The widespread compliance with tax obligations constitutes the essential basis of any tax system and a pillar for the healthy and fair competition of economic agents in the market.

There is a growing awareness that tax non-compliance not only affects the Treasury, but also the free competition of economic agents in the market, especially when the undue benefit obtained is transferred to economic operations.

Among the non-compliant taxpayers, a distinction is made between debtors (those who have their debt determined but do not pay their taxes) and tax evaders (those who do not declare their real income to the Treasury).

In relation to the debtors, in order to dissuade them from their behavior, the legislations establish compensatory or punitive interests for the time of delay and some also apply fines for the delay in the payment of the tax debt (thus for example, In the U.S., 0.5% is applied for each month, without exceeding 20%; in Spain, three types of late payment surcharges are applied, the executive surcharge of 5%, the reduced surcharge of 10% and the 20% surcharge; in Uruguay, the late payment fine is equivalent to 5% to 20% of the unpaid tax depending on the time elapsed; in Venezuela, late payment implies a fine of 0.28% per day up to a maximum of 100%; etc.).

But not all debtors are in the  same conditions and therefore should not receive the same treatment under tax law.

Concept

ETCO (Brazilian Institute of Competition Ethics) [1] he has defined the “contumacious tax debtor”, as the subject who makes tax default his livelihood, not for lack of economic capacity, but to be able to sell his products cheaper than the competition, and thus win more market and thus obtain an undue profitability with this strategy [2].

In Brazil, civil and business organizations, the tax agencies and the doctrine [3], have highlighted the figure of the ”stubborn debtor“ (”contumacious debtor”), maintaining the need to apply a specific disciplinary regime with exceptional sanctions, which aims to deter this behavior, as it is highly harmful both for the tax system and for the free competition of economic agents and therefore for the economic development of the country.

This subject has as a final strategy the default of his payment, being his “modus operandi” to use all legal remedies with mere delaying intent and / or to adhere to payment facility plans (fractionation), to avoid the payment of the debt, which finally ends up being much higher than his declared assets and therefore unrecoverable.

Among their maneuvers, it is worth mentioning, among others, the cancellation of their company or declaring themselves bankrupt due to the accumulation of debts, to continue their economic activity by creating other companies under the ownership of third parties (relatives, acquaintances or members of the economic group), through the so-called shell companies, straw, “laranjas”, etc., to continue avoiding the payment of the consolidated debt and generating, in turn, a new debt that they will not pay either.

These actions are “sine die,” so one could almost go as far as to affirm, that the business of the “contumacious debtor” is the tax default “per se,” rather than the economic activity it develops.

To limit such maneuvers, many tax administrations have instituted payments on account, collection or withholding regimes, to obtain the income of said subjects in advance and have also assigned certain classes of tax invoices that do not grant tax credit in VAT.

In this case, it is necessary to distinguish the “contumacious debtor ”from the “eventual” or “bona fide debtor.” In the latter case, the debt is caused by temporary and unexpected real difficulties (cash problems, decline in sales, claims, etc.), which may or may not be recurring, but which are generated within the framework of the conduct of a good taxpayer.

Restrictive measures for their actions.

In order to provide a response to this situation, in Brazil in 2019 Bill No. 1.646 [4] under the title “Measures for fighting the contumacious debtor”, where he was defined as a taxpayer whose conduct is characterized by substantial and repeated non-compliance with the taxation. It was determined in cases where the amount of the debt was equal to or greater than R$ 15 million and was configured with the subjective element of their behavior, which was the intentionality of not paying taxes.

Once this situation was verified, the project enabled the tax administration to conduct the following procedures: a) cancel their registration in the taxpayer registry, when their proven actions caused damages to competition, b) cancel the tax benefits obtained, and c) exclude them from the payment facilities plans (fractionation).

In view of the lack of approval of the aforementioned bill, this year a new bill was introduced, No. 15/2024 [5], where a new regime called the “Contumacious Debtor” is implemented, defining it as that taxpayer with tax debts equal to or greater than R$ 15 million, who incurs in any of the following situations: a) the debt lacks adequate collateral and exceeds 100 % of its equity, b) has debts due irregularly for more than a year, c) is a party related to a de-recognized or declared failed legal entity, with tax credits or due debt.

Once some of these requirements have been verified, the tax administration registers the debtor in the Federal Register of the Contumacious Debtor (CFDC) and the following measures are applied : 1) suspension in the National Register of Legal Entities, 2) the administrative litigation procedure by which the last decision-making instance is the collegiate body of the Delegation of the Federal Revenue, and 3) the impediment to participate in public tenders or concessions.

The Receita Federal reported that the universe of taxpayers qualified as contumacious debtors would be approximately 1,000, that is, only 0.005% of the 20 million of the general registry, but that each had debts greater than R$ 15 million and in total the general debt amounted to approximately 100,000 million reais [6].

One of the premises of this proposal was that it is necessary to give “teeth to the State” to defend itself against these actions and thus prevent the “illicit economy” from surpassing the “real economy”.

Conclusion

Regardless of the defeat of the present legislative initiative, it is interesting to note that the Federal Receita has put on the table a new institute in tax law “the contumacious tax debtor,” whose conduct causes significant damage to the tax revenues.

Considering that this unfair practice is common in the countries of the region, it may be that this initiative serves as a reference for the analysis of upcoming reforms, which must take into consideration a precise and objective definition of the contumacious tax debtor to be able to clearly distinguish it from the “bona fide debtor”, as well as determine its exemplary consequences in the field of tax administration and, where appropriate, to be able to typify their conduct also in the tax criminal field [7].

This would not only significantly increase the perception of risk and tax revenues but would also favor better conditions for free competition in the market for the economic agents.

[1] It is a civil society organization, founded in 2003 that promotes integrity in the business environment. They argue that fair competition is one of the main pillars of economic development and building a fairer and stronger nation.

[2] https://es.etco.org.br/noticias/entenda-o-que-e-o-devedor-contumaz/

https://es.etco.org.br/projetos/a-luta-contra-o-devedor-contumaz-de-tributos/

[3] Júlia Silvia Araújo Carneiro (2020): “O devedor contumaz no Direito Tributário: premisas teóricas, conceito e regime jurídico”, Forum.

[4] https://www.camara.leg.br/proposicoesWeb/fichadetramitacao?idProposicao=2194879

[5] https://www.camara.leg.br/proposicoesWeb/fichadetramitacao?idProposicao=2416861

[6] R$ 100,000 millions

[7] The Plenary of the Supreme Federal Court (STF) of Brazil on 18/12/2019 in the case “RHC n. 163.334/SC”held that “…the taxpayer who, in a contumacious manner and with intent of appropriation, fails to pay the ICMS (VAT) collected from the purchaser of the goods or service, incurs the penal type of art. 2, inc. II of Law No. 8.137/1990”.

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