Insights on Illicit Actions, Sanctions, and Deductibility of Penalties within the Income Tax

Abstract

The text addresses, for purposes of income tax and social contribution on profits, the right to deduct expenses related to penalties applied within the context of business’ activities. Initially, the legal requirements for an expense to be deductible are analyzed. The article sustains the nonexistence, in Brazilian tax law, of a general principle that would forbid either the taxation of illicit gains or the deductibility of expenses related to illicit actions. From then on, the necessity, normality, and usualness of these expenses to the business’ activities are analyzed. It follows in conclusion that the non-deductibility of expenses related to penalties incurred within the context of the enterprise would violate, on the one hand, the concept of taxable income; and, on the other hand, the principle of net income. Besides that, it is sustained that the deductibility of some penalties in detriment of others is arbitrary and contrary to the principle of equality. At last, it’s shown that the non-deduction transforms the income tax into a penalty itself, which is forbidden by Brazilian law.