International In-house Counsel Journal Vol. 10, No. 39, Spring 2017, 1

The Application of General Constitutional Principles Governing Taxation to Control Tax Exemptions Pursuant to Precedents of the Supreme Court of

JULIANA BASTIANELLO BALDIN MARTINS Director, GTIS Partners LP, Brazil

ABSTRACT The purpose of the paper is to analyse how the Supreme Court of Brazil applies general tax principles to control tax exemptions. More specifically, the paper envisions to answer whether, based on the Supreme Court of Brazil’s view, tax exemptions can be granted, extinguished or modified according to political criteria, without consideration to general tax principles. For that, the application of four general tax principles commonly referred by Brazilian scholars will be analysed: rule of law, equality, non-retroactivity and anteriority. Other principles, such as the principles of the capacity to contribute and the prohibition of confiscatory taxation, which are also general tax principles under Brazilian constitution, will not be analysed. After a brief introduction, the paper brings an explanation of the legal classification of tax exemptions, as well as of the four principles to be considered, pursuant to Brazilian law. Then, decisions issued by the Supreme Court of Brazil with respect to tax exemptions will be analysed. Finally, conclusions will be drawn in order to identify the tendency verified in the decisions of the Supreme Court of Brazil regarding the application of general tax principles to control tax exemptions. Key-words: Exemptions, Principles, Rule of Law, Equality, Non-retroactivity, Anteriority, Precedents, Control, Supreme Court of Brazil. 1. Introduction This paper intends analyse one aspect of the constitutional control of tax exemptions. This aspect became more relevant in Brazil recently due to the increasing governmental practice of extending tax exemptions with the purpose to boost consumption and reduce the economic deceleration. In addition, articles published in Brazilian newspapers indicated that tax exemptions were extended to benefit specific tax payers, as in the case of the reduction of the rates of the industrialized products tax (“IPT”) for automobiles between 2011 and 20151. Due to the use of tax exemptions as a macroeconomic policy mechanism and the suspicious in respect to the rules extending tax exemptions, our intention is to analyse the constitutional control of tax exemptions. The aspect to be analysed herein refers to the application, by the Supreme Court of Brazil (“SCB”), of general taxation principles2 to control tax exemptions. More specifically, this paper envisions to answer to what extent the SCB applied certain general taxation principles to control tax exemptions between January 1st, 2007 and April 30th, 2016, with

1 Fabrini, Fabio e Matais, Andreza. Documentos Apontam que MP Editada na Gestão Lula foi Comprada por Lobby. Available at: http://politica.estadao.com.br/noticias/geral,documentos-apontam-que-mp-editada-na- gestao-lula-foi-comprada-por-lobby,1772249. Access on 01.29.2017. 2 ‘General taxation principles’ are principles that apply, if not to all taxes, to most of them (SCHOUERI, Luís Eduardo. Direito Tributário. 4th edition. São Paulo: Saraiva, 2014, page 385). In contrast to ‘general taxation principles’, there are ‘specific taxation principles’, which only apply to certain taxes.

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2 Juliana Bastianello Baldin Martins a view to confirm if, in the court’s view, tax exemptions can be extended, extinguished or modified based on political criteria, disregarding said principles. For that, we will analyse the application of four principles: rule of law, equality, anteriority and non-retroactivity. In a preliminary research, we identified in certain decisions that the SCB tends not to enforce the above general taxation principles while controlling tax exemptions. Based on such precedents, and as a starting point to the research proposed hereby, we assumed that the SCB tends not to declare the violation of the Brazilian constitution by rules granting tax exemptions based on said principles and to reinstate the autonomy of the Legislative and the Executive Branches to determine the extent of tax exemptions and their political grounds. In that sense, said branches would have a sort of “blank check” to extend, extinguish or modify tax exemptions. Before describing the research methodology, it is worth drawing brief notes about the legal classification of tax exemptions and the principles to be analysed. 2. Brief notes about the legal classification of tax exemptions and similar institutes Among Brazilian scholars, we identified four main opinions on the legal classification of tax exemptions. The first, supported by traditional scholars, classifies tax exemptions as a waiver to pay a tax due. The second, leaded by Souto Maior Borges, qualifies tax exemptions as hypothesis laid down by ordinary law based on which a tax should not levied3. The third, introduced by Barros Carvalho, sustains that tax exemptions are inhibitors of one or more elements of a taxation rule4. Finally, the forth, defended by Navarro Coêlho, proposes that tax exemptions delineate the facts based on which a tax should be levied5. As a guidance to our research, we will not adopt the position supported by the traditional scholars, even though this is the position followed by the SCB. The reasons for that approach are twofold. First, the position adopted by the SCB – and indeed reflected in the Brazilian National Tax Code – is criticized by most scholars for defining tax exemptions as a chronologic phenomenon that succeeds taxation. Second, adopting the SCB position would lead us to identify limited results. Therefore, we propose to adopt the position sustained by Barros Carvalho, which seems to be the most objective and comprehensive. It is important to note that tax exemptions differ from tax immunities, tax forgiveness, tax amnesty and moratorium under Brazilian law. Most Brazilian scholars classify tax immunities as rules defining the authority of political entities. Some scholars even support that tax immunities and tax exemptions have the same effect, but tax immunities have a constitutional status while tax exemptions have an ordinary law status6. Tax forgiveness, on the other hand, consists on a waiver provided by law for the payment of a tax. Tax amnesty, on its turn, is a waiver for the payment of fines. Finally, moratorium is a postponement of the deadline to pay a tax. Therefore, tax exemptions, tax immunities, tax forgiveness and moratorium are different institutes under Brazilian law and this paper will not address institutes other than tax exemptions.

3 BORGES, José Souto Maior. Teoria Geral da Isenção Tributária. 3rd edition. São Paulo: Malheiros, 2001, page 200. 4 BARROS CARVALHO, Paulo de. Curso de Direito Tributário. 26th edition. São Paulo: Saraiva, 2014, page 450. 5 NAVARRO COÊLHO, Sacha Calmon. Teoria Geral do Tributo, da Interpretação e da Exoneração Tributária, 3rd edition. São Paulo: Dialética, 2003, page 201. 6 See reference 3, page 205.

Taxation 3

3. Brief notes about the general taxation principles: rule of law, equality, non- retroactivity and anteriority 3.1. Rule of law The rule of law is set forth in two provisions of the Brazilian constitution, article 5th, II and article 150, II, in addition to being confirmed by other constitutional provisions, such as article 22 et seq, which govern the authority of entities to legislate, and article 145, which regulates the authority of entities to create taxes. The principle was originated from a customary practice within tax law: taxes could only be charged if created by law, that is, if approved by the people’s representatives7. Among other sets of rules8, the Magna Carta, dated 1215, established in its article XII the rule that was once customarily settled: “no scutage or aid shall be imposed on our kingdom unless by the common counsel of our kingdom”9. For years, the rule of law was claimed by Brazilian scholars and courts to be a superior rule that determined how others rules of our taxation system should apply10. Per traditional scholars’ and precedents’ view, the rule of law required more than a piece of legislation to create a tax; it required that the tax legislation described all aspects of the taxation rule. The Brazilian taxation system would, therefore, be oriented by an absolute rule of law. In this regard, the expression “by virtue of law” contained in article 5th, II, of Brazilian Constitution11 would encompass situations in which the law determines that one does or abstains from doing something, as well as the cases in which the Executive Branch is authorized to define that one does or abstains from doing something, within the scope of the authority delegated to it12. Per Bianco, such traditional view was criticized by Ricardo Lobo Torres, who distinguished “type” and “concept”13. Bianco explains that, as proposed by Ricardo Lobo Torres, a “type” is necessarily open because it is represented by concrete data organized based on a similarity criteria14, whereas a ‘concept’ consists on an abstract representation of empiric data15. From a concept, therefore, one could extract an object’s qualities or characteristics. In this sense, according to Ricardo Lobo Torres, Brazilian tax law would not be oriented by an absolute rule of law, but rather would be inspired by the principle by which the tax triggering event is gradually determined, and which would apply even if general provisions or undetermined concepts are used by the taxation rule16. 3.2. Equality The equality is reflected in two provisions of the Brazilian Constitution, article 5th, caput, and article 150, II, in addition to being confirmed by the Constitution’s preamble and by other constitutional provisions, such as article 145, caput. Article 5th, caput, while dealing with equality, addresses two types of equalities: the equality before the law (formal equality) and the equality at the law (substantial equality)17. When such article provides

7 XAVIER, ALBERTO. Os Princípios da Legalidade e da Tipicidade da Tributação. São Paulo: Revista dos Tribunais, 1978, page 6. 8 Navarro Coêlho refers to Portuguese rules that, after 1215, incorporated the idea of rule of law that was customarily settled. (NAVARRO COÊLHO, Sacha Calmon. Curso de Direito Tributário Brasileiro. 12th edition. Rio de Janeiro: Forense, 2012, page 167). 9 See reference 7, page 7. 10 BIANCO, João Francisco. Segurança Jurídica e o Princípio da Legalidade no Direito Tributário. In: Revista Direito Tributário Atual. São Paulo: Dialética, 2005, number 19, page 18. 11 Article 5th, II, of Brazilian Constitution provides: “Nobody shall be compelled to do or abstain from doing something, unless if ordered to do so by virtue of law”. 12 See reference 7, page 31. 13 See reference 10, page 20. 14 Idem. 15 Ibid idem. 16 Ibid idem. 17 ÁVILA, HUMBERTO. Teoria da Igualdade Tributária. 3rd edition, São Paulo: Malheiros, 2015, page 77. 4 Juliana Bastianello Baldin Martins that “all people are equal before the law” it is referring to the formal equality, which means that a law should be applied uniformly to all, regardless of its content18. On the other hand, when such article ensures “no distinction of any sort” and the “inviolability of equality” it is referring to the substantial equality, which precludes a law from making arbitrary distinctions19. In this regard, article 5th, caput, ensures that the law is applied uniformly to all and does not make arbitrary distinctions. In addition to the distinction between formal and substantial equality, Brazilian scholars differentiate particular and general equality. “Particular equality” considers the personal characteristics of an individual and the specificities of a case, while “general equality” considers the average characteristics of tax payers, based on case differences defined by the legislator20. According to Avila, the Brazilian Constitution prioritizes the “particular equality” over the “general equality”, and the “general equality” shall only be applied if (i) it is not possible or extremely expensive to inspect the compliance to taxation rules; and (ii) the individual characteristics and specificities of the cases cannot be identified21. Ávila defines equality as the relation among two or more persons, based on a comparison criteria or measure built upon an indicative element, which serves as a mean to achieve a certain purpose22. To such scholar, the comparison measure shall be valid, that is, it shall be based on a distinction compatible with the Brazilian Constitution, and shall be material, that is, it shall promote the intended purpose23. Still according to Ávila, there shall be a connection between the indicative element of the comparison measure and the comparison measure; the indicative element of the comparison measure shall be related to the comparison measure and shall be the most relevant element related to the comparison measure. 3.3. Non-retroactivity and anteriority The non-retroactivity is provided in articles 5th, XXXVI, and 150, III, “a”, of the Brazilian Constitution, and the anteriority, or non-surprise principle, is reflected in articles 150, III, “b” and “c”, and 195, §6, of the Brazilian Constitution. According to Ferraz Junior, similarly to the rule of law, non-retroactivity and anteriority are manifestations of the law predictability24. The scholar explains the non-retroactivity and the anteriority based on validity and effectiveness concepts. It is important to note that the anteriority is subject to exceptions and, therefore, it is not an absolute principle under Brazilian law25. From a tax perspective, in addition to being protected by article 5th, XXXVI of the Brazilian Constitution, which preserves perfect rights, tax payers benefit from article 150, III, “a”26. In this later provision, the Brazilian Constitution sets forth that tax payers can only be charged by virtue of a law in force at the time of the tax event27, which means that a new law cannot be applied to events that happened before it came into force. The non-retroactivity, therefore, is bifurcated in two subprinciples: the first consisting on the

18 Idem. 19 See reference 17, pages 78 to 80. 20 See reference 17, pages 83 to 86. 21 See reference 17, pages 89 and 90. 22 See reference 17, pages 45. 23 See reference 17, pages 48 to 50. 24 FERRAZ JUNIOR, Tercio Sampaio. Anterioridade e Irretroatividade no Campo Tributário. In: Tratado de Direito Constitucional Tributário: Estudos em Homenagem a Paulo de Barros Carvalho. São Paulo: Saraiva, 2005, pages 234 and 235. 25 The anteriority is subject to the exeptions provided in articles 148, II, 150, §1, 155, §4, “c”, and 195, §6, all of the Brazilian Constitution. 26 See reference 24, page 236. 27 Idem. Taxation 5 preservation of perfect rights, and the second consisting on the protection of past events, which is translated on the non-retroactivity of laws creating new crimes and taxes28. Anteriority, on the other hand, refers to the validity and effectiveness of a rule at a certain point in time29. In this sense, the expression “charge”, contained in article 150, III, of Brazilian Constitution30, shall be interpreted as the possibility of a rule to be valid in the fiscal year in which it was published and during the ninety day-period from its publication, and, at the same time, as the impossibility of that same rule to be effective in the fiscal year in which it was published (art. 150, III, “b”) and during the ninety day- period following its publication (art. 150, III, “c”)31. The tax rule not being effective in relation to events verified in the fiscal year in which it was published and during the ninety days following its publication, the tax created thereby cannot be levied in relation to said events32. 4. Tax exemptions per the SCB precedents. Rule of Law, equality, non-retroactivity and anteriority 4.1. Precedents’ selection, methodology and results In this section, we are analysing how the rule of law, equality, non-retroactivity and anteriority are applied to control tax exemptions. As previously referred, this paper envisions to answer to what extent the SCB applied said principles to control tax exemptions between January 1st, 2007 and April 30th, 2016, with a view to confirm if, on the court’s view, tax exemptions can be extended, extinguished or modified based on political criteria, with disregard to such principles. Other general taxation principles provided in the Brazilian constitution, such as the capacity to contribute and the prohibition of confiscatory taxation, will not be addressed in this paper. To achieve such purpose, we conducted a research on the SCB website (www.stf.gov.br), between May 1st, 2016 and May 31st, 2016, considering the decisions taken between January 1st, 2007 and April 30th, 2016. We researched decisions using the parameters “Tax Law and Exemption”, “Tax Law and Benefit” and “Tax Law and Incentive”, combining each of them with the parameters “and Rule of Law”, “and Equality”, “and Non-retroactivity” and, finally, “and Anteriority”. In addition, we considered the parameters “Tax Law and Positive Legislator”, Tax Law and Tax Favour” and Tax Law and Tax Concession”, as the SCB frequently uses the expressions “positive legislator”, “tax favour” and “tax concession” in its decisions. Based on such research methodology, we identified one hundred and eleven decisions, taken in actions or appeals submitted to the SCB, such as Actions to Declare Constitution Violation (“ADI”), Precautionary Measures within Actions to Declare Constitution Violation (“ADI MC”), Extraordinary Appeals (“RE”), Review based on Court Rulings within Extraordinary Appeals (“RE AgR”) and Review based on Court Rulings within Interim Appeals (“ARE AgR”). Out of the one hundred and eleven decisions identified, we analysed forty-three decisions and disregarded sixty-eight decisions. The decisions that were disregarded either did not refer to the topic “tax exemptions” or were identified more than once based on the research parameters, being, in the latter case, considered only once.

28 See reference 24, page 239. 29 Idem. 30 Article 150, III, of Brazilian Constitution precludes Federal, State and Municipal authorities to: “charge taxes: (…) (b) on the same fiscal year when the law creating or increasing such taxes was published; (c) before ninety days when the law creating or increasing such taxes was published (…)”. 31 See reference 24, pages 240 and 241. 32 Idem.

6 Juliana Bastianello Baldin Martins

4.2. Tax exemptions and rule of law Based on the parameters “Tax Law and Exemption”, “Tax Law and Benefit” and “Tax Law and Incentive”, each of which combined with the parameter “and Rule of Law”, we identified twenty-four decisions, of which we analysed nine decisions. In six of the analysed decisions33, the SCB did not analyse the merits of the extraordinary appeals because the underlying litigation did not involve constitutional matters or required the review of ordinary laws or proves, what the SCB is precluded from doing pursuant to the court rulings 27934 and 63635. In such cases, according to the SCB, the violation of the constitution was indirect. In the other three decisions that were analysed, the barriers for appeals to be analysed were overcome. In two of such cases, the SCB analysed the conformity to the rule of law of a law and a contract between States to grant sales tax (“ST”) exemptions. In such cases, the SCB determined that the Legislative Branch shall expressly approve contracts entered into among the States (RE 539.130/RS)36 and that a contract among States cannot convert a credit cancelation into a payment obligation, as article 155, §4th, of Brazilian Constitution does not authorize States to do so (ADI 4171/DF)37. In such cases, it is fair to say that the SCB declared the violation of the Brazilian Constitution by laws and contracts among States based on authority the Brazilian Constitutions delegates to such federation entities. In the last decision that was analysed, the RE 208.526/RS38, the SCB discussed the validity of article 30, §1, of Law 7,730/89, towards the constitution. Such article provided that, for purposes of income tax (“IT”) assessment, companies should adjust their balance sheets based on the deflation verified before Law 7,730/89 came into force pursuant to an index that was inconsistent with the actual deflation at the time. The main discussion referred to the concept of income, and the prevailing understanding was that article 30, §1, of Law 7,730/89 taxed assets, not income, and, thereby, violated the constitution. Judge criticized the “indirect violation” concept previously raised by the SCB and concluded, after analysing the ordinary law, that the difference between the deflation at the time and the index elected by article 30, §1, of Law 7,730/89, violated the constitutional concept of income39. The judges sustaining that the Judiciary Branch could replace the Legislative Branch while establishing an index for deflation adjustment were defeated. Based on the analysis contained in this topic, we noticed that, in most decisions (six among nine decisions), the SCB did not analyse the merits of the cases because they either did not involve constitutional matters or required the analysis of ordinary law or proves, what is prohibited by the court rulings 279 and 636. The RE 208.526/RS, however, is a precedent in which the SCB analysed the ordinary legislation to declare the violation to the constitution, regardless of the content of court ruling 636. In the other cases in which the SCB analysed the merits of the cases, the RE 539.130/RS and the ADI 4.171/DF, the ratio decidendi was based on the violation of constitutional rules

33 RE 609.513 AgR/PR, President Judge , Judgement Date 10.25.2011, First Court; RE 645.399 AgR/RS, President Judge Celso de Mello, Judgement Date 08.28.2012, Second Chamber; AI 821.698 AgR/RS, President Judge , Judgement Date 11.18.2014, First Chamber; ARE 669.072 AgR/MG, President Judge Rosa Weber, Judgement Date 08.04.2015, First Chamber; RE 596.673 AgR/RS, President Judge Celso de Mello, Judgement Date 02.07.2012, Second Chamber; and RE 501.877 AgR/MA, President Judge , Judgement Date 02.05.2013, Second Chamber. 34 Court Ruling 279, SCB: ‘The extraordinary appeal is not suitable for a mere re-examination of proves’. 35 Court Ruling 636, SCB: ‘The extraordinary appeal is not suitable to claim a violation to the rule of law when such violation demands the review of an interpretation given to an ordinary law’. 36 RE 539.130/RS, President Judge Ellen Gracie, Judgement Date 12.04.2009, Second Chamber. 37 ADI 4.171/DF, President Judge Ellen Gracie, Judgement Date 05.20.2015, Higher Court. 38 RE 208.526/RS, President Judge Marco Aurélio, Judgement Date 11.20.2013, Higher Court. 39 See reference 38, page 383. Taxation 7 concerning delegation of authority to federation entities. We can, therefore, affirm that the lack of constitutional discussions and the barriers established by court rulings 279 and 636 precluded the SCB to analyse the merits of most cases concerning the rule of law, even though it analysed one case involving the review of an ordinary law and declared the violation of the constitution. 4.3. Tax exemptions and equality Based on the parameters “Tax Law and Exemption”, “Tax Law and Benefit” and “Tax Law and Incentive”, each of which combined with the parameter “and Equality”, we identified thirty-four decisions, of which we analysed seventeen decisions. In eight of the analysed decisions, the SCB did not analyse the merits of the extraordinary appeals submitted to it. In six of such cases, decisions not to accept the extraordinary appeals were justified by the fact that the Judiciary Branch shall not play the role of a legislator by extending tax exemptions to those who were not contemplated by the tax exemption rule40. In two extraordinary appeals which merits were analysed, the RE 231.924/PR and the RE 405.579/PR41, the SCB reaffirmed the court’s precedents in the sense that the Judiciary Branch shall not act as a legislator by extending tax exemptions with a view to enforce equality. Such appeals refer to prior cases which judgement was presided by judge Celso de Mello42, whose sayings are repeated in the SCB decisions which seem to form the thesis that precludes the Judiciary Branch to act as a legislator. In another extraordinary appeal which merits were analysed by the SCB, the RE 614.406/RS43, the SCB recognized that article 12 of Law 9,713/88 violated the Brazilian constitution. Such article allowed income tax to be levied at higher rates over lump sum income and the SCB understood that tax payers that received lump sum income should not be treated differently from tax payers that received income over time by the fact that they received income in different moments. Notwithstanding the court’s precedents precluding the Judiciary Branch to act as a legislator, in the RE 614.406/RS, judge Ellen Gracie was defeated while sustaining that the taxation at higher rates of lump sum income was an election of the legislator and there were no grounds to declare the violation of the Constitution and to create a new rule in the case44. The position taken by judge Ellen Gracie, although she was defeated in the judgement, seems consistent with the SCB’s approach to preclude the Judiciary Branch to act as a legislator. In other extraordinary appeals and actions to declare the constitution violation in which the SCB analysed the merits of the cases45, the decisions established criteria to control tax exemptions based on equality. Pursuant to such decisions, we can affirm that, on the SCB’s view, tax exemptions that are not unreasonably or arbitrarily extended and that are not extended to a single beneficiary, representing an undue benefit, comply with equality.

40 AgR 782.376 RE/MG, President Judge Celso de Mello, Judgement Date 05.05.2015, Second Chamber; ED 710.026 ARE/RS, President Judge Luiz Fux, Judgement Date 07.04.2015, First Chamber; RE 614.407 AgR- Segundo/DF, President Judge Rosa Weber, Judgement Date 11.25.2014, First Chamber; RE 628.791 AgR- Segundo/RS, President Judge Edson Facchin, Judgement Date 12.01.2015, First Chamber; RE 782.376 AgR/MG, President Judge Celso de Mello, Judgement Date 05.05.2015, Second Chamber; and RE 475.954 AgR/RS, President Judge , Judgement Date 06.25.2013, First Chamber. 41 RE 231.924/PR, President Judge Marco Aurélio, Judgement Date 04.06.2011, Higher Court; and RE 405.579/PR, President Judge , Judgement Date 12.01.2010, Higher Court. 42 RE 166.122/SP, President Judge Celso de Mello, Judgement Date 03.10.1995, First Chamber; and MS 22.690/PE, President Judge Celso de Mello, Judgement Date 04.17.1997, Higher Court. 43 RE 614.406/RS, President Judge Ellen Gracie, Judgement Date 10.23.2014, Higher Court. 44 See reference 43, page 16. 45 ADI 4.276/MT, President Judge Luiz Fux, Judgement Date 08.20.2014, Higher Court; ADI 4.976/DF, President Judge , Judgement Date 05.07.2014, Higher Court; RE 599.632, President Judge Dias Tóffoli. Judgement Date 11.06.2014, Higher Court; RE 231.924/PR, President Judge Marco Aurélio, Judgement Date 04.06.2011, Higher Court; and ADI 4.259/PB, President Judge , Judgement Date 03.03.2016, Higher Court. 8 Juliana Bastianello Baldin Martins

Also, if tax payers are treated differently, the necessity, adequacy and proportionality of the rule establishing such differentiation shall be analysed to confirm if the purpose of the tax exemption rule justifies the exception to equality46. Finally, the lack of a rule does not imply a violation to equality, as per the RE 599.632/RJ and precedents referred therein47. Based on the decisions analysed in this section, we concluded that the thesis that precludes the Judiciary Branch to act as a legislator while extending tax exemptions with the purpose to enforce equality was used by the SCB to reject the analysis of more than a third of the analysed decisions. There are inconsistencies between said thesis and the opinions prevailing in the RE 614.406/RS, in which the SCB adopted a hybrid solution, with no support on the law, to authorize the taxation of lump sum income the same way that income received over time. Finally, in the control of tax exemptions based on the equality, the SCB tends to declare the violation of the constitution in cases involving clear violations of impersonality and proportionality and respects the political judgement made by the Executive and the Legislative Branches to grant the tax exemptions. 4.4. Tax exemptions, non-retroactivity and anteriority Based on the parameters “Tax Law and Exemption”, “Tax Law and Benefit” and “Tax Law and Incentive”, each of which combined with the parameter “and Non-retroactivity” and “and Anteriority”, we identified seventeen decisions, of which we analysed ten decisions. In two of the analysed decisions, the SCB did not analyse the merits of the cases by arguing that reviewing and extinguishing a tax exemption is a political decision, which can be modified at any time, without regard to the principles of anteriority and non-retroactivity48. Such understanding is sustained by judge Ricardo Lewandowski, who presided the two decisions referred to above and repeated that same understanding at the RE 545.308/SP49. We could also identified the understanding that extinguishing a tax exemption is not the same as increasing a tax and, therefore, the anteriority does not apply when a tax exemption is extinguished (RE 377.457-3/PR50 and ADI 4.016-2 MC/PR51). Judge Gilmar Mendes clarified that the SCB’s opinion is that the anteriority does not have to be observed in the following situations, which do not represent increases of taxes: (1) modification of inflation adjustment indexes; (2) alteration of deadlines to collect taxes (court ruling 669); and (3) extinction of tax exemptions, when taxes become immediately due (RE 204.062)52. Similarly, the reduction or extinction of discounts for payment of taxes is not understood as a tax increase and the anteriority does not apply in these cases either53. In only two of the ten cases analysed, the SCB understood that the extinction of tax exemptions violated the non-retroactivity. In such cases, the underlying discussion referred to the increase on December, 1989, by Law 7,988/89, of the income tax rates applied to incentivized export transactions made in 1989. Although the SCB preserved its understanding that the triggering event of the income tax happens on December 31 of each year (court ruling 584), in the case of incentivized export transactions, in which the manoeuvre of tax rates has economic purposes, the income tax triggering event should be deemed to occur by the time the export transaction is made and any subsequent

46 RE 231.924/PR, President Judge Marco Aurélio, Judgement Date 04.06.2011, Higher Court, page 118. 47 See reference 45, page 16. 48 AI 783.509/SP AgR, President Judge Ricardo Lewandowski, Judgement Date 10.19.2010, First Chamber, page 155, and AgR 588.639 RE/SP, President Judge Ricardo Lewandowski, Judgement Date 11.09.2010, Higher Court, page 438. 49 RE 545.308/SP, President Judge Marco Aurelio, Judgement Date 10.08.2009, Higher Court. 50 RE 377.457/PR, President Judge Gilmar Mendes, Judgement Date 09.1.7.2008, Higher Court.. 51 ADI 4.016 MC/PR, President Judge Gilmar Mendes, Judgement Date 08.01.2008, Higher Court. 52 See reference 51, page 58. 53 See reference 51, page 60. Taxation 9 retroactive alterations of tax rates violates the non-retroactivity. This understanding was settled with binding effect to the Judiciary, Executive and Legislative Branches at the RE 592.396/SP54. Based on the decisions analysed in this section, we can affirm that, on the SCB’s view, the reduction or extinction of tax exemptions is not equivalent to an increase of taxes and the anteriority does not apply in those situations (MC 4.016-2/PR). The understanding that the review or extinction of a tax exemption is a political decision, which can be modified at any time, without regard to the principles of anteriority and non-retroactivity, seems to be an isolated position of judge Ricardo Lewandowski, which indeed goes beyond the opinion settled on the precedent taken by him as a reference (RE 344.994/PR). In the case of the income tax, the increase of tax rates applied to past export transactions, when manoeuvre of tax rates has an economic purpose, violates the non- retroactivity. 4.5. Tax exemption, positive legislator, tax favour and tax concession Based on the parameters “Tax Law and Positive Legislator”, “Tax Law and Tax Favour” and “Tax Law and Tax Concession”, we identified thirty-six decisions, of which seven decisions were analysed. In six of such decisions, the SCB did not analyse the merits of the cases submitted to it. In five out of these six decisions55, the SCB rejected the analysis of the merits based on precedents of the court in the sense that the Judiciary Branch shall not act as a legislator with a view to enforce equality. In the last of these six decisions, the SCB did not analyse the merits of the case due to the prohibition of States to extend ST exemptions without a prior agreement among States56. In the only case which merits were analysed by the SCB, the RE 353.657-5/PR57, the parties discussed if companies could benefit from IPT credits arising out of transactions that were not taxed. The prevailing understanding was that taxes shall be effectively charged and paid in previous transactions for a company to benefit from a tax credit deriving therefrom58, and that, in transactions that are not taxed, there are no legal parameters for a tax credit to be ascertain. Judge Ellen Gracie highlighted that the purpose of reducing a tax rate to zero is to stimulate the production of essential goods, and that the Judiciary Branch would violate the principle of the selectivity59, in addition to breaching the checks and balances system, if it defined a tax rate to allow companies to benefit from tax credits in the case under analysis60. The decisions analysed herein reinforce that the SCB uses the thesis that precludes the Judiciary Branch to act as a legislator with the purpose to enforce equality to reject the analysis of several cases. In the only case addressed in this section which merits were analysed, the SCB decision was aligned with the thesis that the Judiciary Branch shall not act as a legislator as it denied companies to benefit from tax credits arising out of transactions that were not taxed, as there was no legal parameter to define the amount of the tax credit these companies would be entitled to. This precedent is inconsistent with the decision taken at RE 614.406/RS, as we analysed in the section “Tax Exemption and Equality” above.

54 RE 592.396/SP, President Judge Edson Fachin, Judgement Date 12.03.2015, Higher Court. 55 AI 831.965 AgR/RJ, President Judge Rosa Weber, Judgement Date 10.28.2014, First Chamber; ARE 691.852 AgR/RS, President Judge Rosa Weber, Judgement Date 11.05.2013, First Chamber; ARE 937.323 AgR/SC, President Judge Luiz Fux, Judgement Date 03.29.2016, First Chamber; RE 410.515-2 AgR/PI, President Judge Carmen Lucia, Judgement Date 05.26.2016, First Chamber; RE 603.060 AgR/SP, President Judge Carmen Lucia, Judgement Date 02.08.2011, First Chamber. 56 RE 637.959 AgR, President Judge Luiz Fux, Judgement Date 02.19.2013, First Chamber. 57 RE 353.657-5/PR, President Judge Marco Aurélio, Judgement Date 06.25.2007, Higher Court. 58 See reference 57, page 516. 59 The principle of selectivity is a specific taxation principle applicable to the IPT, by which the more essential a good is (for example, food commonly included in people’s daily diet), the less taxed it shall be. 60 See reference 57, page 603. 10 Juliana Bastianello Baldin Martins

4. Conclusion In view of the decisions analysed in this paper, we concluded that the SCB tends not to declare the violation of the Brazilian Constitution by rules extending tax exemptions based on the principles considered herein. Particularly in cases involving the rule of law and the anteriority, this position is justified by the precedents of the court that dictate that the analysis of ordinary law or of proves cannot be made in an extraordinary appeal (court rulings 279 and 636) and that the extinction of tax exemptions is not subject to the principle of anteriority. However, the understanding that the review or the extinction of tax exemptions can be made based on political criteria, without observing the non- retroactivity, seems to be an isolated opinion. This can be confirmed by the declaration, with binding effect, of the violation of the Brazilian Constitution on the RE 592.396/SP, in which the SCB affirmed the non-retroactivity to have been disrespected. The SCB precedents also tend not to enforce equality while controlling tax exemptions. Even though the equality is rarely enforced, the decisions analysed show that the court considers the reasonability and the impersonality of tax exemptions and respects the political judgement made by the Executive and the Legislative Branches to grant the tax exemptions. Also as to the application of equality to control tax exemptions, we found it to be incoherent that the SCB raises the thesis that precludes the Judiciary Branch to act as a legislator in a number of the cases analysed herein and still concluded, in the RE 614.406/RS, that a hybrid solution, with no legal support, could be adopted to authorize the taxation of lump sum income the same way as income received over time. As in the RE 614.406/RS, other SCB’s precedents show that the court often takes a legislative approach. REFERENCES ÁVILA, HUMBERTO. Legalidade Tributária Multidimensional. In: Princípios e Limites da Tributação. Ferraz, Roberto (Coord.). São Paulo: Quartier Latin, 2005. ______. Teoria da Igualdade Tributária. 3rd edition, São Paulo: Malheiros, 2015. ______. Teoria dos Princípios: da Definição à Aplicação dos Princípios Jurídicos. 4th edition, São Paulo: Malheiros, 2005. BANDEIRA DE MELLO, Celso Antônio. O Conteúdo Jurídico do Princípio da Igualdade. 3rd edition, São Paulo: Malheiros, 2015. BARRETO, Paulo Ayres. Contribuições: regime jurídico, destinação e controle. 1st edition. Rio de Janeiro: Noeses, 2006. BIANCO, João Francisco. Segurança Jurídica e o Princípio da Legalidade no Direito Tributário. In: Revista Direito Tributário Atual. São Paulo: Dialética, 2005, number 19. BORGES, José Souto Maior. Teoria Geral da Isenção Tributária. 3rd edition, São Paulo: Malheiros, 2001. CARVALHO, Paulo de Barros. Curso de Direito Tributário. 26th edition, São Paulo: Saraiva, 2014. ______. Fundamentos Jurídicos da Incidência. 9th edition, São Paulo: Saraiva, 2012. FABRINI, FABIO e MATAIS, ANDREZA. Documentos Apontam que MP Editada na Gestão Lula foi Comprada por Lobby. Disponível em: http://politica.estadao.com.br/noticias/geral,documentos-apontam-que- mp-editada-na-gestao-lula-foi-comprada-por-lobby,1772249. Acess on 01.29.2017. FERRAZ JUNIOR, Tercio Sampaio. Anterioridade e Irretroatividade no Campo Tributário. In: Tratado de Direito Constitucional Tributário: Estudos em Homenagem a Paulo de Barros Carvalho. São Paulo: Saraiva, 2005. LUNARDELLI, Pedro Guilherme Acorsi. Isenções Tributárias. São Paulo: Dialética, 1999. NAVARRO COÊLHO, Sacha Calmon. Curso de Direito Tributário Brasileiro. 12th edition, Rio de Janeiro: Forense, 2012. ______. Teoria Geral do Tributo, da Interpretação e da Exoneração Tributária, 3rd edition, São Paulo: Dialética, 2003. SEIXAS FILHO, Aurélio Pitanga. Teoria e Prática das Isenções Tributárias. 2nd edition, Rio de Janeiro: Editora Forense. 1999. SCHOUERI, Luís Eduardo. Direito Tributário. 4th edition, São Paulo: Saraiva, 2014. XAVIER, ALBERTO. Os Princípios da Legalidade e da Tipicidade da Tributação. São Paulo: Revista dos Tribunais, 1978. Taxation 11

ADI 4016 MC/PR, President Judge Gilmar Mendes, Judgement Date 08.01.2008, Higher Court. ADI 4171/DF, President Judge Ellen Gracie, Judgement Date 05.20.2015, Higher Court. ADI 4259/PB, President Judge Edson Fachin, Judgement Date 03.03.2016, Higher Court. ADI 4276/MT, President Judge Luiz Fux, Judgement Date 08.20.2014, Higher Court. ADI 4976/DF, President Judge Ricardo Lewandowski, Judgement Date 05.07.2014, Higher Court. AI 783.509 AgR/SP, President Judge Ricardo Lewandowski, Judgement Date 10.19.2010, First Chamber. AI 821.698 AgR/RS, Relator Ministra Rosa Weber, Judgement Date 11.18.2014, First Chamber. AI 831.965 AgR/RJ, President Judge Rosa Weber, Judgement Date 10.28.2014, First Chamber. ARE 669.072 AgR/MG, President Judge Rosa Weber, Judgement Date 08.04.2015, First Chamber. ARE 691.852 AgR/RS, President Judge Rosa Weber, Judgement Date 11.05.2013, First Chamber. ARE 710.026 ED / RS, President Judge Luiz Fux, Judgement Date 04.07.2015, First Chamber. ARE 742.618/RJ AgR, President Judge Rosa Weber, Judgement Date 10.08.2013, First Chamber ARE 831.170 AgR/PE, President Judge Luiz Fux, Judgement Date 04.07.2015, First Chamber. ARE 937.323 AgR/SC, President Judge Luiz Fux, Judgement Date 03.29.2016, First Chamber. RE 183.130/PR, President Judge Carlos Velloso, Judgement Date 09.25.2014, Higher Court. RE 201.512/MG, President Judge Carmem Lucia, Judgement Date 11.05.2015, Higher Court. RE 208.526/RS, President Judge Marco Aurélio, Judgement Date 11.20.2013, Higher Court. RE 231.924/PR, President Judge Marco Aurélio, Judgement Date 04.06.2011, Higher Court. RE 244.293/SC, President Judge Ilmar Galvão, Judgement Date 11.20.2013, Higher Court. RE 344.994/PR, President Judge Marco Aurélio, Judgement Date 03.25.2009, Higher Court. RE 353.657/PR, President Judge Marco Aurélio, Judgement Date 06.25.2007, Higher Court. RE 377.457/PR, President Judge Gilmar Mendes, Judgement Date 08.19.2008, Higher Court. RE 405.579/PR, President Judge Joaquim Barbosa, Judgement Date 12.01.2010, Higher Court. RE 410.515-2 AgR/PI, President Judge Carmen Lucia, Judgement Date 05.26.2016, First Chamber. RE 475.954 AgR/RS, President Judge Dias Toffoli, Judgement Date 06.25.2013, First Chamber. RE 477.323/RS, President Judge Marco Aurélio, Judgement Date 10.16.2004, Higher Court. RE 501.877 AgR/MA, President Judge Gilmar Mendes, Judgement Date 05.05.2013, Second Chamber. RE 539.130/RS, President Judge Ellen Gracie, Judgement Date 12.04.2009, Second Chamber. RE 545.308/SP, President Judge Marco Aurelio, Judgement Date 10.08.2009, Higher Court. RE 588.639 AgR/SP, President Judge Ricardo Lewandowski, Judgement Date 11.09.2010, Higher Court. RE 592.396/SP, President Judge Edson Fachin, Judgement Date 12.03.2015, Higher Court. RE 596.673 AgR/RS, President Judge Celso de Mello, Judgement Date 02.07.2012, Second Chamber. RE 599.632/RJ, President Judge Dias Toffoli, Judgement Date 11.06.2014, Higher Court. RE 603.060 AgR/SP, President Judge Carmen Lucia, Judgement Date 02.08.2011, First Chamber. RE 609.513 AgR/PR, President Judge Luiz Fux, Judgement Date 10.25.2011, First Chamber. RE 614.406/RS, President Judge Ellen Gracie, Judgement Date 10.23.2014, Higher Court. RE 614.407 AgR-segundo/DF, President Judge Rosa Weber, Judgement Date 11.25.2014, First Chamber. RE 627.543/RS, President Judge Dias Toffoli, Judgement Date 10.30.2013, Higher Court. RE 628.791 AgR-segundo/RS, Relatora Edson Fachin, Judgement Date 12.01.2015, First Chamber. RE 637.959 AgR, President Judge Luiz Fux, Judgement Date 02.19.2013, First Chamber. RE 645.399 AgR/RS, President Judge Celso de Mello, Judgement Date 08.28.2012, Second Chamber. RE 782.376 AgR/MG, President Judge Celso de Mello, Judgement Date 05.05.2015, Second Chamber. RE 804.267 AgR/SP, President Judge Rosa Weber, Judgement Date 11.18.2014, First Chamber. *** Juliana Bastianello Baldin Martins joined GTIS Partners on May 2011 and is currently a Diretor at the firm. Mrs. Baldin Martins is responsible for legal matters pertaining to real estate, corporate, contracts and tax activities. Mrs. Baldin Martins has over six years of experience in corporate law. Prior to joining GTIS Partners, she was a lawyer at Machado, Meyer, Sendacz e Opice Advogados, one of the largest law firms in Brazil, where she spent over three years dedicating herself to mergers, acquisitions and corporate 12 Juliana Bastianello Baldin Martins restructuring transactions. Prior to Machado, Meyer, Sendacz e Opice, she was an intern at TozziniFreire Advogados, also one of the largest law firms in Brazil, where she dedicated herself to capital markets transactions for over three years. As a lawyer at Machado, Meyer, Sendacz e Opice and as an intern at TozziniFreire Advogados she rendered services to the largest corporations and investment funds acting in the Brazilian real estate and capital markets segments. For two consecutive years, 2010 and 2011, Mrs. Baldin Martins contributed with comments on Brazilian corporate law to the “Doing Business”, a copublication of the World Bank and the International Finance Corporation comparing business regulation in several economies. Mrs. Baldin Martins graduated from São Paulo University Law School (USP) in 2007, completed her Master of Business Administration at Fundação Getúlio Vargas (FGV) in 2011 and obtained a postgraduation degree in Tax Law at Fundação Getúlio Vargas (FGV) in 2016. GTIS Partners LP (“GTIS Partners”) is a global real estate investment firm headquartered in New York with offices in Los Angeles, San Francisco, Atlanta, São Paulo, Paris and Munich. GTIS Partners was founded in 2005 and is managed by President Tom Shapiro and Senior Managing Directors Josh Pristaw, Rob Vahradian, Tom Feldstein and João Teixeira. GTIS Partners has eighty-four employees and currently has approximately US$3.8 billion of assets under management. The firm pursues opportunistic real estate investments through direct equity investment and non-traditional lending activities. To date, the firm has commited capital to residential, retail, industrial, office, hotel and mixed-use projects in the U.S. and Brazil, and is among the largest real estate private equity companies in Brazil. The principals of GTIS Partners have over 130 years of investment, legal, management and operations experience, which spans all major property types and geographies. By combining hands-on real estate expertise with a diciplined investment approach, GTIS Partners creates value for its investors and partners.