On April 7, 2018, the State of São Paulo published Complementary Law No. 1,320, of April 6, 2018 ("LC No. 1,320/2018"), resulting from Bill No. 25/2017, which establishes the Program for Stimulating Tax Compliance, “Compliance Program", defining principles for the relationship between taxpayers and the Tax Administration, as well as establishing rules for tax compliance.

By means of the principles established in article 1 of LC No. 1,320/2018 (simplification of the state tax system, good faith, and predictability of the Public Administration’s conduct, legal certainty and consistency in the application of tax legislation, publicity and transparency in the disclosure of data and information, and fair competition among economic agents), the Compliance Program aims at the following guidelines and actions:

I - facilitate and encourage self-regulation and tax compliance;
II - reduce compliance costs for taxpayers;
III - improve communication between taxpayers and the Tax Administration;
IV - simplify tax legislation and improve the quality of taxation by promoting, among other actions

According to article 5 of LC No. 1,320/2018, the Treasury Department of the State of São Paulo, for the implementation of the actions set forth in the Compliance Program, will sua sponte classify taxpayers into the following categories: "A+", "A”, “B”, "C”, "D", and "E” and" NC "(Not Classified), based on the following criteria:

(i) overdue ICMS tax liabilities;
(ii) consistency between bookkeeping or declarations and the tax documents issued or received by the taxpayer; and
(iii) profile of the taxpayer's suppliers, according to classification in the same categories and by the same classification criteria set forth in Complementary Law no. 1,320/2018.

According to the Complementary Law, for each criterion, the taxpayers will be classified into the categories, in descending order of conformity, considering all their establishments, subject to the forms and conditions to be established in regulations. The application of the classification criteria will only take into account the triggering events that occurred after the date of publication of LC No. 1,320/2018, and may take into account the taxpayer's business size and segment of the economic activity.

LC No. 1,320/2018 determines that the taxpayer’s classification, in any of the categories provided, will be reviewed periodically, according to regulations (which have yet to be published).

Taxpayers in a non-active registration situation, in the form and conditions established in regulations, will be classified into category "E". As regards the category NC, it will be transitory: (a) due to the need for gradual implementation of the classification system; (b) upon the commencement of the taxpayer's activities; (c) in the case of a supplier established abroad; and (d) other scenarios defined in the regulations.

Regarding the publicity of the classification, taxpayers will be informed in advance of the classification assigned to them, which will be available for public consultation on the electronic portal of the São Paulo State Treasury Department. Taxpayers may oppose the disclosure of their tax classification on the website, in which case their classification will not be prejudiced by said opposition.

In relation to the classification criteria, the rule in question states as follows:

(i) Regarding the first classification criterion (overdue ICMS obligations), article 7 of LC No. 1,320/2018 states that this will occur due to delay in the payment of the tax, such that the taxpayers with an tax obligation overdue by more than 2 months cannot be classified into the category "A+", and the taxpayer will be classified into category "D" when the obligation is pending for more than 6 months. Classification into the other categories will occur in the interval between the categories "A+" and "D".

Tax debts with suspended enforceability or subject to full collateral provided in court, or at a small amount fixed in regulations, will not be considered. In the event that a debit, previously suspended, loses said condition, it will be incumbent on the taxpayer to prove reinstatement of the suspension of enforceability at any time.

(ii) Regarding the second classification criterion (consistency), LC No. 1,320/2018 determined in its article 8 that the relationship between the amounts indicated in the tax documents issued and received by the taxpayer and those regularly recorded in the tax books or declared will be considered.

Taxpayers with 98% consistency will be classified into the category "A+” and taxpayers with less than 90% consistency will be classified into category "D". Classification into the other categories will occur in the interval between the categories "A+" and "D".

Taxpayers who agree with the divergence pointed out by the Tax Administration may request additional time for correction of their systems and procedures, noting that, in the event that the request is granted, and provided that the correction has been made within the time limit indicated by the Tax Administration, the divergence will not prejudice the taxpayer's classification.

(iii) Regarding the third classification criterion (suppliers), article 9 of LC No. 1,320/2018 determines that classification will consider the percentage of goods and services taxed by ICMS from suppliers classified into the categories of the Complementary Law.

Taxpayers with at least 70% of the total value of their entries from suppliers classified into the "A+" or "A" categories, and a maximum of 5% in the "D" category, will be classified into the "A+" category. Taxpayer with less than 40% of the total value of their entries from suppliers classified into the categories "A+", "A" or "B", or more than 30% into category "D” will be classified into category "D".

Supplier classified into category "NC" will not be considered for the purpose of the classification provided in the head paragraph of this article unless there is a relevant concentration of suppliers in that category in relation to the same taxpayer, in the form and conditions established in regulations.

In the case of taxpayers established in other Brazilian States that provide services and merchandise to taxpayers established in the State of São Paulo, the State Revenue Service may establish a separate procedure for registration and for electronic transmission of information, which shall be provided directly by the supplier itself or by means of an agreement entered into between the Revenue Service and the body responsible for the Tax Administration of the supplier and shall be used exclusively for criterion to classify the supplier. In the event of failure to transmit supplier information, classification into category "D" will be automatically adopted.

For taxpayers who collect state tax based on the Special Unified Tax Collection and Contributions Due from Micro-Companies and Small Enterprises - National Simple System, established by Complementary Law No. 123, of December 14, 2006, the regulations may establish parameters for conformity and respective forms for calculation different from those established for other companies.

Among the actions for self-regulation, the Revenue Service will institute the Preliminary Tax Analysis ("AFP"), which consists of analytical or field work by an Income Tax Agent, without the purpose of drawing up an infraction notice or imposing a fine. At the discretion of the Revenue Service, taxpayers may be notified of the finding of an indication of irregularity, in which case they will be exempt from penalties provided for in the legislation, provided that the irregularity is cured within the time limit.

The Preliminary Tax Analysis procedure does not constitute a start of an audit and does not rule out the spontaneity of the taxpayer. However, it should be noted that AFP's incentives do not cover cases of tax suits arising from a judicial order or duly established fraud.

Under the terms of the LC in question, depending on their classification, taxpayers will be entitled to the following benefits from the State:

(i) A+

· Access to the Prior Tax Analysis proceeding;
· Authorization for accrual of accumulated debt, observing simplified procedures;
· Effect of the refund referred to in article 66-B of Law No. 6,374/89 (presumed taxable event), observing simplified procedures;
· Authorization to pay ICMS for the tax substitution of goods originating from another Brazilian State, whose taxable amount has not been withheld in advance by means of compensation in an escrow account, or collection via a special form by the 15th of the following month;
· Authorization for payment of ICMS over the importation of merchandise from abroad by means of compensation in escrow account;
· Renewal of special treatment granted under Article 71 of Law No. 6,374/89, observing simplified procedures;
· Registration of new establishments of the same holder in the register of taxpayers referred to in article 16 of Law No. 6,374/89, observing simplified procedures;
· Transfer of accumulated debt to a non-interdependent company, observing simplified procedures, in the form and conditions established in regulations, provided that it is generated in period of jurisdiction after the publication of this complementary law, subject to the annual limit established in regulations.

(ii) A

· Access to the Prior Tax Analysis proceeding;
· Authorization for accrual of accumulated debt, observing simplified procedures;
· Effect of the refund referred to in article 66-B of Law No. 6,374/89 (presumed taxable event), observing simplified procedures;
· Authorization to pay ICMS for the tax substitution of goods originating from another Brazilian State, whose taxable amount has not been withheld in advance by means of compensation in an escrow account, or collection via a special form by the 15th of the following month;
· Authorization for payment of ICMS over the importation of merchandise from abroad by means of compensation in escrow account;
· Renewal of special schemes granted under Article 71 of Law No. 6.374/89, with simplified procedures; and
· Registration of new establishments of the same holder in the register of taxpayers referred to in article 16 of Law No. 6,374/89, observing simplified procedures.

(iii) B

· Authorization for the appropriation of up to 50% of the accumulated debt, observing simplified procedures, in the form and conditions established in regulations;

· Authorization for the payment of ICMS over the importation of merchandise from abroad, by means of compensation in an escrow account; and
· Registration of new establishments of the same holder in the register of taxpayers referred to in article 16 of Law No. 6,374/89, observing simplified procedures.

In accordance with article 17 of LC No. 1,320/2018, there will be a regulation to discipline and measure the benefits of the Program for each category, depending on the length of stay in each category.

The drawing up of a notice of infraction and imposition of a fine that establishes willful conduct, the occurrence of fraud, or the practice of concealing of assets by the taxpayer will entail suspension of the benefits provided for in this chapter for the following periods: (i) up to a maximum of 1 year, if the respective tax debt is subject to extinction or agreed-upon installments that are being regularly fulfilled; (ii) up to a maximum of 2 years, which will be terminated in the event of a final decision favorable to the taxpayer at the administrative level. Hindrance of an audit or recurrence in the commission by the same taxpayer of an irregularity already indicated by the Tax Administration may also entail suspension of the benefits for a maximum period of 1 year, according to the regulations.

Noncompliant debtors will be subject to the Special Framework for the fulfillment of tax obligations, in the form and conditions to be established in regulations, thus considered to be the taxable persons who: (a) have declared and unpaid ICMS debt in relation to 6 calculation periods, whether or not consecutive, in the previous 12 months; (b) have ICMS debts registered as non-performing debt totaling more than 40,000 UFESPs and corresponding to more than 30% of their net equity, or more than 25% of the total value of the transactions of outsourced services rendered in 12 previous months.

For the purposes of calculating the noncompliant debtor, debts with suspended enforceability or subject to full collateral given in court will not be considered. If the taxable person is not in activity during the period indicated in items "a" and "b" above, the sum of up to 12 previous months will be considered.

The Special System for the fulfillment of tax obligations may consist, individually or cumulatively, of the following measures:

· The obligation to provide periodic information regarding the transaction or provision to be performed;
· Change in the calculation period, in the time limit and in the form of tax collection;
· Prior and individual authorization for issuing and recording tax documents;
· Freeze on the use of tax benefits or incentives related to ICMS taxes;
· Permanent duty of Tax Income Agent in the place where the ICMS audit is to be carried out to oversee the transaction or provision of services, tax documents, and other element related to the taxpayer’s condition;
· Requirement of proof of the entry of the merchandise or goods, or the receipt of the service for the appropriation of the respective debt;
· Assignment of the responsibility for the withholding and collection of ICMS due for subsequent transactions with goods subject to the tax substitution system, even if previously taxed or reported in the tax document relating to acquisition of the merchandise, in which case the appropriation will be accepted as a credit against the tax shown to have been collected in previous transactions;
· ICMS tax due, including that which is due by way of tax substitution, for each transaction or provision of services, at the time of the occurrence of the taxable event, observing at the end of the calculation period the system for offsetting the tax;
· Payment of ICMS due to tax substitution, until the moment of entry of the goods into the territory of São Paulo, in the event of liability for tax substitution
· Assigned to the recipient of the goods;
· Centralization of ICMS payments due into one of the establishments;
· Suspension or institution of deferral of ICMS payments;
· Inclusion in a special tax audit program;
· Requirement of periodic presentation of economic, equity, and financial information;
· Disqualification of credentials, qualifications, and special systems.

The application of the Special System mentioned above will be preceded, as provided for in paragraph 2 of Article 20 of the aforementioned LC, by a duly substantiated opinion, as will be set forth in regulations to be published.

Pursuant to article 26, LC No. 1,320/2018 shall enter into force on the date of its publication.