of business related matters, including corporate, commercial, regulatory and tax disputes.  Tax issues commonly subject to litigation include:

  • Transfer pricing
  • General anti-avoidance rules
  • Permanent establishments
  • Related-party transactions.

After the litigation in the court of first instance is complete, Russia’s tax appeal process includes three judicial levels:

Appeal court – Cases at the first appeal level are reviewed in full by the court, and you may seek to establish new facts at this time. This is the final chance to get all your facts and arguments, since the higher appeal courts will not consider new information. About 24 percent of tax disputes are escalated to the appeal court, but the chances of success at this level are extremely low: In 2014, only 3 percent of cases resulted in reversals or adjustments of disputed taxes, and 32.8 percent of cases were further appealed.3

Cassation court – At this level, the court focuses on legal interpretations, rather than the cases’ facts. The court may decide to hear the case itself or send the case for retrial if earlier judgments contradict the evidence on record. Your chances of a win here are only slightly better: the Cassation court reversed or modified 5 percent of appeal court decisions in 2014.4

Supreme Court – At the third and final level of appeal, the Supreme Court only takes cases at its discretion. Only decisions at this level have precedential value, so a Supreme Court win can produce significant benefits for taxpayers.

Engaging legal representation is advised

Since taxpayers ultimately win their appeals in slightly more than 1 in 5 cases, allocating ample time and resources to prepare a strong defense is critical. While you are not required to have a lawyer represent you in Russia’s courts, it may be to your advantage to engage one. The tax authorities are generally represented by legal counsel, either from their local office or, in high-profile cases, from federal or regional headquarters. 

Further, access to legal privilege to protect the confidentiality of your tax pleadings can only be secured by engaging a representation from a licensed legal firm. This can be especially important in the case of sensitive tax matters, since the text of all Russian court decisions is published online.

Although the burden of proof is technically with the tax authority, you must still prove that your tax position is correct, so the burden often shifts to the taxpayer as the case proceeds. Expert witnesses are increasingly used in transfer pricing cases and sometimes when business purpose is an issue. Witnesses to the facts are rarely used, except when general anti-avoidance rules are involved.

Countering tax authority aggression among litigation’s benefits

Overall, pursuing tax litigation in Russia may be well worth the effort. Despite the discouraging statistics, your prospects of winning are quite good if the tax authorities have neglected relevant information or if you have a well-reasoned argument on a point of law. Compared to the process in other countries, tax matters are dealt with quickly (usually within 1 year of filing). Outside the Moscow area, the commercial courts will usually suspend collection of disputed amounts while the case is pending. 

Further, even though only Supreme Court decisions are binding, the tax authorities often take direction from lower court judgments, so a win at any court level can add more certainty to the tax system and help avoid future disputes.

Finally, as in Brazil and France, tax litigation in Russia is an important way to demonstrate to tax authorities that their audit decisions will not be accepted unless they are defensible in and supported by a court of law.


1KPMG International 2015, Russian Federal Commercial Courts  (, Russian Federal Tax Service (

2See note 1.

3KPMG International 2015, Russian Federal Commercial Courts (

4See note 3.

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.

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