Tax wars in Brazil and the great expectations for 2018
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Tax wars in Brazil and the great expectations for 2018

Sponsored by

sponsored-firms-mattosfilho.png
brazil tax war 320 x 215

Renata Correia Cubas, partner at Mattos Filho, writes about the landmark progress made so far on tackling the tax wars between Brazilian states on state VAT and what you can expect from 2018.

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 2017.

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 challenges.

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: rcorreia@mattosfilho.com.br


more across site & bottom lb ros

More from across our site

The stagnating pay and tax bonuses cap follow slashed payouts for the deals team and business consolidation in the last month
A greater UN role has been secured after disagreements between developed and developing countries over the OECD’s influence in global tax reform
The US-based firm picks up investment fund specialist Ceinwen Rees, while Ireland nearly doubles its corporation tax receipts in three years
The order comes amid controversy over another of David Collard’s companies’ tax and TP affairs
NASSCOM, which represents over 3,000 Indian companies, has argued for the removal of the segmentation rule
The chancellor claims it is the largest business tax cut in modern British history
ITR invites tax firms, in-house teams, and tax professionals to make nominations for the 2024 ITR Tax Awards in the Americas, EMEA, and Asia-Pacific
With a total of 32 new appointments, Hogan Lovells has capitalised on Stroock’s demise
Bech-Bruun was found to have helped a banking client receive over DKK 1 billion in tax refunds based on ‘fictitious transactions’
But Hywel Ball said his view doesn’t mean EY will be doing a second such project