Tax Law Highlights | Effects of the Res Judicata in Tax Matters

1. Updates in evidence:

a) General Aspects of the Modulation of the Effects of Decisions

- Definition and analysis of legislative authorization for the modulation of decision effects.

b) Applicability of the Modulation of Effects in Tax Cases at the Federal Supreme Court (STF)

- Analysis of the criteria used by the STF for the modulation of effects in tax decisions, based on highly relevant cases from the past four years.

c) Partial Res Judicata at the Superior Court of Justice (STJ)

- The STJ's interpretation of partial res judicata before and after the enactment of the 2015 Civil Procedure Code (CPC) and its effects.

2. Introduction:

To “modulate” means to create a differentiated or specific way of implementing a decision, potentially applying it both retrospectively and prospectively. In essence, modulation means restricting the temporal effects of decisions.
Although legal authorization for the application of modulation of decision effects was only granted in 1999, the Brazilian Federal Supreme Court (STF) had been regulating the effects of certain decisions for decades, breaking the expectation that once declared unconstitutional, acts could not produce legal effects and should be considered null from their inception.

With the enactment of Laws No. 9.868 and 9.882 in 1999, explicit authorization was introduced for the STF to modulate the effects of decisions (in concentrated control of constitutionality) in situations of (i) legal certainty and (ii) exceptional social interest, requiring a quorum of an absolute majority.

In 2015, the new Brazilian Civil Procedure Code (CPC) allowed the National High Court of Brazil (STJ), Federal Courts, and State Courts to modulate the effects of their decisions in cases of jurisprudential change (overruling of precedent).

Since then, the application of the modulation of res judicata effects has become increasingly common, utilizing criteria that do not always align with the primary objective of protecting the Constitution and fundamental rights, such as legal certainty and the protection of trust in precedents. As a result, questions have arisen as to whether the modulation of decision effects has been applied outside the legally prescribed scenarios.

3. Tax landscape:

Given the frequency with which the modulation of res judicata effects has been applied by the STF, whether in concentrated control of constitutionality or under the general repercussion system, and the lack of uniformity in the STF's understanding of its definition and applicability, it is imperative to analyze the institute on a case-by-case basis.

Although the law explicitly allows the modulation of decision effects only in situations of legal certainty and exceptional social interest, there are several decisions where economic factors have been identified as the primary reasoning of the Justices for applying the modulation of effects.

Thus, we have selected the key STF rulings from the past four years, where the modulation of res judicata effects was applied in tax matters, to analyze the criteria used by the Justices. These cases are available for download at the end.

At the STJ, during the validity of the 1973 CPC, it was not possible for parts of a judgment or ruling to become res judicata at different times, based on the principle of the unity of the decision and the initial term of the statute of limitations for filing an action for annulment. However, with the advent of the 2015

CPC, the STJ began to apply the institute of partial res judicata through the implementation of new provisions.

4. Repercussions and changes:

In light of the increasing applicability of decision effect modulation, taxpayers' behavior has shifted towards filing individual lawsuits to challenge the tax in question in the leading case, the merits of which will be binding on all, aiming to protect their rights, such as the recovery of taxes unduly paid in the past. This has led to a growing number of individual lawsuits concerning the same issues affected by the general repercussion system.

Moreover, it is notable that, although the modulation of temporal effects of decisions originated as a means of protecting taxpayer trust, the argument of potential damage to public coffers has increasingly been used to assign prospective effects to decisions, even though this is not a legally prescribed criterion. There is a trend to incorporate potential damage as a justification for exceptional social interest, which is an allowed ground for both the modulation of unconstitutional decisions and the overruling of precedents for future application.

As for the possibility of partial res judicata, the STJ recognizes that the 2015 CPC has enhanced the effectiveness of judicial relief and the reasonable duration of proceedings, allowing the partial enforcement of judgments regarding the chapter that has become res judicata, even while other parts of the case are still under discussion.

5. What conclusions can we draw?

Considering the increasing number of individual lawsuits filed after issues are submitted to the general repercussion system, and the concern over substantial amounts being refunded as undue payments, the Treasury has argued that the time frame for modulation should be the date of the recognition of general repercussion, not the date of the merits decision or the judgment transcript, as the STF has been applying.

Based on the STJ's interpretation of the possibility of partial and progressive formation of res judicata in tax matters, provisional and final judgment enforcement is allowed within the same case, as well as multiple annulment actions with different and stabilized objects through progressive res judicata.

The Tax team is available to discuss these matters, including decisions that may be subject to the modulation of effects, as well as the effects of partial res judicata in ongoing actions, which will undoubtedly impact our clients' businesses.

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