• BEPS Developments in Brazil
    Mandatory Disclosure Rules

    By Daniel Zugman

    17-08-2016

    This is the first of a series of articles analyzing BEPS implications in Brazil

    In the last few years, the OECD have been leading the discussions as to set forth recommendable measures for curbing cases of base erosion and profit shifting ("BEPS"). In October 2015, the OECD published the final BEPS report, by means of which 15 actions were recommended - the Action Plan.

    New laws have already passed in several countries (e.g. Mexico, the Netherlands, Canada among others) inspired by the Action Plan objectives. Although Brazil has acted actively in the development of BEPS works (as a G20 country), no specific rules have been enacted in Brazil to comply with BEPS guidelines to date.

    Nonetheless, there were two recent attempts to pass new laws in Brazil clearly inspired on BEPS guidelines. The first relates to mandatory disclosures rules, while the second intended to define the concept of economic substance.

    In this article, we will comment on the attempt to introduce mandatory disclosure rules in Brazil and on the potential reasons that might explain why such rules were not put in force.

    Provisional Measure No. 685/2015 ("MP 685/15"), proposed by the Brazilian Presidency, attempted to introduce in Brazil mandatory disclosure rules of aggressive tax planning.

    MP 685/15 created a new ancillary obligation known as Declaration of Information on Relevant Operations ("DIOR"), which main goal was to provide the tax authorities with information on aggressive tax planning.

    To produce legal effects, MP 685/15 should have been converted into Law by the Brazilian Congress by the end of 2015. However, the Congress have not approved the conversion of the MP's provisions related to mandatory disclosure rules.

    According to the reasons to justify the new Law (exposição de motivos), the DIOR would increase transparency by providing the tax administration with early information regarding potentially aggressive or abusive tax planning schemes. As stated, this would also increase legal certainty, as in case the Brazilian tax authorities disagreed with the taxpayer as to the tax implications of a given transaction / scheme, the correspondent taxes would be charged without penalties.

    It was also mentioned that the DIOR was consistent with Action 12 of the BEPS Report, which recommends the introduction of mandatory disclosure rules.

    Although the goals of MP 685/15 were commendable, its wording raised great concern among taxpayers. This is because MP 685/15 provided that information regarding the following situations should be reported:

    • acts or transactions performed without relevant non-tax reasons (that is, without relevant business purpose);
    • acts or transactions that adopt unusual structures, indirect legal transactions or that contain provisions that may distort the effects of typical contracts; or
    • specific acts or legal transactions to be described by the Brazilian Revenue Department in normative rulings.

    The taxpayers' concerns were mainly related to the vagueness of concepts such as "relevant non-tax reasons", "unusual structures" and "indirect legal transactions".

    According to the language inserted in MP 685/15, in case the taxpayer failed to file the DIOR or to include a reportable transaction in the DIOR, a penalty of up to 150% calculated on the amounts of taxes due upon the reportable transaction could apply.

    In other words, MP 685/15 transferred to the taxpayer the responsibility of identifying transactions that could lack business reasons or that could comprise unusual structures or indirect legal transactions. And in case the taxpayers failed to report such transactions, they could be subject to penalties of up to 150%.

    Furthermore, by reporting these transactions, the taxpayers could somehow automatically declare that the transaction could be disregarded for tax purposes, as it would lack business reasons and/or contain unusual structures (unless the reportable transaction was one of those to be specifically described by the Brazilian tax authorities in separate normative rulings).

    Although MP 685/15 was allegedly inspired on Action 12 of BEPS, the Final Report itself clarifies that it should be a central concern of this type of mandatory disclosure legislation to establish precisely: (i) who should report the information, (ii) what should be reported and (iii) when the information should be reported.

    Action 12 of BEPS was based on the experiences of jurisdictions such as the United States and the United Kingdom, in which, in summary, the taxpayer (or its tax advisor) is required to report only transactions specifically listed in the applicable regulations. Or in case the transaction contains specific characteristics such as: (1) confidential transactions, (2) transactions with contractual protection, (3) loss transactions, (4) book-to-tax difference transactions, and (5) tax credit transactions having a brief asset holding period.

    Apart from the differences between the type of wording used in the Brazilian MP in comparison to the legislation of the jurisdictions on which Action 12 was based, cultural reasons may explain why the mandatory disclosure rules were not put in force in Brazil.

    Mandatory disclosure rules inspired on common law countries' mechanisms such as the US and the UK might not be consistent with the legal environment of civil law jurisdictions such as Brazil1.

    In common law countries such as the US and the UK, the tax authorities may have an advisory role and the taxpayers may submit documents and disclose transactions to confirm beforehand the tax authorities' understanding with respect to a given transaction before its implementation. It is common to have discussions and negotiations between taxpayers and the tax administration.

    On the other hand, in civil law jurisdictions such as Brazil, tax inspections are carried out on site and data is directly collected by means of electronic accounting records and electronic tax ancillary obligations. There is no culture of dialogue between taxpayers and tax authorities. In practice, thus, disclosure could be viewed both by the tax authorities and the tax authorities as a "request" for additional tax inspections. And not as an opportunity to clarify tax issues and create more legal certainty.

    In summary, although the mandatory disclosure rules included in MP 685/15 were inspired by BEPS, the wording failed to clarify the transactions that should be reported, creating more legal uncertainty from taxpayers' standpoint.

    In addition, the importation of mandatory disclosure rules from common law jurisdictions without adaptations to the legal and tax environment of Brazil might have contributed to the failure of putting the disclosure rules in force.


    1. For a more detailed comparison with respect to civil law jurisdictions and common law jurisdictions as well as mandatory disclosure rules, refer to: MAJED, Leila. Implementation in France of the disclosure of aggressive tax planning arrangements under Action 12 of BEPS.
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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

Daniel Zugman

Daniel is an attorney based in Sao Paulo. His practice concentrates on direct taxes, including tax planning, corporate reorganizations, cross-border investments and tax litigation. He is used to assist foreign investors through the complex Brazilian tax environment, and also Brazilian companies and individuals who face tax challenges in the context of domestic and outbound investments. He holds a Master of Laws Degree from FGV Law School, based in Sao Paulo, and he is also a frequent lecturer on courses and events focused in taxation.

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