In recent years, it has become increasingly common for various municipalities to demand payment of the license tax—commonly known as “Commercial Patent”– to companies engaged in primary industries, such as agriculture, livestock, mining, and others.
These complaints are usually handled through administrative proceedings that subsequently lead to administrative litigation, or directly through enforcement proceedings initiated on the basis of debt certificates issued by the Municipality itself and filed with the Civil and Commercial Courts of First Instance.
The choice between one route or the other—administrative or judicial—depends, to a large extent, on the taxpayer’s procedural conduct during the initial stage of the proceedings. Generally speaking, The procedure adopted by the municipalities follows this outline:
- First, the taxpayer is notified by means of a notice, which specifies the amounts allegedly owed and the tax years in question, along with a tax assessment. This notice requires the taxpayer to settle the alleged debt within a within eight (8) business days.
- If the taxpayer does not file an objection within the specified time limit but also fails to make payment, the Municipality issues a debt certificate that serves as an enforceable title. It then enforces the instrument through enforcement proceedings, which result in an order to seize sufficient assets of the taxpayer to cover the amount claimed and the estimated legal costs (generally 10% of the amount claimed).
- If the taxpayer files an objection, the Municipality initiates an administrative proceeding before the Misdemeanor Court. In practice, these proceedings almost invariably conclude with a ruling requiring the taxpayer to pay the tax originally assessed, along with a fine for a municipal violation. Afterward, the taxpayer is free to pursue legal action in the administrative courts.
On the substantive issue, over the past decade, the Criminal Chamber of the Supreme Court of Justice (the “Criminal Chamber”), which hears as the court of last resort matters relating to the contentious-, has held divergent positions on the question of whether primary activities are subject to the business license tax.
In this regard, it is noted that, until approximately 2015, the Criminal Chamber held that such activities were not subject to this tax, on the grounds that engaging in them does not constitute a commercial transaction—one of the events giving rise to the tax.
However, beginning that year, the Criminal Chamber changed its approach and henceforth held that primary activities are commercial in nature when carried out by a corporation governed by the provisions of the Civil Code (corporation, limited liability company, etc.), pursuant to a presumption established in Law No. 1034/83 “On Merchants.”.
Thus, the—at the very least, debatable—criterion that an activity is considered commercial and, therefore, subject to the Business License Tax, based on the legal status of the taxpayer carrying out the activity, has remained in effect to this day. In other words, under this line of reasoning, the activity would be commercial in nature for some, but not for others.
Beyond the discussion of the substantive issue—on which I expressly reserve my opinion because I do not agree with the Criminal Chamber’s current position—there is another issue that has been overlooked in all similar cases analyzed in the contentious-administrative jurisdiction, but which is just as important as the substantive issue: tax assessment.
According to the teachings of Villegas, the tax assessment is the “an act or series of acts intended to determine, in each specific case, whether a tax liability exists (‘an debeatur’); where applicable, who is obligated to pay the tax to the tax authorities (the taxpayer) and what the amount of the liability is (‘quantum debeatur’)”.
For its part, García Vizcaíno argues that, although the tax liability arises when the taxable event occurs, “[E]It doesn't matter whether we consider that this [tax assessment] is unnecessary, since it is a prerequisite for the tax authority to effectively claim the tax credit…”. He then concludes that: “[L]This determination establishes certainty regarding the existence and scope of the preexisting tax obligation”.
Consequently, for these authors—whose views I share—the tax assessment is just as important as the definition of the taxable event. Although the tax obligation becomes enforceable as soon as the taxable event is verified, it cannot be enforced until the tax assessment is issued.
In this regard, Article 209 of Law No. 125/91 (the “Tax Code”) provides that the tax assessment is “…The administrative act that establishes the existence and amount of the tax liability is binding and mandatory for the parties.”. And, pursuant to Article 210 of the same statute, the following applies, among other things, “… (b) when returns are not filed”.
That said, it should be noted that Article 5 of Law No. 620/76 (the “Municipal Tax Law”) provides that the business license tax must be paid “based on the value of the assets located in the respective municipality; for this purpose, the value of assets located in other municipalities shall be deducted from the total assets”.
In this regard, Article 3 of the Municipal Tax Law establishes that, for this purpose, merchants—including companies engaged in primary activities, as determined by the Criminal Chamber—must submit “a copy of the balance sheet for the previous fiscal year certified by the Income Tax Authority or, in the case of banks and financial institutions, by the Superintendency of Banks, or an affidavit.”
However, logically, when a company does not acknowledge that it is subject to the Business License Tax—because, in its view, it does not meet the taxable event—it does not submit the documentation required by law for the assessment of the tax. In such cases, the aforementioned Article 3 provides that “The Executive Branch will determine the value of the asset on its own initiative”.
This is where the City’s confusion lies and, furthermore, where we find a striking omission on the part of the Court of Auditors and the Criminal Chamber in the cases they have handled, since, apparently, these bodies interpret this power to act ex officio as an exclusively discretionary prerogative of the authority, even though it is not.
On the contrary, far from being an entirely discretionary power, Article 3 itself establishes that, for ex officio determinations, an ordinance must be enacted “the method for determining the asset based on: […] b) if the information referred to in the preceding paragraph is not available, consideration of the assets of similar businesses, based on types of operations, their location, and the number of employees, as well as any documentation deemed necessary to request”.
However, on the other hand, we are not aware of any municipality in the country that has regulated this procedure through a municipal ordinance. Furthermore, in none of the cases analyzed have we observed that municipalities have justified the amounts claimed from their residents based on the objective criteria established in the last part of Article 3 of the Municipal Tax Law.
Therefore, in this regard, it is clear that the ex officio determinations made by municipalities to establish the amount of the license tax allegedly owed by their taxpayers are irregular, since they are not carried out in accordance with the provisions of the Municipal Tax Law. They are also arbitrary, as they are not based on factual standards.
In short, These are amounts set unilaterally by the municipalities, lacking any valid or legitimate justification, and likely intended solely to serve their revenue-raising interests.
That being the case, if we take into account that the contentious-administrative jurisdiction reviews the legality and validity of administrative acts, ordering the payment of amounts that have not been determined in accordance with legal guidelines, such acts should be revoked, regardless of the debate over whether or not the primary activities are subject to the business license tax.
It should be remembered that it is the duty of the administration—the municipalities—to ensure that their actions comply with the law, in accordance with the principle of legality in administrative law. In the event of a failure to meet 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 not proceed either. The tax assessment, therefore, is the preliminary administrative act that establishes the existence and amount of the tax liability. Consequently, a debt certificate issued despite the omission of that procedure would support a debt that is neither liquid nor due.
In light of the foregoing, It is essential that taxpayers not limit their defense solely to challenging whether or not the taxable event occurred. —that is, whether or not the primary activity is subject to the business license tax—but also rigorously examine whether the municipality has complied with all legal and procedural requirements related to the tax assessment.
Consequently, in any municipal tax claim, The defense strategy must include a critical review of the administrative acts that support the amount claimed., in order to identify irregularities or omissions that would allow for an effective challenge to the decision and overturn any adverse ruling or judgment.
Senior Associate
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