Through strategic agreements, government successfully minimized disbursements in three significant cases

07/16/2024

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Priscila Faricelli — Foto: Divulgação

The federal government has successfully averted a financial hit estimated at R$169.24 billion in legal judgments handed down by the Federal Supreme Court and the Superior Court of Justice in the first half of the year. This total was tied to ten significant cases in which the courts ruled favorably on arguments presented by the Federal Attorney General’s Office (AGU) and the Attorney General’s Office of the National Treasury (PGFN).

Additionally, the government considers agreements reached in three other cases as victories. These settlements will result in disbursements totaling R$5.5 billion, a figure significantly lower than initially projected, though the federal government has not disclosed the initial amount. This information was provided in a report requested by Valor from these agencies.

Negotiation is increasingly recognized as a valuable tool in AGU’s strategy. “We view some of our negotiated agreements as victories,” states Flavio José Roman, Deputy to the AGU. At the AGU, he notes with a touch of humor that the office never loses; it either wins or negotiates.

For the AGU, actively negotiating cases cultivates a positive relationship with the judiciary, particularly when scheduling hearings. “We are unequivocal about our stance. Negotiation is always on the table for us,” says Mr. Roman.

The AGU has noticed that the judiciary is increasingly mindful of the economic consequences of its rulings, a shift backed by legal mandates. According to the Law on the Introduction to the Norms of Brazilian Law (Law No. 13655 of 2018), judges must consider the implications of their decisions, particularly when these are based on broad legal principles.

“This shift required judges to adopt a new perspective. Notably, the current chief justice of the Supreme Court [Justice Luís Roberto Barroso] has appointed an economic advisor specifically to address these concerns,” Mr. Roman adds.

The stipulations of Law No. 13655/2018 have heightened the AGU’s attention to the financial stakes in litigation. Nonetheless, this has drawn criticism, particularly from legal professionals, who argue that these financial estimates are often exaggerated. A notable instance was the “lifetime review” case, a social security matter in which the financial impact projected by the federal government vastly differed from that of taxpayers.

“We’re in the dark about how these numbers are computed,” states Maria Raphaela Matthiesen, a partner at Mannrich e Vasconcelos Advogados. She points out that while these figures are included in the fiscal risks annex of the Budgetary Guidelines Law (LDO) and shared with judges during their rulings, the methodology and data sources remain opaque.

Economist Tiago Sbardelotto from XP Investimentos, who is also a licensed auditor with the National Treasury, clarifies that the projected financial impacts outlined in the LDO are often much more significant than the actual outcomes. According to him, the Federal Revenue Office bases its calculations on the assumption that all eligible taxpayers will pursue legal action, a scenario that rarely materializes.

Ms. Matthiesen points out that the Superior Court of Justice has recently started implementing time limits on its decisions—a process known as modulation. This approach generally indicates a judicial concern about the economic impacts of decisions by attempting to mitigate their retroactive effects.

In her review of cases listed under tax risks, Ms. Matthiesen notes that none of the items adjudicated in the first half of the year favored taxpayers. However, among the tax decisions during this period, she identified one clear victory and one partial win for taxpayers.

The outright victory occurred in a Superior Court of Justice ruling that determined the ICMS sales tax should not be included in the base calculation for the social taxes PIS and Cofins owed by taxpayers under the progressive tax substitution system. There is no available estimate on the financial impact of this case (Special Appeal 1896678 and Special Appeal 1958265).

The federal government considers a “half victory” a complete win in a case regarding the inclusion of income from real estate rentals in the PIS tax base. This applies both to companies primarily engaged in this type of operation and those for which rental is an incidental and subordinate activity.

For the lawyer, if leasing is not integral to a company’s corporate purpose, it should not be taxed. “In their decision, the Supreme Court agreed that the tax applies but restricted its scope to instances where leasing aligns with the company’s corporate objective. Rentals undertaken as sporadic or auxiliary activities are exempt from this tax,” she explained.

These positive outcomes for the federal government in the higher courts align with a strategy by Finance Minister Fernando Haddad, who has prioritized fiscal risks within the judiciary since his tenure began. When identifying cases that could significantly impact public finances, the minister intervenes, often collaborating with the AGU and PGFN to negotiate directly with the justices.

The first half of the year saw significant legal victories. Just before the recess, the Superior Court of Justice ruled on a batch of cases with repetitive effects, establishing legal precedents in favor of the federal government.

Meanwhile, at the Federal Supreme Court, a notable judgment involved the remuneration of Workers’ Severance Fund (FGTS) accounts. Initially, the court ruled in favor of the taxpayers, allowing for a higher rate of remuneration. However, following a motion for reconsideration, this decision was reversed, and it was determined that workers only receive remuneration based on inflation. While the government did not count this outcome as a victory, it exemplifies the negotiation strategies in play (direct action for the declaration of unconstitutionality 5090).

The law firm brokered an agreement with trade union centers and proposed to the Federal Supreme Court that the fund’s resources be adjusted merely for inflation. Mr. Roman emphasized that the objective was to demonstrate to workers and their representatives that increasing the fund’s remuneration could negatively impact public policies intended to benefit lower-income individuals.

“The support of the [trade union] federations was fundamental in persuading not only the justices but also the people,” says the deputy from the AGU. The impact of the ruling remains unestimated.

Judgments in the first half of the year echo the successes of 2023, where the federal government fared well in the courts. For instance, at the Superior Court of Justice, all tax cases from the Fiscal Risks Annex of the LDO were decided favorably, including the upheld taxation of tax benefits after an appeal by taxpayers. In the tax domain alone, favorable judgments in 2023 helped avert losses totaling R$195.6 billion.

Economist Tiago Sbardelotto notes that the government’s dual strategy of making the judiciary aware of the negative impacts on public accounts and negotiating in cases where a federal defeat seemed likely has been effective. “Even in instances where the federal government faced adverse decisions, the effects have been substantially mitigated,” he states.

The agreements enable the government to reduce interest costs and extend payments through 2026 via court-ordered payments, which are excluded from the spending cap and fiscal targets, explains the economist. “We believe that the culmination of both strategies is to mitigate fiscal impacts in the medium term when fiscal regulations tighten. This progress is undeniable. However, it’s also crucial to preemptively address the surge in the judicialization of benefits, a trend that has markedly increased recently,” notes Mr. Sbardelotto.

Priscila Faricelli, a partner at Demarest Advogados, notes that the pandemic has led to an increase in major tax cases being adjudicated via virtual hearings. According to her, the majority of these cases have been resolved in ways that do not favor the taxpayers.

“For at least a decade, the PGFN has refined its approach in higher courts,” she observes. However, she also points out that judges, as political figures, have become increasingly budget-conscious. “The clearest evidence of this focus on budgetary matters is the nature of the modulations, which invariably aim to protect the budget,” she adds.

*Por Beatriz Olivon, Jéssica Sant’Ana — Brasília

Source: Valor International

https://valorinternational.globo.com/