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Brazil’s Federal Supreme Court (STF), in ruling on Extraordinary Appeal (RE) No. 640,452/RO (General Repercussion Topic 487), established that the so-called “stand-alone penalty” (multa isolada) does not have a confiscatory nature. This penalty is applied for failure to comply with ancillary tax obligations, even when the transaction does not result in the assessment of a tax credit.

The dispute originated from an assessment issued by the State of Rondônia against Eletronorte, which was fined an amount equivalent to 40% of the value of a diesel fuel shipment due to the failure to issue tax documents. Although the ICMS had already been collected at the refinery stage under the tax substitution regime, the state tax authority imposed a penalty for noncompliance with a formal obligation.

By majority decision, the Court adopted the opinion proposed by Justice Dias Toffoli, which was developed as a compromise among the differing positions formed over a proceeding that had been interrupted six times. The Court ultimately established the following thesis:

1 – Where there is an associated tax or tax credit, the stand-alone penalty may not exceed 60% of the tax or credit amount, and may reach up to 100% in the presence of aggravating circumstances.

2 – Where there is no associated tax or tax credit, but there is a transaction or service value, the penalty may not exceed 20% of such value, and may reach up to 30% in the presence of aggravating circumstances.

3 – In applying penalties for noncompliance with ancillary obligations, criteria such as appropriateness, necessity, proportionality, insignificance, and the prohibition of double jeopardy (bis in idem) must be observed.

4 – The established limits do not apply to stand-alone penalties of a predominantly administrative nature, such as customs fines.

The STF also limited the temporal effects of its decision, establishing that the thesis will apply as of the publication of the judgment, except for pending cases and prior taxable events in which the penalty has not yet been paid.

The Tax Law team at BRZ Advogados remains available should you have any questions.