Copying and distributing are prohibited without permission of the publisher

Brazil Federal Supreme Court deems inclusion of ICMS in the PIS/COFINS taxable basis unconstitutional

03 April 2017

ITR Correspondent

Email a friend
  • Please enter a maximum of 5 recipients. Use ; to separate more than one email address.


The Brazilian Federal Supreme Court ruled in favour of the taxpayers, determining that the state VAT should not be included in the concept of “gross revenues” for the purpose of the PIS/COFINS taxable basis.

On March 15, the Full Bench of the Brazilian Federal Supreme Court (STF) ruled that the inclusion of the state VAT (ICMS) on the social contributions on gross revenue (PIS and COFINS) taxable basis is unconstitutional (Extraordinary Appeal No. 574706).

The main argument to grant the taxpayer’s appeal to not include the ICMS on the PIS/COFINS taxable basis was that, in summary, even though the ICMS amounts are charged by the seller as part of the product’s price, such amounts will be transferred to the state treasury department. Therefore, they will not be added to the company’s assets and will not fall within the concept of gross-revenue, which is the taxable basis for the PIS/COFINS.

Regarding the issue of establishing a date for the STF ruling to take effect, despite the request made by the Attorney of the National Treasury in the oral arguments, STF’s Justice Rapporteur Carmen Lucia found that there was no claim in this regard in the court documents. Therefore, this matter was not subject to trial. However, the Attorney General of the National Treasury might file a Motion to Clarify this issue in court.

Given the uncertainty of the effective date of the ruling, it would be best to have a lawsuit filed on the matter. This would allow the taxpayer to reclaim the PIS/COFINS paid in excess (the ICMS amounts included in the sales price) in the five years before the date of the claim. This is because, even if the STF rules in favour of establishing a date for the decision to take effect – which in practical terms generally, prevents the recovery of overpaid taxes – based on its case law, the STF tends to protect the taxpayers that have already claimed their rights by filing a lawsuit. It should be noted that the five years is the statute of limitation period according to Brazilian tax legislation.

Furthermore, taxpayers may henceforth exclude the ICMS from the PIS/COFINS taxable basis. If companies adopt a conservative approach, they should obtain a ruling that allows the suspension of the payments and, thus, inform said suspension in the federal debts and credits accessory obligation form (DCTF). However, companies may decide to suspend payments immediately based only on the STF ruling. In this case, the possibility of the Federal Revenue assessing the companies, based on the legislation that was deemed unconstitutional but is still in force, should not be ruled out.

Additionally, the government, to mitigate the decrease in tax collection and absorb the impact arising from the refund regarding the past five years, may increase the PIS/COFINS tax rate. This increase would be aligned with the previous government decision to increase the PIS/COFINS rate levied on the import of good, when the STF (in Extraordinary Appeal 55937) decided to exclude the ICMS and the PIS/COFINS from the goods’ import taxable basis. The increase of the PIS/COFINS may be performed in the same fiscal year. However, a period of 90 days must be respected before it is enforceable.

Finally, based on the content of the STF ruling, a case law was established that may increase the taxpayers’ chances of favourable outcomes regarding the following pending court discussions:

The exclusion of the municipal tax service (ISS) from the PIS/COFINS taxable basis; and The exclusion of ISS and ICMS from the social security contributions (INSS) calculated on gross-revenues. 

  • The exclusion of the municipal tax service (ISS) from the PIS/COFINS taxable basis; and
  • The exclusion of ISS and ICMS from the social security contributions (INSS) calculated on gross-revenues.

In such cases, a similar understanding to the ruling on the Extraordinary Appeal 574706 could be reached, as the ISS and ICMS amounts will be transferred to, respectively, the municipal and state treasury departments and would, therefore, not fall within the concept of "gross-revenues".

In summary, although there are several questions about the future impacts and developments of the STF ruling on the Extraordinary Appeal 574706, taxpayers should be alert and adopt the proper measures and counselling to reap benefits from the decision.

By Júlio M de Oliveira  and Fernando Telles da Silva, members of Machado Associados’s indirect tax team in Brazil.

Julio M de Oliveira Brazil 100 x 110 Júlio M de Oliveira
joliveira@machadoassociados.com.br

Fernando Telles da Silva 100 x 110 Fernando Telles da Silva
(fsilva@machadoassociados.com.br






International Tax Review Profile

Switzerland has launched its consultation to overhaul its withholding tax ordinance with effect from 2020 https://t.co/dKCmNzS5Tz

Sep 21 2017 11:39 ·  reply ·  retweet ·  favourite
International Tax Review Profile

ITR's Women in Tax Leaders guide 2017 is online now! Check if you made the list here: https://t.co/nRkSpNAk3C @WomenInTax @womentaxjustice

Sep 21 2017 09:49 ·  reply ·  retweet ·  favourite
International Tax Review Profile

The EC has today announced its agenda to tax digital companies more after the latest ECOFIN meeting outcomes https://t.co/pvAaTqS0CY

Sep 21 2017 09:35 ·  reply ·  retweet ·  favourite
International Tax Review Profile

Philippine Senate committee OKs tax reform bill; Will introduce #sugartax. What now for CocaCola's investment plans? https://t.co/41Obf6nlBF

Sep 21 2017 08:42 ·  reply ·  retweet ·  favourite
International Tax Review Profile

Shocking that Cairn Energy has to wait until August 2018 for its final hearing on the India tax dispute https://t.co/TDghPza3qA via @FT

Sep 21 2017 08:38 ·  reply ·  retweet ·  favourite
International Correspondents