The state VAT referred to as ICMS – charged on the
circulation of goods and communication, intermunicipal and
interstate transportation services – has for at least
three decades been the object of disputes.
These disputes concern the collection of taxes by states
where goods and services are consumed or where resellers are
domiciled, and how taxpayers claim credits and tax benefits.
They arise because ICMS is collected upon invoicing in the
state from where the good or service originates and is then
credited in the destination state of this good or service. As
benefits are granted for manufacturing or distribution centres,
normally states where these facilities are set up grant
benefits without the consent of other states, creating
conflict, or 'tax wars’.
For different reasons, lower tax states have attracted
investment in the production of goods and services even when
the end product or service was mostly destined to be consumed
in higher tax locations. This is due to the fact that the
principle of taxation on destination has been hardly introduced
in Brazil with respect to the taxation of goods and services
subject to ICMS. While a tax reform does not change that, some
baby steps have been taken with regard to that matter in
The end of tax wars at state level have been repeatedly
announced by states during 2017, and that has caused different
outcomes. From the taxpayers perspective, each case offered new
hope of a final validation of all the tax benefits considered
unconstitutional and thus for the end of liabilities and
disputes for the past decades. From the states’
perspectives, it meant a totally new environment full of
Indeed, most ICMS benefits such as discounts, reduced
calculation basis, exemptions, presumed credits and deferrals
have been declared unconstitutional as long as they have not
been object of agreement among all the Brazilian state
representatives. As most ICMS benefits of this nature are not
part of the aforementioned agreement, the new statutes
promising to end the tax war confirm the validity of those
benefits, as long as some conditions are fulfilled.
By the end of December 2017, a new
chapter in the process to end the tax wars was written with the
approval of ICMS Convention nº. 190/17. The validation is
supposed to comprise tax credits relating to exemptions,
incentives and fiscal benefits granted in conflict with the
provisions of the Federal Constitution.
ICMS Convention nº. 190/17 was
approved in order to minimise the effects of the tax war caused
by tax benefits granted without consulting all other state
representatives and members of the National Council of Finance
Policy (CONFAZ) as stated in the Federal Constitution.
The creation of the National Tax
Transparency website, which can be accessed through the CONFAZ
website, is also a condition for this validation. As such,
authorities would be able to access all the existing tax
benefits being offered by the states. It should be noted that
until now, all these benefits were not disclosed by the
respective states, and due to the lack of transparency,
taxpayers have faced embargos and claims with regard to those
tax benefits. For example, states have filed claims before the
Supreme Court over the constitutionality of state laws that
grant tax benefits without the consent of other states, and the
destination states of goods and services have charged penalties
and interest on credits claims by taxpayers.
The extension of tax benefits to
other taxpayers are also confirmed by new rules. States are
allowed to extend the existing tax benefits to other taxpayers
based in their respective territory on the same conditions and
within the time limits for the benefit.
It is also now possible for states
and the federal district to grant reinstituted tax benefits,
granted or extended by another state in the same region or the
federal district, provided that they comply with the
requirements of the convention and apply, at a maximum, for the
same periods and on the same conditions as the ruling in force
at the time they are granted.
Furthermore, with all the states disclosing the contents of
their tax benefits, taxpayers will also have to give up their
claims against the states, among other rules.
The promise of an end to the legal uncertainty truly reached
new levels in 2017 with new legislation creating what some have
been calling a transition aiming to the end the tax wars.
The frontline to end the tax war
has advanced considerably, but this has not been without its
casualties. Numerous conditions have been placed upon the
states and taxpayers, and efforts have been made over the past
30 years to end the disputes and implement legislation across
all 27 Brazilian states, but the bills have placed numerous
conditions on the states and taxpayers causing them to fail.
Now, there is legislation promising to end all the issues, but
getting it passed will be a challenge in 2018 as its approval
is in the hands of the state.. For this reason, all states and
taxpayers, are closely watching the developments of this
validation process, and hoping that 2018 brings new hopes to
end the tax war, as well as reach the goals that have never
been met before.
Renata Correia Cubas is a
partner focused on indirect taxation in Mattos Filho Advogados.
T: +55 11 3147 7777; E: firstname.lastname@example.org