Exactly five years ago, the first foreign asset voluntary disclosure program in our history began in Brazil. Called the Special Regime for Currency and Tax Regularization (RERCT), it became known as ‘amnesty.’
Despite the precarious drafting of the law and threats from the Federal Revenue Service, the program successfully allowed the collection of almost BRL 170 billion in taxes and fines. In 2017, the Government reopened the RERCT, but with more modest results.
Well, maybe soon we will have a new “RERCT round 3” that reopens the opportunity for taxpayers to regularize assets abroad that have not been properly declared to the Brazilian authorities.
On March 9, 2021, the Federal Senate’s Chairman, Senator Rodrigo Pacheco, presented Law Project 798/2021 (PL 798) to that house, which reopens the RERCT for 120 days after the publication of the law, if and when it occurs.
PL 798 takes December 31, 2020, as the cut-off date. Under the terms of art. 4, § 9 of Law No. 13.254 / 2015, foreign assets subject to disclosure will be converted at the dollar sale price of December 31, 2020, set by the Central Bank at R $ 5.1967.
If approved, PL 798 requires payment of income tax at the rate of 15% plus a fine of 167% of the tax due, which totals a disclosure cost of 40% of the value of the declared assets. It is worth remembering that RERCT 1 allowed regularization at the burden of 30% with a dollar at R $ 2.66, whereas, in RERCT 2, the burden was 35.25% with the dollar at R $ 3.21.
Thus, if approved, RERCT 3 will have a hefty settlement cost, precisely 160% higher than RERCT 1 and 83% higher than RERCT 2. As an example, let’s look at the costs of settling USD 1 million in each one of the editions of the RERCT and the possible RERCT 3:
RERCT 1: BRL 2.66 million x 30% = BRL 798,000
RERCT 2: BRL 3.21 million x 35.25% = BRL 1,131,525
RERCT 3: BRL 5.19 million x 40% = BRL 2,076,000
PL 798, however, is not limited to changing the percentage of the applicable fine. Among the innovations brought by the project, it is worth highlighting the possibility for the taxpayer to complement the RERCT 1 and 2 returns with undeclared assets in these programs by paying the tax and the new fine on the difference amount.
Given the insecurity brought by the “Questions and Answers” (Q&A) edited by the Federal Revenue Department (FRD) in 2018, art. 4 of PL 798 is explicit in saying that the taxpayer will not be required to prove the origin of the assets. A mere statement that they are from a lawful economic activity will suffice. When submitting PL 798, Senator Pacheco makes express reference to item 40 of the Q&A published in 2018, which said that the taxpayer had to prove the declared assets’ licit origin if so asked by the tax authorities. Paragraph 1 of art. 4 of PL 798 says that it is up to the Tax Administration, at all times, the burden of proof to demonstrate that the taxpayer’s statement is false.
Paragraph 2 goes further by determining that the FRD can only notify the RERCT applicant to present documentation if there is evidence or other elements sufficient to open a criminal investigation or procedure other than the taxpayer’s statement. Paragraph 3 of art. 4 comes to demand that it is up to the FRD to demonstrate the presence of such evidence before issuing the tax notice to the taxpayer under penalty of nullity.
Despite reasonable attempts to clarify some controversial points of the original RERCT law, the project has lost the opportunity to resolve the most significant doubt of all: whether the amount to be regularized should take the ‘snapshot’ or ‘movie’ approach, that is, whether or not the taxpayer has to include amounts spent in years prior to the disclosure.
The FRD has always understood that total regularization would only occur if the taxpayer included the amounts consumed (expenses) in the years before the cut-off date. Although we are convinced that the law was clear enough about regularizing only the balance (snapshot approach) and not the amounts consumed (movie approach), PL 798 could take the opportunity to clarify the matter. The PL’s Justification mentions the “snapshot x movie approach” controversy without addressing the topic.
Some may wonder if a new RERCT would have the same impact as previous editions, given that today the automatic exchange of information between more than 100 countries would leave little room in the world for values to remain undeclared.
There is still a lot of money in the world that has not been properly declared. At the time of RERCT, the world was moving towards the automatic exchange of information but leaving a major player out of this equation: the United States. Although America has adopted FATCA with dozens of countries for automatic information exchange, the FATCA system is asymmetric and unfavorable to countries in relation to the USA.
If fact, while the FATCA requires from other countries detailed information on accounts held directly or indirectly by Americans, the US provides information only on American accounts’ direct holders. Thus, a Brazilian who maintains an undeclared bank account in the USA in the name of an offshore company is not reported to Brazil, as the holder is the offshore and not the individual. Because of this, many Brazilians took undeclared money from other countries (e.g., Switzerland) and sent it to American accounts, whose holders were companies.
But the destination of undeclared resources was not just the United States. Investments in real estate and insurance policies were also destinations for undeclared resources in the first editions of RERCT, not to mention the acquisition of jewelry, precious stones, gold bars, and other metals. The world has become smaller and more complex for those who do not adequately declare their assets abroad, but we are far from total disclosure and transparency.
On March 31, 2021, Senator Renan Calheiros was appointed rapporteur for PL 798, but the project has not yet evolved further. One of the complaints of previous editions was the prohibition on politicians or their relatives from applying to the program. It would not be surprising that, during the legislative process, some modification or amendment is made to include the politically exposed persons or their relatives. In reality, it would be a measure of justice, given that previous laws assumed that all value abroad of politicians was of illicit origin without allowing the contrary to be proved. By making participation in the RERCT conditional on resources of lawful origin, there would be no reason to prohibit politicians and their relatives from joining the program. A false declaration about the origin of the funds would be enough to exclude one from the program, and there is no reason for the pure and simple prohibition of this group of people.
The Government indeed needs money, and a new RERCT could bring some relief to public finances in this pandemic moment. We will wait for scenes from the following chapters.
David Roberto R. Soares da Silva, is an expert in tax, estate and succession planning, founding partner of do Battella, Lasmar & Silva Advogados, author of Brazil Tax Guide for Foreigners, and coauthor of Planejamento Patrimonial: Família, Sucessão e Impostos, and Tributação da Economia Digital no Brasil, published by Editora B18.