Using the Covid-19 pandemic as a justification, a law project under review in Brazil’s House of Representatives proposes the creation of an extraordinary tax on the past profit of large companies.
At the end of March, lawmaker Wellington Ribeiro submitted Complementary Law Project (PLP) No. 34/2020 to the House of Representatives, which proposes the creation of an extraordinary tax (so-called “compulsory loan”) to meet urgent expenses resulting from the situation of public calamity due to COVID-19.
A compulsory loan is a “refundable” tax that the Union can only create through a complementary law approved by absolute majority votes both in the House of Representative (257 votes) and the Senate (41 votes), in cases of:
- external war or imminence of war,
- a public calamity that requires federal aid that is impossible to meet with available budgetary resources, or
- a situation that requires a temporary absorption of purchasing power.
The justification for PLP No. 34/2020 is precisely the public calamity resulting from the Covid-19 crisis, whose health expenses could not typically be met with budgetary resources.
On other occasions, when a compulsory loan was created (on car and fuel sales and electricity bills), the amounts paid by taxpayers have not been fully refunded, generating endless court disputes.
The PLP in question proposes that companies domiciled in Brazil with net equity of BRL 1 billion or more, according to their last balance sheet, will be subject to a compulsory loan of up to 10 percent of their net income of the previous twelve months before the publication of the law. It proposes that tax rates shall vary according to business sectors and that the Ministry of Economy shall establish the rates within 15 days from the date of publication of the law. The deadline for payment of the compulsory loan shall be within 30 days as from the publication of the law.
Where the amount payable is higher than BRL 1 million, payment can be made in up to three monthly and successive installments. Payment after the due date shall trigger the accrual of interest and a penalty between 10 and 30 percent of the amount due, depending on the delay time. The penalty shall be 10 percent if the payment is made within the same month of the due date, 20 percent when made in the month following the due date, and 30 percent if made after the second month following the due date.
If the PLP is approved, the amounts received by the government as a compulsory loan shall be refunded to taxpayers within four years, counting from the end of the Covid-19 calamity situation in up to 12 monthly installments adjusted monthly by the SELIC interest rate. If any amount collected is not spent, the refund shall occur proportionally to the amounts collected within 60 days as from the end of the public calamity situation.
The constitutionality of the PLC is questionable. By intending to tax net income of the 12 months before the publication of the law, the project might violate the non-retroactivity principle contemplated in Article 150, item III(a) of the Federal Constitution. The non-retroactivity principle, or the ex-post-facto rule, means that the tax law cannot retroact in time to impose taxes on taxable events that occurred before the law has entered into force. This principle aims at guaranteeing that taxpayers will not be surprised by a tax law that affects past transactions. Additionally, taxation of past economic performance may represent an offense to another constitutional principle, that is, the tax capacity principle of Article 145 § 1 of the Constitution. In practice, it means that those who can pay more should pay more. Still, in the case at hand, the criterion of past net income might violate the tax capacity principle because the net equity of 2019, in most cases, no longer reflects the current scenario in 2020 amidst the pandemic.
Priscila Lucenti Estevam, senior tax associate of Battella, Lasmar & Silva Advogados and co-author of Planejamento Patrimonial: Família, Sucessão e Impostos and Tributação da Economia Digital no Brasil, published by Editora B18.