Carf: States and municipalities could lose BRL 82 billion – 7/2/2023 – Market

States and municipalities could lose BRL 82 billion in potential revenues, if Congress decides to stop the Ministry of Finance’s attempt to resume the so-called casting vote in the judgment of tax disputes at CARF (Administrative Council of Tax Appeals).

The instrument assures the Union of decision-making power in case of a tie in the court, which since 1931 has had an equal composition: half of the directors are appointed by the federal government and the other half by entities that represent taxpayers —mainly business associations.

The number, calculated by the IJF (Instituto Justiça Fiscal), considers a current stock of BRL 1.3 trillion in dispute at Carf and the projection of the minimum risk of losses in these judgments, given the recent history of court decisions.

The negative impact can be diluted over time, as some cases take years to be adjudicated. The entity’s main message, however, is that maintaining the current model can also cause damage to states and municipalities, which receive tax quotas collected by the federal government —such as Income Tax and IPI (Tax on Industrialized Products)— through the participation funds.

The quality vote was overturned by the Legislature in 2020, in a decision that has already caused billionaire losses to the Farm and regional governments.

In the same year of the new law, 41% of the R$ 39.5 billion in credits judged by the casting vote were annulled in favor of taxpayers. The proportion rose to 81% in 2021, reaching 98% in 2022. Last year alone, of the BRL 25.4 billion judged by tiebreaker, BRL 24.8 billion were extinct thanks to the new rule.

In early 2023, Minister Fernando Haddad (Finance) proposed an MP (provisional measure) to restore the mechanism, but faced resistance in Congress, and the text ended up losing validity. Now, the government insists on the initiative through a bill, which is being processed on an urgent basis.

Amidst the discussion of the text, the IJF decided to point out in a technical note the consequences of maintaining the current design of the Carf, without the casting vote.

“This reduction will have a profound impact on Brazilian cities, especially small municipalities and the people who live in them”, says the entity, which has the collaboration of tax auditors from the Revenue.

In the document, the IJF analyzes how the court’s judgments between 2017 and 2019 would have been, if the tiebreaker in favor of the Treasury had already been revoked.

The exercise is necessary to measure the impact on each tax, since the most recent data, from 2020, still do not have this detail. The parameters of this simulation serve as a basis for the projection into the future.

According to IJF calculations, in 2017 R$ 270 billion were judged in tax disputes at Carf, of which R$ 206.7 billion involved IR and IPI. Of these amounts, R$ 179.7 billion in charges were upheld by the court, with R$ 129 billion in taxes shared with states and municipalities.

If the casting vote did not exist that year, the survey indicates that pro-Finance decisions would fall to almost BRL 129.4 billion, of which BRL 93.6 billion involved disputes over the IR and the IPI.

This means that, of the BRL 50.44 billion in losses without the casting vote that year, BRL 35.45 billion (70.27%) would be concentrated in the taxes that make up the base of the FPE (State Participation Fund) and the FPM (Municipal Participation Fund).

To calculate possible future losses, technicians applied this proportion to what they consider to be the minimum loss that the Union will have in CARF judgments involving the current stock (R$ 252.4 billion, or 18.68% of the total).

In this scenario, unfavorable decisions would reach R$177.4 billion in disputes involving income tax and IPI. As the FPE is supplied with 21.5% of the revenues from these taxes, the impact would be R$ 38.15 billion. In the FPM, which receives 24.5%, the blow would be greater: R$ 43.9 billion.

With the disclosure of the numbers, the entity’s expectation is to manage to sensitize the National Congress to resume the instrument of the casting vote in CARF’s decisions.

In a recent interview with Sheetthe rapporteur for the proposal, Deputy Beto Pereira (PSDB-MS), said that the mechanism only has a chance of being resumed subject to negotiation conditions with the taxpayers.

In February, the Treasury, Abrasca (Brazilian Association of Listed Companies) and the OAB (Order of Lawyers of Brazil) even sealed an agreement around the resumption of the casting vote, which freed taxpayers from fines and gave discounts on interest in case of a tie in the trial at Carf.

The companies’ argument was that the scoreboard indicated the existence of controversy over the charge, which should exempt companies from the penalty (fine) —a kind of benefit of the doubt.

According to the rapporteur, the logic of granting some type of benefit can be a way out. “It may have a benefit for those who reached the casting vote,” he says.

The vote on the Carf bill is scheduled for this Monday (3) in the plenary of the Chamber of Deputies. The proposal is one of Haddad’s flags to expand the federal government’s sources of revenue, in view of the goals of reducing the gap in the accounts this year and zeroing the deficit in 2024.