Suspension of ITBI collections in Sao Paulo due to lack of fair hearing and adversarial process

The recent decisions of the Court of Justice of the State of Sao Paulo (“TJSP”), favorable to the taxpayers of Sao Paulo, reinforce the understanding opposing the collection of Property Conveyance Tax (“ITBI”), having as the calculation base the value of the property derived from the valuation arbitration procedure conducted by the Tax Authorities without the participation of the taxpayer. Through such decisions, important precedents arise for future operations of buying and selling real estate.

These decisions are based on the need to offer the taxpayer the possibility of challenging the property valuation report presented by the Tax Authorities, as well ensuring the right to a fair hearing and adversarial process in the course of such arbitration. The arbitration procedure for the value used as a basis for calculating the tax is authorized only when there are indications of omission or bad faith in the taxpayer’s declaration, pursuant to Article 148 of the National Tax Code (CTN), as long as the taxpayer is notified and has the opportunity to present a defense. However, municipal tax authorities, in general, tend to expand the cases in which determination of the value can be carried out by arbitration – a practice that sometimes generates a higher payment compared to what would be practiced if the market value were used.

Differences regarding the basis for calculating the collection of ITBI arose when the decision of the Superior Court of Justice (STJ) was published in February 2022, in the judgement of Resp No. 1937821, in which it was established that ITBI should be based on the market value of the property and not on the market value of the Urban Land and Property Tax (“IPTU”) or on the reference market value, which is projected by the Tax Authorities based on market estimates.

Although the decision has ensured taxpayers of the tax collection based on the market value of the property, having been published in a repetitive appeal, some municipalities, such as São Paulo, have disagreed with the declared market value, and for this purpose, required the payment of the difference in the tax value, taking as a calculation base the value of the property obtained through a valuation arbitration procedure, without the participation of the taxpayer.

In situations such as these, takent to the judiciary, the decisions of the TJSP have been protective of taxpayers and determine the suspension or cancellation of the tax assessments, considering the lack of participation of the taxpayer in the procedure that arbitrated the value of the property, due to the absence of a fair hearing and adversarial process.

However, current divergences could result in the issue reaching the higher courts again. If this happens and there is an understanding favorable to taxpayers, future property purchase and sale operations may benefit from the decision, since municipalities must respect the market value declared by the taxpayer as the basis of calculation of the ITBI. Also, if there is evidence of omission or bad faith, such municipalities must offer taxpayers the opportunity of participation in the valuation arbitration procedure of the property, allowing the presentation of any challenge to the evaluation report by the taxpayer.

Demarest’s Real Estate team is monitoring new developments within the sector and is available to provide any further clarifications that may be necessary.