Brazil's Statute of Limitation for Social Security Taxes Unconstitutional, Court Says

Brazil’s Superior Court of Justice (Superior Tribunal de Justiça, or STJ) on August 15 delivered a decision that significantly reduces the statute of limitations applicable to unpaid social security taxes. The decision rules that the 10-year statute of limitation for social security taxes, provided by article 45 of Law 8,212/91, is unconstitutional.

The decision is important because the Federal Revenue Department — which has taken over control and audit of social security taxes — will now have a shorter, standard five-year term to audit and assess unpaid social security taxes.

Although the full text of the decision has not yet been released, the STJ’s decision in special appeal 616,348, filed by Companhia Materiais Sulfurosos, rules unconstitutional the10-year statute of limitation for social security taxes determined by article 45 of Law 8,212/91. According to the STJ, social security taxes have the same nature of other ordinary taxes for which the federal constitution requires a complementary law to provide general taxing rules, which include those regulating the applicable statute of limitations. Because Law 8,212/91 was an ordinary law, it would violate the constitution, the court said. As a consequence, social security taxes should follow the five-year statute of limitation provided by the National Tax Code, deemed as a complementary law.

The STJ’s decision was unanimous. The judgment was initiated in December 2005 and concluded only on August 15 because of frequent requests from STJ justices to review the case files before delivering their opinion.

The decision is good news for taxpayers because it limits the tax authorities’ ability to audit beyond five years. In practical terms, the Federal Revenue Department can no longer audit and assess taxpayers for unpaid social security taxes, such as the employers’ 20 percent payroll tax, beyond August 2002. Before the decision, the Federal Revenue Department could audit and assess social security taxes as far as August 1997.

It is important to note that the STJ’s decision is not binding, which means that taxpayers will have to use it as a defense argument in case tax authorities try to assess social security taxes beyond five years. With the decision, however, possibly administrative tax courts will start to follow the STJ’s rule.

The government may try to reverse the decision before the Supreme Court, which is the highest Brazilian court for constitutional issues.

Azevedo Sette Advogados