INCREASE IN TAX LITIGATION
WHAT ARE THE IMPACTS ARISING FROM THE CHANGE IN LEGISLATION CARRIED BY THE FEDERAL GOVERNMENT: BEYOND REASONABLE DOUBT STANDARD IN FAVOR OF THE TAXPAYER? INCREASE IN COMPANY TAXES?
Provisional Measure Number 1160 of January 12, 2023, and its unconstitutionality.
Provisional Measure Number 1160, of January 12, 2023, issued by the President of the Republic during his first days in office, reinstated the figure of the so-called casting vote in favor of TAX AUTHORITY, in cases of a tie in the judgments held within the framework of the Administrative Council of Fiscal Appeals – CARF, pursuant to § 9 of Article 25 of Decree Number 70.235, of March 6, 1972.
The aforementioned rule remains thus written: “§ 9º The positions of Presiding Justice of the Superior Court of Tax Appeals, their divisions, their panels and special panels will be occupied by counselors representing the National Treasury, who, in case of a tie, will issue the casting vote, and the positions of Vice-President, by taxpayers’ representatives.”
It is important to point out that this form of judgment had been revoked by article 28 of Law # 13,988/2020, which included Article 19-E in Law # 10,522 /2002.
However, despite the relevance of the matter, and as to the merit itself, it is relevant to analyze whether the adopted procedural-legislative path followed constitutional guidelines.
ü Provisional Measures
First and foremost, it might be useful to refer to the delimitation of the provisional measure as a normative species, its requirements and limitations, in order to analyze its unconstitutionality.
The provisional measure is a primary normative species of rule provided for in Article 59 of the Federal Constitution, of exclusive competence of the Executive Branch and holds, as a requirement, the relevance and urgency of the matter to be regulated, subject to the material seals expressly provided for in the Brazilian Federal Constitution, as it brings out the constitutional limitation that prevents a provisional measure from dealing with procedural matters, provided for in the wording of the Federal Constitution in Article 62, § 1, item “b”.
The constitutional legislator imposed this limit because the procedural law has immediate application, in accordance with Article 14 of the Code of Civil Procedure, which reflects the theory of the isolation of procedural acts; that is, the process is a concatenated march of acts aiming at obtaining the satisfaction of a claim, and it must be so considered as such for each procedural act is understood in isolation by applying the new procedural law immediately, respecting the procedural acts carried out under the aegis of the previous procedural legislation.
On the theory of isolation of procedural acts, below is an excerpt of the judgment of the Superior Court of Justice:
“… According to this theory – currently positive in art. 14 of the Code of Civil Procedure/2015 – the new procedural law has immediate application to pending cases, safeguarding, however, the effectiveness of the procedural acts already consolidated in the form of the previous legislation, as well as the legal situations consolidated under the validity of the repealed rule…” (REsp 1.666.321-RS)
The decision in question is that provisional measures are not to deal with matters related to procedural law and which was passed by Constitutional Amendment Number 32/01; however, this understanding had already been adopted by the Supreme Court, which ruled as “the use of provisional measures to change the legal discipline of the process, in view of the definition of the acts performed therein, is not lawful” (Direct Action for the Declaration of Unconstitutionality – ADI #1.910 Min. Sepúlveda Pertence) and “… the change in instrumental standards is not made on an emergency basis…” (Direct Action for the Declaration of Unconstitutionality ADI # 1,753-2 Min. Marco Aurélio).
Furthermore, legislating on procedural law is the private competence of the Legislative Branch, pursuant to Article 22, I, of the Brazilian Federal Constitution CF/88, and, for this reason, not delegable to the Executive Branch, under penalty of offense to the principle of separation of powers and legal certainty. Even the legislative justification for the promulgation of Constitutional Amendment EC # 32/01 resulted from the abusive use of provisional measures, an atypical activity of the Executive Branch that had been vilifying the independence of powers, as observed below:
“The primary objective is to stem the tide of such practices, which are revealingly undemocratic, thereby limiting the scope of the passive matters of provisional measures…. This will inevitably result in a relief for the National Congress, along with the responsible balance between the Executive and the Legislature” (Constitutional Amendment PEC # 472/1997)
ü Presidential Decree # 70.235/72
In the tax sphere, the relationship between the Treasury and taxpayers must develop respecting the principles of legality, democratic principle and fundamental rights, whether in the judicial or administrative sphere, which is why the violation of legality, in matters of administrative-tax proceedings, leads to the consequent violation of fundamental rights of those involved in the legal relationship.
The administrative proceedings originally arose in Great Britain from the due process of law, from an eminently procedural criminal nature.
In Brazil, tax administrative proceedings were regulated by Decree # 70,235, of 03/June/1972, approved by the constitutional order comprehending ordinary and suppletive law status and will be subject to the rules of the Code of Civil Procedure, in accordance with Article 15.
Article 15 of the Code of Civil Procedure provides that: “in the absence of rules governing administrative procedures, the provisions of the Code of Civil Procedure shall be applied in a supplementary and subsidiary basis”, so that if the special legislation contains gaps, either by default or by incompleteness, the civil procedural rules will be applied to the Tax Administrative Proceedings (PAF).
Tax Administrative Proceedings (PAF) aims to resolve the claims between taxpayers and the Tax Authority, including reviewing the constitution of tax credits in favor of the correct application of the tax law, which is why it is subject to the principle of due process provided for in art. 5º, items LIV and LV of the Brazilian Federal Constitution that read: “no one shall be deprived of freedom or of their assets without due process of law” and “litigants in judicial or administrative processes as well as defendants in general are ensured of the adversary system and of full defense, with the means and resources inherent to it;”
Therefore, due process is an instrumental guarantee, a constitutional rule of full effectiveness, which requires that the fundamental rights of taxpayers in administrative action be protected, which has been in force pursuant Law # 9,784/99 that regulated the Lato Sensu Administrative Procedure, for it regulated the participation of the governed party in the formation of administrative acts once only by the Public Administration.
Also, Article 37 of the Brazilian Federal Constitution and Law # 9,784/99 brought out several principles that apply to Tax Administrative Proceedings (PAF), among which are: the principle of legality “acting in accordance with legislation and Law = principle of administrative juridicity” and the principle of legal certainty; also, among the principles of Tax Administrative Proceedings (PAF), the principle of objective legality stands out as it “requires that the process be instituted and conducted on the basis of the law”.
It is necessary to remember that, in the administrative proceedings, the Treasury is usually, concomitantly, the party and the judge of the case and, although we adopt the system of single jurisdiction and the taxpayer, in case of defeat, can make use of Article 5, XXXV, of the Brazilian Federal Constitution of 1988, in order to have their claim reviewed by the Judiciary, in the light of the principle of access to justice, it is certain that the casting vote, “resurrected” by Provisional Measure MP # 1.160/23, affronts due process and equality, considering that the tax legal relationship is born unequal due to the strength of the Administration, not to mention that, both the administrative decision and the judicial decision, will be subject to the final decision of the Judiciary.
Thus, procedural rules aim to ensure due process, equality (principle of parity) and legal certainty, especially when seeking uniformity and coherence of jurisprudence in order to avoid conflicting decisions, a purpose implemented through the systematic binding precedents expressed in Articles 927 and 928 of the Code of Civil Procedure to mitigate gaps and antinomies.
ü Federal Supreme Court Casting Vote
Furthermore, the so-called neoproceduralism requires that all procedural rules be compatible and applied in the light of the Brazilian Federal Constitution.
In the Supreme Court, Direct Actions of Unconstitutionality No. 6399, 6,403 and 6,415 filed against art. 19-E of Law # 10,522 /2002 (included by art. 28 of Law No. 13,988/2020) are in progress and their provision altered the system of the casting vote, determining that in the event of a tie, the administrative conflict be judged in favor of the taxpayer.
In this context, such Direct Actions of Unconstitutionality (ADIs), have been a majority so far as to the recognition of the constitutionality of the legal provision questioned, because these demands adduce alleged “legislative smuggling” that would have tainted the due legislative process of production of the legal standard which marks an innovation in the legal system.
Nonetheless, the point that deserves to be brought to light is the basis raised by Justice Luís Roberto Barroso when he describes the current casting vote system in favor of the Tax Authority as a “rule of dubious material constitutionality” and concludes on the “absence of material unconstitutionality in the extinction of the casting vote in CARF (Administrative Council for Tax Appeals).”
The casting vote gives the presiding judge of the trial session the power to untie the issue, so that in addition to voting ordinarily, the vote exceptionally decides the issue in trial. The matter of the question is that the Presiding Judge is often a representative of the Tax Authority, who might eventually vote in favor of the Tax Administration.
Hence, considering that the tax legal relationship is always of an unequal nature in reference to the Imperial Power of the State, the State will still enjoy such privilege in the event of a tie, so that the procedural imbalance remains evident, with the consequent offense to the principle of isonomy and the principle of parity.
In order to correct this distortion there came the normative change keeping the systematic tiebreaker; however, now in favor of the taxpayer (in dubio pro taxpayer), mitigating the presumption of certainty of the tax assessment due to the uncertainty of the correct application of tax rules and concomitantly recognizing the tax authority interest to act and try to reverse its succumbence within the judiciary, in order to obtain in exaurient cognition the re-establishment of the tax assessment, thesis which has been suggested by the aforementioned Supreme Court Justice, as quoted below:
“It is constitutional to extinguish the casting vote of the President of the judging panels of the Administrative Council for Tax Appeals (CARF), when the tie decision is favorable to the taxpayer. In such case, however, the Treasury may take action to reinstate the tax assessment.” (Direct Actions of Unconstitutionality) ADI numbers 6399, 6.403 and 6.415)
Therefore, with no intent to elaborate on the supposed legislative smuggling or on the absence of administrative jurisdiction in favor of forming “administrative res judicata”, the Executive Branch cannot introduce a Provisional Measure to partially repeal such relevant rule to the Taxpayer, when there are doubts about its constitutionality, looking solely for the state’s collection purpose in favor of generating revenue to cover budget deficits generated by the misadministration of the managers of the public property.
Thus, if the Supreme Court, The Guardian of the Constitution, has doubts about the constitutionality of the provision, if the unequal relationship between the Tax Authority and taxpayer is evident, or even in the case no final decision on the merits has been granted, the Powers need to be “harmonious among themselves”, which is why such harmonic autonomy requires that there be a dialogue between the representatives of the respective Powers so that the taxpayer can organize and better understand the rules of the game, respecting the principles of due process, isonomy and legal certainty since we are in a Democratic State of Law.
Below is an excerpt from the Rapporteur’s vote:
“… I consider the doubts as to the constitutionality of the broad admission of the casting vote in CARF trials even more relevant. Declaring the formal unconstitutionality of article 19-E of Law #10,522/2002 would imply reinforce a rule of dubious material constitutionality…”
Now back to Article 15 of the Code of Civil Procedure, the re-establishment of the casting vote in favor of the Tax Authority by Provisional Measure MP # 1,160/23 generates the suppletive application of this provision, due to its evident antinomy, combined with the ADIs (Direct Actions of Unconstitutionality) that are submitted to the analysis of the Constitutional Court, and the usurpation of legislative competence of the Executive Branch to deal with procedural matters, mainly because it is not up to a reckless, provisional and precarious measure to amend procedural rules for immediate effect for total offense to the principles of separation of powers, legal certainty, isonomy of due process and due legislative process (democratic principle).
The democratic state of law is geared towards a provision of fair state activity, that is, the administrative procedure presupposes a case, in which there are parties, there is an appointed attorney subject to an administrative decision, whose administrative procedure is governed by procedural provisions regulated by specific and general rules, so one of the parties will succumb and the succumbence is a procedural burden imposed on the losing party of an eminently procedural nature.
The Supreme Court has already recognized that they are: “rules of procedural law relating to the guarantees of the adversarial, due process, the powers, rights and burden that constitute the procedural relationship” (ADI # 2,970, Rel. Min. Ellen Gracie)
Therefore, if the party loses one administrative claim by reason of a casting vote in favor of the Tax Authority, it is evident that due administrative legal process has been altered in a precarious manner by a Provisional Measure unilaterally issued by the Executive Branch, which is why its unconstitutionality is notorious, due to the usurpation of legislative competence of the legislative power and its material unconstitutionality, for dealing with procedural matters which strictly prohibited this normative species, generating direct offense to the fundamental rights of the taxpayer and the principle of legality/administrative juridicity.
- The pecuniary jurisdiction for trial in CARF – Administrative Council for Tax Appeals
One other unconstitutionality worthy of note is worded in Provisional Measure MP # 1,160/2023 on the increase in the amount value of jurisdiction for the trial of administrative-tax proceedings by the Administrative Council for Tax Appeals CARF, pursuant to Article 4:
Art. 4 Law # 13,988, of April 14 2020, shall be in force with the following amendments:
“Art. 27-B. Article 23 to the low complexity tax administrative litigation, thus understood by that which tax assessment or controversy does not exceed 1,000 minimum wages.”
The purpose of this measure is to reduce the volume of cases under CARF and to this end the amount value of jurisdiction was increased as a way of preventing taxpayers from accessing the Administrative Court.
However, by increasing the value of Trial or Appeal Jurisdiction, the large taxpayers/debtors are favored and, concomitantly, the accessibility of small taxpayers / debtors to CARF is prejudiced, a fact that, per se, violates the principle of isonomy and denies the taxpayer the possibility of having the tax credit reviewed by the agent of the tax assessment as to the correct application of legislation.
It is totally unreasonable and disproportionate to delimit a very high amount for jurisdiction, given that two taxpayers may be in an identical legal situation, with unfavorable decisions, and one of them has been denied his administrative right due to lack of economic and financial capacity, that is, the taxpayer’s financial capacity is a discriminatory element for access to the Administrative Council for Tax Appeals (CARF).
It is worth noting that the value has ranged from 60 (sixty) minimum wages to 1,000 (one thousand) minimum wages, which currently in Brazil corresponds to the exorbitant amount of R$ 1,302,000.00 (one million three hundred and two thousand Brazilian Reais); that is, administrative-tax cases involving values below this limit will be judged definitively by the Federal Revenue Service, without the possibility of access to CARF, which violates the principle of double administrative degree, a right provided for in Decree # 70,235/72 (art. 33) which ensures the taxpayer the right to administrative appeal, in the sense that the decision of the administrative court is reviewed by a hierarchical body higher than the previous one.
This guarantee also stems from the axiological matrix worded in Binding Precedent # 21 of the Brazilian Supreme Court establishing: “It is unconstitutional to demand prior deposit or payment of money or assets for admissibility of administrative appeal.”
The administrative appeal is effective as a result of the right of action, of the right to claim, expressed in art. 5, item XXXIV of the Brazilian Federal Constitution, the reason why costs, deposits and disproportionate assumptions cannot impose excessive burden on the taxpayers to make them inevitably lose their cause.
Furthermore, the Background of the above-mentioned provisional measure indicates that the parameter of 1,000 minimum wages was adopted on the basis of the value set out in paragraph 3 of Article 496 of the Code of Civil Procedure, which provides for the limit of the required consignment in the case of a judgment passed against the Union or to which the motion to stay execution on tax enforcement is granted, in whole or in part. However, that rule refers to cases in which the Federal Union is unsuccessful, whereas the Provisional Measure restricts access to taxpayers in cases where the Union is the winner, i.e. completely different situations which bring out the inconsistency and incoherence in the Provisional Measure Background.
Therefore, if the taxpayer is entitled to access to appeal as a right it is not up to the “Executive” to impose such unreasonable requirement that derails the management of the remedy itself and as the Federal Constitution also ensures the adversarial and the ample defense principles “with the inherent means and resources” in the administrative due process (art. 5, item LV), said constitutional guarantees and due process are deemed prejudiced and harmed.
The adversarial principle makes the need for the bilaterality of the parties clear and the principle of ample defense makes the need for the possibility of full production of evidence clear, as in the teachings of Vicente Greco Filho[1]:
The adversarial is effective ensuring the following elements: a) the knowledge of the demand through a formal act of service of summons (b) the opportunity, within a reasonable period, to be contrary to the initial claim; c) the opportunity to produce evidence and manifest on the evidence produced by the opponent; (d) the opportunity to be present at all oral procedural acts, making the comments as desired; (e) the opportunity to appeal against the unfavorable decision.
Thus, as such principles are based on the Constitution itself they cannot be mitigated or extinguished by any Law, much less by a precarious/transitory measure, under penalty of blatant unconstitutionality, so this restriction on the CARF based on an immoderate economic and financial criterion may not be allowed.
Although the provisional measure still depends on the legislative assessment, which may modify its text or even reject the measure, this rule is already producing effects; that is, legal relations are being constituted during its enforcement and for this reason such condition may be questioned judicially due to the manifest defects depicted in this article.
Therefore, it is expected that the Law Makers in Congress, when assessing and voting Provisional Measure 1160/2023, take into account the rules of the Brazilian Tax System.
[1] Greco Filho, Vicente. in: Direito Processual Civil Brasileiro. 2º Volume. 11ª edição. Saraiva. 1996. São Paulo. page 90-B.
