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

The exclusion of the tax on circulation of goods and services (ICMS) from the calculation basis of PIS and COFINS


In Brazil, PIS and COFINS are taxes that, for a long time, applied on the gross revenue of legal entities on a cumulative basis. Despite countless changes regarding the taxes in recent years, they currently apply on the full revenue of the taxpayers and are subject to a non-cumulative system.

The discussions related to the requirement to make PIS/COFINS contributions were, and continue to be, extensive and for the most part inconclusive. However, recently, the Supreme Federal Court decided on a significant matter related to said taxes, that is to say, the impossibility of including the amount of ICMS – on the calculation basis of PIS/COFINS.

Indeed, after almost two decades of court discussions, the Supreme Federal Court (STF), on March 15 2017, acknowledged, with general repercussion, the unconstitutionality of the ICMS on the calculation basis of the PIS Contribution and the Contribution for Financing the Social Security – COFINS.

After intense debates and extensive votes, the main argument accepted by six of the ten Justices attending the two judgment sessions where the matter was decided, involved the fact that the ICMS included in the calculation basis of PIS and COFINS is a mere entry, but it does not represent actual revenue obtained by the taxpayer.

Please note that PIS and COFINS contributions are taxes which are calculated based on the revenue, implying patrimonial evolution by the company acquiring it. A mere entry – as the amount of the ICMS was considered, which is later transferred to the states – is not a revenue, and, therefore, cannot be included on the tax application basis.

Decision appealed by the Treasury

The impact of this decision was in a certain way overshadowed by the statement by the head attorney of the Brazilian Treasury, claiming the modulation of the effects of the decision to be postponed to January 1 2018. The attorney justified the claim, which will likely be the object of an appeal to be filed as soon as the collective judgment is published, by saying that  the judgment should cause significant impact to the public treasury, and estimating it at approximately BRL 250 billion ($79 billion).

The current legal system, specifically, article 27 of Law No. 9,868/99  permits the STF to, “when declaring the unconstitutionality of a law or normative act (...) to restrict the effects of said declaration or to decide that it shall only be effective after the decision becomes final or at another moment to be established in the future”.

It is also undeniable that said rule contains a high measure of subjectivity, since it justifies the modulation of effects for “reasons of legal certainty or exceptional social interest”, besides allowing the Court to establish an initial term for the effectiveness of a decision “at any moment” (prior or after the decision itself).

Although there is no question regarding the decision on the merits of the discussion, the government maintains the unpredictability with the claim for modulating its effects, which can take place on an uncertain form and time.

Despite that and considering the STF precedents, it is possible to try to minimize this unpredictability when seeking to identify which is the most likely situation of modulation of effects. What is practically certain is that when the head attorney of the National Treasury submits a motion to the STF requesting the modulation of effects, the STF should grant it at least in part.

After decades of discussion,  we cannot and must not count on the highest court of Brazil postponing the application of the construction of the rule to a future occasion and disregarding the right of taxpayers who have filed an action in court and, in many cases, obtained favorable decisions, though not final yet.

The March 15 decision, despite the precaution of everyone in view of the high amounts involved and the very strong pressure exercised by the government seeking a result which was the opposite to the interests of taxpayers, did not surprise anyone.

Four of the six Justices who voted for the winning thesis had already expressed their understanding on the matter upon the judgment of a specific case, namely through Extraordinary Appeal No. 240,785, taken place on October 8 2014. Only two new votes were required for the conclusion of the general repercussion to coincide to the decisions by the STF itself, back in 2014.

Before that, however, the judgment of Extraordinary Appeal No. 240,785 had started by August 24 2006, when six of the Justices – which is a majority of the Court – had already granted the claim by the taxpayer. The case was formally closed as a result of a request by one of the Justices, which postponed the formal and final completion of the case to 2014 (with a result in favor to the unconstitutionality of including the ICMS in the calculation basis of the PIS/COFINS contributions by eight votes to two).

A certain measure of predictability existed concerning the possible result of the discussion as demonstrated by the General Attorney of the Republic, when disclosing the so-called Schedule of Tax Risks, by means of Law No. 13,408, indicated the existence of a risk to the federal government tax revenues of approximately BRL 250 billion.

Accordingly, we have to ask: would it not be reasonable for the government to be prepared for the scenario of losing this discussion? This was not exactly the risk of loss reflected in the Schedule of Tax Risks mentioned above? In addition, the account only reached approximately BRL 250 billion because the government continued to require from taxpayers the inclusion of the ICMS on the calculation basis of the PIS/COFINS contributions, despite signs coming from the STF since 2006.

If the government had considered the possibility of losing the discussion, we would certainly not be talking about a ‘gap’ of approximately BRL 250 billion. We cannot accept the government’s claim of ignorance of the facts, for so many years, to justify the argument of restraining the effects of the decision with the relevance of the amounts involved and with the negative impacts to be caused to the public treasury. The public treasury shall only be impacted by billionaire amounts because billionaire amounts were unduly required from the taxpayers!

If the STF postpones the effects of its decision, it is approving, as regards past periods, a proceeding acknowledged as unconstitutional, which, in  last analysis, would serve as incentive for new unconstitutional and collecting measures to be adopted with the protection to the government that, even being unconstitutional, would have some effect in the legal world.

Back to basics, we know that the modulation of effects of a decision by the STF is surrounded by considerable subjectivity. But, we expect that the same STF, which took long years to declare the unconstitutionality of the requirement, surmounts this apparent dilemma and acknowledges that the debt of the government only reaches stratospheric amounts because billions of Brazilian reais were unduly collected from the taxpayers for a long time.

In practical terms – and considering that any modulation of effects preserves the right of those who have filed a court action to discuss said requirement – we notice countless taxpayers will not only be able to recover amounts unduly paid, but also stop including the amount of the ICMS in the calculation basis of the PIS/COFINS contributions from now on.

This means that significant amounts must stop being collected, but such amounts will continue to be in the possession of companies, and must be applied in their operating activities, cash flow, investments and, even the creation of new jobs.

Another important aspect of the judgment is that, even in view of the huge amounts, the Brazilian Supreme Court has opted for an extremely technical judgment, in which the Constitution was taken into consideration and the tax requirement acknowledged as undue. This proves the impartiality of the Court when assessing tax issues even when they are huge and very controversial. At least up to now, this is the case.

We expect that the Supreme Court, if and when it decides to modulate the effects of its own decision, does not become discouraged with the size of the amounts and, in particular, that it does not ignore the right of those who filed an action in the courts against the requirement that the Court itself understood to judge undue. This is the role we expect from the highest Court of Brazil.

This article was prepared by Glaucia Lauletta Frascino, a partner at Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados.

more across site & bottom lb ros

More from across our site

PwC publishes detailed accounts of its behaviour in the tax scandal in Australia, while another tax trial looms for pop star Shakira.
The winners of the ITR Europe, Middle East, and Africa Tax Awards 2023 have been announced!
The winners of the ITR Asia-Pacific Tax Awards 2023 have been announced!
Mauro Faggion appeared cautiously optimistic as the European Commission waits to see whether all 27 member states will accept its proposal.
The global minimum rate also won’t entirely stop a race to the bottom, according to a tax director speaking at an ITR conference in London.
The country’s tax authorities are not interested in seeing transfer pricing studies any more, it was claimed at an ITR industry conference in London.
The controversial measure is being watered down after criticism from the European Central Bank.
More than 600 such requests were made in 2022, while HMRC has also bolstered its fraud service, it has been revealed.
The General Court reverses its position taken four years ago, while the UN discusses tax policy in New York.
Discussion on amount B under the first part of the OECD's two-pronged approach to international tax reform is far from over, if the latest consultation is anything go by.