Brazilian tax authorities and taxpayers have long contested
the inclusion of ICMS (a tax on the circulation of goods,
interstate and intercity transportation and communication
services) when calculating COFINS and PIS contributions, two
complex social taxes.
Tax authorities consider that the ICMS involved the revenue
received by the taxpayer in the sale of merchandise and,
therefore, should be included in the basis of calculation of
both social taxes. On the other hand, taxpayers argued that
they receive the amounts corresponding to the ICMS with the
obligation to pay the state with jurisdiction to collect such
The topic gained relevance in 2006 when the Federal Supreme
Court indicated, for the first time, that the ICMS could not
be included when calculating PIS and COFINS. The ruling then
was suspended and was resumed eight years later when the
court finally confirmed this. However, the
court’s decision in 2006 did not have a strong
impact on other judicial proceedings related to this topic,
and it failed to settle the dispute between tax authorities
In March 2017, the Federal Supreme Court restated its 2006
understanding – this time when ruling on a case that
affected other pending lawsuits on this topic. As such, the
legal controversy regarding the issue seems to be over.
However, reimbursement of improperly collected amounts is
Brazilian tax laws guarantee restitution for unduly collected
taxes, observing a five-year statute of limitations.
Nonetheless, the procedural legislation permits that the
Federal Supreme Court can limit the impact of the decision or
impose a timeframe on its application that it finds
Following this latest case in March 2017, the government
declared that the full refund to taxpayers of the amounts
paid correspond to the disbursement of BRL 240 billion ($77.2
billion), which is an amount higher than the government
fiscal deficit in recent years.
Due to this large amount, the Treasury pleaded to the court
to postpone the effective date of the decision to 2018, when
the public budget could be amended to reflect the reduction
on the basis of calculating ICMS imposed by the Federal
Supreme Court decision. This, in practice, would make it
impossible to recover the excess taxes paid by
The Treasury's claim, however, would provoke significant
Before the March ruling, some taxpayers secured court
decisions that permitted the exclusion of ICMS from the basis
of calculating COFINS and PIS contributions, but others did
not. This inconsistency was due to the lack of a definitive
position from the Federal Supreme Court on this topic.
Accordingly, removing the ICMS from the basis of calculating
PIS and COFINS retroactively would never accommodate the
consequences arising from the existence of conflicting court
decisions on this topic.
If the exclusion of ICMS is applied to future events, the
taxpayer who initiated a court proceeding in a timely manner,
had a favourable decision in line with the understanding of
the Federal Supreme Court and did not collect the amounts in
recent years, would be required to collect such taxes.
However, it does not make sense to require a taxpayer, who
adopted the understanding in line with the position of the
Federal Supreme Court, to collect such amounts.
On the other hand, preserving the situation of the taxpayer
who has a favourable decision by exempting him from the duty
to collect such amounts would hurt taxpayers that also filed
lawsuits but have not obtained a favourable decision yet.
In this situation, taxpayers that had unfavourable court
decisions would not be able to recover the amounts they were
charged in excess. This would deny them of such amounts
solely because, in their cases, the judges had rendered
decisions in disagreement with the guidance now set by the
Federal Supreme Court.
In order to avoid this unfairness, the Federal Supreme Court,
when limiting the effects of a decision in time, typically
reserves the right to recover taxes improperly collected by
all those with pending lawsuits by the time the court issued
its understanding on this topic.
Therefore, in case the Federal Supreme Court limits the
effects of its decision in the ICMS case, it seems more
reasonable to preserve the right of taxpayers who have
already filed lawsuits.
In addition, the scale of the amounts involved in such
reimbursements to taxpayers should not limit their rights to
recover amounts unduly collected.
We have seen similar situations in the past in which
taxpayers were repaid in instalments. This was the outcome of
the Collor Plan, involving income tax and social contribution
in 1990, and the denial of application of inflation to FGTS
(Fundo de Garantia do Tempo de Serviço, or employee's
dismissal fund) accounts in the beginning of the following
By Paulo Camargo Tedesco, partner at
Mattos Filho in São Paulo.