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 Brazil 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. International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online 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.