The general anti-abuse clause provided for in article 38 of the General Tax Law (LGT) has in its genesis a simple idea: when someone sets up and executes “operations” just to pay less taxes, outside the normality of legal traffic, the Tax Administration can disregard these operations and charge what it understands to be due according to its reading of the concrete taxable situation, regardless of the way found to carry out the non-taxed or less taxed operation. It is an important brake against businesses or operations that aim to conceal the true tax facts. The standard itself, its reason for being can be seen, but requires in its application criteria of proportionality, transparency and reasonableness that are normally not taken into account.
In reality, the CGAB, instead of currently being used to tax exceptional situations, the Tax Authority has often resorted to it in normal tax planning situations, even when it comes to options foreseen and permitted by the system itself. Now, in a modern and growing economy, companies and individuals make decisions based on costs, risks and also taxes. The law allows choices: forming a company, opting for a “green” tax incentive, reorganizing a group, selling today or tomorrow. If each of these choices can later be reclassified with the argument that “the main objective was to pay less tax”, uncertainty arises among economic operators. Everyone begins to distrust the AT’s interpretations of the rules in force. And, when the confidence of economic operators disappears, investments are no longer made.
This is not about giving carte blanche to those looking for shortcuts: an anti-abuse clause would be necessary, but it would have to have wording that the current one does not have, which is completely indeterminate, opening the way to all types of casuistic and abusive interpretation on the part of the AT. The use of clauses of this type to cover and justify taxation of operations that in the letter of the tax law are not taxed or are taxed less, must involve an unequivocal demonstration by the AT that the operation was constructed with the purpose of obtaining a tax advantage that the law did not intend to grant, that there is no relevant economic substance and that, in a reasonable alternative, the tax result would be different. It is not enough to baselessly classify the operation in question as “aggressive planning” to trigger the anti-abuse clause. It is necessary to accurately describe the underlying factuality covered up in an operation that only aimed to cover up the real deal of the operation: what was done, why, what tax advantage was obtained, what was the purpose of the applicable rules and why that purpose failed in the specific case.
The courts have been demanding exactly this: rigorous and exhaustive reasons that justify the application of the anti-abuse clause. When the AT’s decision does not explain the logical path that led it to the conclusion of abuse or ignores that the law offers specific means to correct certain situations, the review of taxation falls apart, although, sometimes, it has already caused a lot of damage, in some cases difficulties in paying salaries, suppliers, the State itself, or even insolvency. In reality, when the taxpayer presents credible economic reasons – cost reduction, alignment of functions and risks, need for financing – the clause should not be applied. Furthermore, in most cases, the AT hears the taxpayer in a prior hearing, but this is a mere formal hearing, as, in fact, it does not truly consider the taxpayer’s reasons, disregarding them in the name of collecting undue revenue. Now, the contradiction is not a bureaucratic formality, it is the opportunity to correct misunderstandings and provide documents that explain the logic of the business. Without a rigorous and serious prior hearing phase on the part of the AT – in fact, the party interested in the collection –, the probability of error increases and litigation drags on for years, with high costs for everyone, especially for the taxpayers targeted, some who are no longer recovering from the illegality and abuse of which they were victims.
The anti-abuse clause should be a scalpel, not a hammer. Well applied, it dismantles artificial schemes and protects fair competition. Poorly applied, it turns the exception into the rule, undermines predictability and deters investment. Fiscal justice is not about charging more taxes, it is about charging in a stable, proportional and understandable way. This is what taxpayers and the economy itself need.
Lawyer and founding partner of ATMJ – Sociedade de Advogados