In recent years, it has become increasingly common for various Municipalities to claim payment of the License Tax – commonly referred to as the “Commercial License” – from companies engaged in primary activities such as agriculture, livestock, mining, among others.
These claims are usually processed through administrative proceedings that subsequently lead to contentious-administrative litigation, or directly through enforcement actions initiated on the basis of debt certificates issued by the Municipality itself and processed before Civil and Commercial Courts of First Instance.
The choice of one route or another – administrative or judicial – depends largely on the taxpayer’s procedural conduct during the initial stage of the proceedings. In general terms, the procedure adopted by the Municipalities follows the following scheme:
- First, the taxpayer is notified by official notice indicating the allegedly outstanding amounts and the fiscal years involved, together with a tax assessment. In such notice, the taxpayer is required to regularize the alleged debt within a period of eight (8) business days.
- If the taxpayer does not file an objection within the indicated period but also fails to make payment, the Municipality issues a certificate of debt that serves as an enforceable title. The Municipality then enforces the title through summary enforcement proceedings, usually accompanied by an order of attachment over sufficient assets of the taxpayer to cover the claimed amount and the estimated court costs (generally around 10% of the claimed amount).
- If the taxpayer files an objection, the Municipality orders the opening of administrative proceedings before the Municipal Court of Infractions. In practice, these proceedings almost invariably conclude with a resolution ordering the taxpayer to pay the originally claimed tax together with a fine for a municipal violation. After this, the judicial avenue becomes available before the contentious-administrative jurisdiction.
Regarding the substantive issue, over the last decade the Criminal Chamber of the Supreme Court of Justice (the “Criminal Chamber”), which acts as the court of last instance in matters related to contentious-administrative jurisdiction, has maintained divergent criteria regarding whether primary activities are subject to the License Tax.
In this regard, it is observed that until approximately 2015, the Criminal Chamber held that such activities were not subject to the tax, considering that the exercise of these activities does not involve acts of commerce – one of the taxable events of the tax.
However, from that year onward, the Criminal Chamber changed its interpretation and subsequently held that primary activities are commercial in nature when carried out by companies governed by the provisions of the Civil Code (corporations, limited liability companies, etc.), by virtue of a presumption established in Law No. 1034/83 “On Merchants”.
Thus, the – at the very least debatable – criterion remains in force whereby an activity is considered commercial and therefore subject to the License Tax depending on the legal personality of the taxpayer carrying out the activity. In other words, under this reasoning, the activity would be commercial for some, but not for others.
Beyond the discussion of the substantive issue, on which I expressly reserve my position as I do not agree with the current interpretation of the Criminal Chamber, another issue arises that has been omitted in all analogous cases analyzed within the contentious-administrative jurisdiction but which is equally important as the substantive issue: tax assessment.
According to the teachings of Villegas, tax assessment is the “act or set of acts aimed at determining, in each particular case, whether a tax debt exists (‘an debeatur’); if so, who is obliged to pay the tax to the treasury (taxpayer) and what the amount of the debt is (‘quantum debeatur’)”.
Likewise, García Vizcaíno explains that although the tax obligation arises when the taxable event occurs “[E]this does not mean that tax assessment is unnecessary, since it constitutes a condition for the treasury to effectively claim the tax credit…”. He further concludes that “[T]ax assessment creates a state of certainty regarding the existence and scope of the preexisting tax obligation”.
Consequently, according to these authors – with whom I agree – tax assessment is just as important as the occurrence of the taxable event. Although the tax obligation becomes enforceable from the moment the taxable event occurs, its enforceability cannot be executed until the tax assessment is carried out.
In this regard, Article 209 of Law No. 125/91 (the “Tax Code”) establishes that tax assessment is “…the administrative act that declares the existence and amount of the tax obligation, and is binding and mandatory for the parties”. Likewise, pursuant to Article 210 of the same legal body, it proceeds, among other cases, “… b) when tax returns have not been filed”.
Having said this, it should be noted that Article 5 of Law No. 620/76 (the “Municipal Tax Law”) establishes that the License Tax must be calculated “based on the value of the assets located in the respective municipality, for which purpose the value of assets located in other municipalities shall be deductible from the assets”.
In this regard, Article 3 of the Municipal Tax Law establishes that, for this purpose, merchants – including companies engaged in primary activities according to the interpretation of the Criminal Chamber – must submit “a copy of the balance sheet of the previous fiscal year approved by the Income Tax Directorate or by the Superintendence of Banks in the case of banks and financial entities, or a sworn statement”.
Logically, when a company does not acknowledge being subject to the License Tax because, in its view, it has not incurred the taxable event, it does not submit the documentation required by law for calculating the tax. In such cases, Article 3 provides that “the Executive Department shall estimate the amount of the assets ex officio”.
This is where the Municipality’s misunderstanding lies and where we also find the striking omission by the Court of Accounts and the Criminal Chamber in the cases they have addressed, since apparently such authority to assess ex officio is understood by these bodies as an exclusively discretionary prerogative of the authority, even though it is not.
On the contrary, far from being entirely discretionary, Article 3 itself establishes that for ex officio assessment it must be determined by Ordinance “the manner of determining assets based on: […] b) if the elements mentioned in the previous paragraph are not available, the consideration of assets of similar businesses according to the type of operations, their location and number of employees, and any documentation deemed necessary”.
However, we are not aware of any Municipality in the country that has regulated this procedure through a Municipal Ordinance. Likewise, in none of the cases analyzed have we observed Municipalities substantiating the amounts claimed from taxpayers based on the objective criteria established in the final part of Article 3 of the Municipal Tax Law.
Therefore, under these circumstances, it is evident that the ex officio assessments carried out by Municipalities to determine the amount of the allegedly owed License Tax are irregular, since they are not conducted in accordance with the provisions of the Municipal Tax Law. They are also arbitrary, since they are not supported by factual standards.
Ultimately, they are amounts unilaterally established by the Municipalities, lacking any valid and legitimate justification, which likely respond solely to their revenue-collection interests.
Thus, considering that contentious-administrative jurisdiction reviews the regularity and validity of administrative acts, when courts order the payment of amounts that have not been determined in accordance with legal guidelines, such acts should be revoked, regardless of the debate as to whether primary activities are subject to the License Tax.
It must be remembered that it is the duty of the administration – the Municipalities – to subject their actions to the law under the principle of legality in administrative law. In the absence of this essential requirement, their irregular actions should not be able to produce legal effects against those to whom they are directed.
For the same reasons, enforcement proceedings initiated based on the unilateral issuance of debt certificates should also not succeed. Tax assessment is the prior administrative act declaring the existence and amount of the tax obligation. Therefore, a debt certificate issued despite the omission of such procedure would support a debt that is neither liquid nor enforceable.
In light of the foregoing, it is essential that taxpayers do not limit their defense solely to questioning the existence of the taxable event – that is, whether the primary activity is subject to the License Tax – but also rigorously examine whether the Municipality has complied with all legal and procedural rules relating to tax assessment.
Consequently, in any municipal tax claim, the defense strategy must include a critical review of the administrative acts supporting the claimed amount, in order to identify irregularities or omissions that may allow the effective challenge of the assessment act and the reversal of a possible adverse decision or judgment.
Senior Associate