Tax evasion in Brazil

In Brazil, tax evasion is identified in cases where the taxpayer (i) generates the taxable event of a specific tax and evades its payment; and (ii) fails to pay the tax due to acts characterised by simulation, concealment, forgery, or other fraudulent actions.

If detected by the tax authorities, tax evasion results in the issuance of an infraction notice for the collection of the tax that the taxpayer failed to remit, plus interest and a fine, typically ranging from 75%, 100%, to 150%[1] of the owed tax, depending on the circumstances[2]. The 75% fine applies in cases of mere non-compliance with tax obligations; the 100% fine applies in cases of evasion, fraud, or collusion; and the 150% fine applies in cases of recidivism in evasion, fraud, or simulation.

According to the legislation, tax evasion involves any fraudulent action or omission aimed at preventing or delaying the tax authority’s awareness of the occurrence of the taxable event or relevant circumstances affecting its assessment. An example of tax evasion is declaring a lower tax amount to the tax authority through ancillary obligations than what is actually owed. 

Fraud is defined as any fraudulent action or omission intended to (i) prevent or delay the occurrence of the taxable event ,or (ii) exclude or modify the essential characteristics of the tax obligation to reduce the amount owed or defer its payment. An example of fraud is the forgery of documents to exclude or reduce tax liability. 

Collusion refers to a fraudulent agreement between two or more parties aimed at achieving any effect of evasion or fraud.

Regarding the 100% fine for cases of evasion, fraud, or collusion, it should be noted that until 31 December 2023, the legislation mandated a 150% fine. This 150% fine was frequently imposed by Brazilian tax authorities, but taxpayers consistently challenged it in court, arguing that fines exceeding 100% would violate the constitutional principle against confiscation. In this context, the Federal Supreme Court upheld the taxpayers’ position on several occasions, leading to the amendment of the legislation to reduce the fine to 100%[3]. The reduced 100% fine has been applied retroactively, allowing taxpayers to claim refunds for amounts previously collected that exceeded this threshold.

When it comes to taxes owed by legal entities, if the tax authorities re able to demonstrate the personal involvement of the company's directors in the aforementioned conduct, the directors may be held personally liable for the excluded or reduced taxes[4].

In addition to tax consequences, forgery may also be characterised as a crime against the tax order, subjecting the offender to imprisonment. Generally, the payment or instalment of tax liabilities extinguishes or suspends the criminal process.

Finally, it is worth noting that there is still no clear definition in Brazil on whether abusive tax planning can be characterised as simulation, and thus subject to the application of the aforementioned 100% fine.

In general terms, abusive tax planning is characterised by the exclusion or reduction of owed tax through manipulation of legal forms[5].

Although this matter is not new and has been extensively discussed in doctrine and by administrative and judicial courts, uncertainty remains regarding whether abusive tax planning should (i) be classified as tax avoidance (legal tax planning); (ii) be equated with tax evasion in the form of simulation; or (iii) constitute a distinct third category from tax evasion and tax avoidance, which could be disregarded by tax authorities but subject to a 75% fine instead of 100%. 

The first approach is related to a more formalistic view of tax law, which prevailed in Brazil until the mid-2000s, while the second represents the reaction of the tax authorities and part of the academic community to this formalistic view. The third approach has prevailed in the administrative courts, but the issue has not yet been settled.

How Brazilian tax authorities typically discover tax evasion

The assessment of the main taxes in Brazil is computerised, and taxpayers are required to submit detailed electronic declarations of tax obligations to federal, state, and municipal tax authorities, as well as notary offices, banking, financial, and foreign trade authorities, as applicable. In this context, a significant portion of tax evasion is detected through audit measures initiated by cross-referencing the information provided by taxpayers themselves.

Tax audits may also be conducted spontaneously by the tax authorities, regardless of irregularities identified through the cross-checking of ancillary obligations, whether as a result of complaints or due to audit targets defined by the authorities themselves.

Furthermore, annually the Brazilian Federal Revenue Service publishes a report setting out the priority measures to promote tax compliance. These measures can be structuring, facilitating, assisting, or coercive. For 2024, some of the topics are: 

1. New legislation on transfer pricing, investment funds, and interest on equity; 
2. Misappropriation of Social Integration Program (PIS) and Contribution for the Financing of Social Security (COFINS) credits; and 
3. Misuse of tax losses when calculating corporate income tax (IRPJ); among others[6].

Options to amend tax declarations or declare additional income

The amendment of tax returns, including to declare additional income, is available for all types of taxes, as long as the tax authorities have not yet implemented any enforcement measures related to the tax infraction.

Conditions needed for voluntary disclosure of tax evasion

In Brazil, voluntary disclosure is characterised by payment of the outstanding tax, followed by amendment of the tax return. For voluntary disclosure to produce the intended effect of excluding the fine, the tax must be paid before the ancillary obligations are amended.

Consequences of voluntary disclosure of tax evasion

Voluntary disclosure by paying the outstanding tax entails waiving the fine.

When is voluntary disclosure of tax evasion no longer possible?

Voluntary disclosure is no longer possible once the Brazilian tax authority has initiated any inspection measures related to the infraction. Examples of inspection measures are notification to the taxpayer of the first written official act carried out by a competent official to inform of the existence of the tax obligation; the seizure of goods, documents, or books; and the start of customs clearance of imported goods.

What are the main areas where voluntary disclosure of tax evasion plays a major role?

Voluntary disclosure is widely used by taxpayers who are required to provide frequent evidence of tax compliance in order to maintain contracts with public authorities, obtain financing and enjoy tax benefits.

What is often overlooked by foreigners but is considered tax evasion in Brazil?

As mentioned above, there is no clear definition in Brazil on whether abusive tax planning constitutes tax evasion. Depending on the situation, a specific assessment of administrative and judicial case law involving the intended tax planning is recommended to assess the risk of it being classified as tax evasion and the application of a 100% fine.

What do you recommend to clients who have committed tax evasion?

The Brazilian tax system is extremely complex, leading to numerous and lengthy discussions with the tax authorities. It is not uncommon for infraction notices to be overturned in the administrative and judicial spheres. In many situations it is recommended that taxpayers wait for the assessment and defend themselves later. 

When the prospects of an administrative or judicial dispute look negative, but the taxpayer has not yet been assessed, we recommend evaluating the possibility of using a voluntary disclosure. As a last resort, if there is already an ongoing inspection measure or infraction notice, or if the taxpayer is not in a position to make a voluntary disclosure, we recommend evaluating the possibility of including the tax debt in a settlement programme. Settlement programmes are often granted in Brazil mainly by the federal and state governments.

[1] These are the parameters for levying a fine at federal level. In the case of municipal and state taxes, the amount of the fine may vary.

[2] Art. 44 of Law No. 9430/1996.

[3] Law 14.689/2023.

[4] Art. 135 of the National Tax Code.

[5] Manipulation of legal forms is understood to be the use of certain legal acts or transactions aiming to produce effects that are not inherent to them. In summary, the analysis of tax planning from this perspective requires acknowledging (i) that legal acts or transactions have specific properties, and (ii) that the existence of specific purposes and objectives in the rules defining legal acts and transactions limits the production of practical effects, including for tax purposes.

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Laura Diniz is a partner at Martinelli Law Firm, specialising on domestic and cross-border transactions, focusing on developing solutions for complex tax issues.