Following in the steps of what was inaugurated in the federal sphere, the State of São Paulo published, in October, Law No. 17,293/20, which, among other measures, instituted tax settlement at the state level, allowing consensual resolution of disputes related to debts registered as outstanding debt.

To regulate tax settlements, the State Attorney General's Office issued Resolution PGE-27/20 and Ordinance SUBG CTF-20/20, in force since the end of last year. The purpose of both rules was to establish objective and transparent criteria for entering into settlement, as well as for ranking the credits of taxpayer-debtors in order to ascertain their situation and calculate possible discounts for each specific case.

In general terms, and without prejudice to the peculiarities of each case, settlements in São Paulo and federal settlements have four fundamental differences:

1. While the federal arrangement provides for three modalities (asset-debt settlement, litigation settlement, and small-claims settlement), the state arrangement provides that only debts registered as outstanding debt can be subject to settlement.

2. State settlements allow the granting of discounts (although less significant) also for debts classified as A and B (debts with maximum recovery capacity), while the federal arrangement only admits settlements for outstanding debt referring to debts classified as irrecoverable or difficult to recover (C and D). It also adopts as criteria for granting discounts not only the degree of recoverability of the debt according to the criteria it specifies, but also the chances of success of the litigation.

3. State settlements allow the use of amounts deposited in court to reduce the amount of the debt to be settled.

4. The state legislation defines, even if it does not use this expression, a contumacious debtor, in relation to whom settlement shall not be admitted (Article 47, IV, of the Law “Settlements are prohibited that: (...) involve a debtor of the Tax on the Circulation of Goods and Services of Intermunicipal and Interstate Transport and Communication - ICMS that, in the last five (5) years, present a default of fifty percent (50%) or more of its obligations due"). Federal settlements, on the other hand, provide that settlement with contumacious debtors shall not be admitted, but does not define them. Until such time as there is such a definition, it is believed that this specific restriction does not apply in the federal sphere.

With the due peculiarities, discount on the amount of fines and interest, installment payment of debts, deferment of payment, or moratorium is allowed, in addition to the possibility of settlement on issues linked to guarantees. The use of court-issued registered warrants (precatórios) as a means of offsetting debts owed, on the other hand, is not allowed.

The classification of tax debts to be settled is done according to the following criteria, expressly provided for by law: guarantee, payment history, age of the debt, economic capacity, tax risk, and collection costs. On the basis of the analysis of these criteria, the tax debts to be settled will be divided into the following categories (rating): "A" (maximum recoverability), "B" (average), "C" (difficult), and "D" (irrecoverable).

That is, tax debts will be classified according to their recoverability, but will be eligible for settlement in any of the existing categories. The benefit to be granted is inversely proportional to the rating: the higher the rating, the lower the benefit.

Ratings will be differentiated by the tax to be settled, unlike in the federal sphere, where the rating is uniform. An example is the ICMS (Tax on Circulation of Goods and Services) taxpayers, which will have more specific criteria for classifying tax debts when compared to ITCMD (Causa Mortis and Estate Tax). The objective is to increase the collection of funds considered irrecoverable.

Paragraph 3 of article 54 of Law No. 17,293/20[1] establishes that all information classifying a debt as recoverable shall be confidential and may only be disclosed to debtors or their representative.

However, Resolution PGE-27/20 provides that taxpayer will only know their classification grade and, consequently, their rating when submitting the individual proposal for settlement or adhesion to a public notice. In other words, the resolution ended up creating a restriction of constitutionality and dubious legality, inasmuch as São Paulo law, in line with the Federal Constitution,[2] allows taxpayers access to information related to the recoverability of their debt without any time limitation.

According to the debt classification, the following discounts will be offered:

• 20% on interest and fines for debts classified within rating A, up to the limit of 10% of the total discounted value of the same debt on the date it is granted.

• 20% on interest and fines for debts classified within rating B, up to the limit of 15% of the total discounted value of the same debt on the date it is granted;

• 40% on interest and fines for debts classified within rating C, up to the limit of 20% of the total discounted value of the same debt on the date it is granted.

• 40% on interest and fines for debts classified within rating D, up to the limit of 30% of the total discounted value of the same debt on the date it is granted.

• For settlements with Microenterprises (ME), Small Businesses (EPP), or Individual Microentrepreneurs (MEI), the limits will be 30% for debts classified in ratings A and B, or 50% for debts classified in ratings C and D.

The law provides that settlement may take place by adhesion to the PGE proposal or by individual proposal by the taxpayer. Settlement by adhesion to the public notices will be allowed only for taxpayers that have debts registered at outstanding debt in the maximum amount of R$ 10 million. Above this amount, only settlements pursuant to an individual proposal will be allowed.

In individual settlements, it is up to taxpayers to propose to the PGE which debts they intend to settle and under what conditions. The forms for an individual proposal for settlement transaction requests have already been made available on the PGE-SP website, such that taxpayers that comply with the general requirements set out in Law No. 17,293/20, regulated by Resolution PGE-27/20 and SUBG CTF-20/20, may settlement with the São Paulo tax authorities and bring their situation into good standing.

A settlement by adhesion will be proposed by the PGE to close disputes that deal with the same legal controversy and will be subject to the acceptance of taxpayers that meet the conditions and requirements to be reported in a public notice. It is intended exclusively for taxpayers who have debts registered in an amount not exceeding R$ 10 million and will be made exclusively by adhesion to be formalized electronically. There is no open call for this type of settlement yet.

[1] Article 54 - The State Attorney General shall regulate:

(...)

V - the linkage of the provisions dealt with in article 46 to the degree of recoverability of the debts subject to the settlement, which will take into account the guarantees of the debts assessed, existing judicial deposits, the possibility of success for the Treasury in the claim, the age of the debt, the debtor's solvency capacity and payment history, and the costs of judicial collection;

(...)

Paragraph 3  - Information on the recoverability of the debt referred to in subsection V of this article shall be considered confidential and may be disclosed exclusively to debtors or their representative.

[2] Article 5, subsection XXXIII, of the Federal Constitution of 1988: "all have the right to receive from public bodies information of their private interest, or of collective or general interest, which shall be provided within the time period provided for by law, under penalty of liability, except that for which secrecy is essential to the safety of society and the State"