Withholding income tax on payments to “identified beneficiaries”

Posted: 04/13/2021

CARF recognizes the non-levy of withholding income tax on payments to “identified beneficiaries”

Last week, an important decision issued by the Administrative Council for Tax Appeals (“CARF”) was published, canceling the collection of Withholding Income Tax (“IR-Fonte”) due to the payment made by the taxpayer to an “identified beneficiary”.

The non-levy of IR-Fonte in these cases does not mean that the amounts will not be taxed. Thus, if the beneficiary is identified and the payment has occurred, tax authorities can verify whether such beneficiaries have offered the amounts for taxation.

Per art. 61 of Law 8,981/1995¹, the collection of IR-Fonte at the rate of 35% occurs in the cases of “a) payment to an unidentified beneficiary; b) payment without cause; and c) indirect remuneration without identification of the beneficiary or without inclusion in the respective salaries.”

In the present case, the 1st Ordinary Panel of the 2nd Chamber of the 1st Trial Section of CARF by Judgment No. 1201-004.560, partially granted the Taxpayer’s Voluntary Appeal to cancel the assessment, due to the fact that it had effectively identified the beneficiaries of the payments in the notice of deficiency, and demonstrated the transactions. However, the position adopted was not unanimous among the members of the Ordinary Panel. The trial ended in a tie and, based on the new rule² in force since April 14, 2020, replacing the casting vote, the tie was resolved in favor of the taxpayer.

The decision represents a positive evolution in the discussions on the subject in CARF, mainly involving illegal acts, with a view to recognizing that it should avoid the “natural human intention to supposedly ‘do justice’” and focus on the technical application of the tax law without any moral judgment.

Understand the details

The discussion between the dissent and the majority opinion took place around the sufficiency of the identification factor of the beneficiary of payments to remove the requirement of IR-Fonte. According to the majority opinion, the identification of the beneficiary, the motivation and the cause of the payment are essential elements and when one or more elements are not proven, taxpayers are subject to the requirement of the IR-Fonte at a rate of 35%.

In the majority opinion, proof of the beneficiary’s identification and the actual occurrence of the transaction are sufficient acts to avoid the collection of the IR-Fonte under the terms of art. 61 of Law No. 8,981/1995. In this line of argument, it was confirmed that, even if it was not possible to demonstrate the provision of services effectively – that is, the cause of payment – the documents collected by the taxpayer were able to identify the recipient of the amounts paid and, therefore, that there was an asset transfer.

The decision considered the nature of the payment to be irrelevant, not addressing the lawfulness or illegality of its cause, dismissing the complaint based on the impossibility of economic double taxation.

¹ Art. 61. All payments made by legal entities to an unidentified beneficiary shall be taxed and withheld, at the ta rate of thirty-five percent, except for the provisions of special rules.
Paragraph 1 The taxation set forth in the head provision also applies to payments made or to funds delivered to third parties or members, shareholders or owners, whether or not accounted for, when the transaction or its cause is not evidenced, as well as in the event provided for in § 2, of article 74 of Law No. 8,383, of 1991.
Paragraph 2 -The withholding income tax shall be deemed due on the day of payment of said amount.
Paragraph 3. Revenue shall be deemed net, and the adjustment of the respective gross income on which the tax will be imposed shall be adjusted.”
² Currently favorable to the taxpayer per art. 19-E of Law No. 10,522/2002, added by art. 28 of Law No. 13,988/2020.