Brazil revenue chief calls for retrospective taxes on grey market

Robinson Barreirinhas, Special Secretary of the Brazil Federal Revenue Service (RFB), advocates for the retrospective taxation of betting companies that operated in the grey market prior to Brazil’s regulated betting environment.

On January 1st, Brazil officially initiated its regulated betting market, a milestone that emerged after more than five years of legislative deliberation. The journey began with the National Congress’s approval of online gambling legislation in November 2018, culminating in the Chamber of Deputies granting final approval in December 2023.

During this interim period, numerous operators chose to engage with the grey market, resulting in an influx of unregulated betting sites. Reports suggest that Brazil had unparalleled access to gambling platforms globally during this phase.

Now that the legal market is operational, the government is considering the implications of taxes owed for the activities conducted in the grey market.

In a Parliamentary Inquiry Commission (CPI) meeting on March 11, Rapporteur Soraya Thronicke sought the RFB’s perspective on back taxes related to pre-regulation activities.

Barreirinhas expressed an agreement with the notion of imposing retrospective taxes on the grey market. However, he noted the potential “operational difficulty” in enforcing these taxes.

“While overcoming this challenge is feasible, it may necessitate legislative adjustments,” he stated. “The Federal Revenue Service asserts that taxes can only be levied on operations with a tangible presence in Brazil.”

“If the operations were legitimate and the companies were situated abroad without a physical presence, the ability to impose taxes remains ambiguous,” Barreirinhas added.

Establishing Proof of Operations in Brazil

Senator Marcos Rogério reinforced Barreirinhas’ stance by supporting retrospective taxation on profits accrued during the regulatory gap of five to six years.

He sought insight on whether the RFB engages in cross-referencing payment data to enhance tax compliance.

Barreirinhas confirmed that the RFB employs cross-referencing methodologies to detect discrepancies in financial declarations. However, he acknowledged the complexities associated with monitoring a vast number of individuals and entities.

“Our inspection strategy focuses on those who warrant scrutiny, minimizing disruptions to compliant operators,” Barreirinhas explained. “We identify targets for inspection based on inconsistencies in submitted data.”

In early January, the RFB announced its collaboration with the Secretariat of Prizes and Bets (SPA) to establish a working group aimed at ensuring compliance with tax obligations within the sector.

This initiative followed a November 2023 ordinance that outlined procedures for transitioning data and finances to the regulated market.

Luiz Felipe Maia, founding partner of the Brazilian law firm Maia Yoshiyasu Advogados, has vocally opposed this ordinance.

“My strong opposition stems from the fact that it formalizes evidence of ongoing operations,” Maia stated during a Vixio webinar in January. “This effectively translates to transferring clientele, funds, and branding. Under Brazilian law, this could imply succession of all liabilities, including tax liabilities.”

The Brazilian Government’s Authority on Retrospective Taxes

The dialogue surrounding retrospective taxation raises concerns among operators regarding the financial impact of their previous grey market engagements.

Conversely, operators like Hard Rock International strategically refrained from participating in the grey market, prioritizing compliance and a long-term approach, thus alleviating concerns over back taxes.

Alex Pariente, Corporate Senior Vice President of Casino and Hotel Operations at Hard Rock International, acknowledged the government’s rightful pursuit of back taxes. He emphasized the importance of fairness in evaluating historical operations, considering the lack of clarity surrounding tax obligations during that period.

“Many continued to operate without understanding the full scope of their potential tax liabilities,” Pariente remarked in an interview with iGB. “The government is justified in retrospectively assessing these contributions. However, it’s essential that a standard is established to address these discrepancies, considering the varying degrees of compliance among operators at that time.”