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New controversies related to the ICMS advanced payment system

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The Brazilian Federal Supreme Court (STF) has ruled in favour of taxpayers regarding the refund of the ICMS (state VAT) in the advanced payment system. But the ruling has created more controversies.

The ICMS is a state VAT levied on the domestic circulation and import of goods, and on the rendering of communication and certain types of transportation services.

Commonly, in order to ensure the payment of taxes and prevent tax evasion, the levy of the ICMS on transactions concerning several goods is subject to the advanced payment system (the so-called tax substitution regime).

Under this system, a taxpayer (usually the manufacturer or importer) is held liable for the payment of the ICMS levied on its own transactions and, also, the ICMS levied on future triggering events to be carried out by third parties (wholesalers and retailers) during the commercial chain of such products until the final sale to the end consumer.

As the triggering event related to future transactions can only be presumed, their value is unknown, which means that there would not be an accurate taxable basis to calculate the ICMS charged in advance. In such cases, the legislation establishes a deemed taxable basis, which may be:

  • the price to the end consumer, as suggested by the manufacturer or importer;

  • the maximum or sole retail price set forth by the State Revenue Service; or

  • the seller’s price plus a value-added profit margin (MVA) based on benchmark prices.

Nevertheless, since the creation of the ICMS advanced payment system, several controversies have arisen at the administrative and judiciary branches, especially regarding the definitiveness of the amount due as ICMS advanced payment. That is, if the final sales price is different – higher or lower – from the deemed ICMS taxable basis, there might be either an underpayment or an overpayment of the tax. In such disputes, the main arguments are that:

  • as the ICMS is a tax levied on commercial transactions, its taxable basis must be the actual transaction value. Therefore, if the actual final price is lower than the deemed taxable basis, it should be possible for the final seller to reclaim the exceeding amount of the ICMS paid in advance; on the contrary, if the price is higher, it would be necessary to pay a complementary amount; and, on the other side,

  • as the advanced payment aims at reducing tax audits and tax avoidance by concentrating the levy on a single taxpayer, the possibility of the final seller claiming a refund or paying a complement amount would be against such simplification goals.

In 2002, the STF ruling rendered in Direct Action of Unconstitutionality (ADI) 1851/AL established that the amount of ICMS calculated for advanced payment based on the deemed taxable basis was definitive. Accordingly, the taxpayer would not be entitled to claim a refund based on an actual lower price, and the states would not be entitled to charge a complement based on a final higher price. The Court decided that the right to the ICMS refund would only exist if the presumed transaction (triggering event) did not occur. 

However, in October 2016, the STF concluded the judgement of ADIs 2675/PE and 2777/SP and Extraordinary Appeal (RE) 593.849/MG, regarding the legislation of the states of Pernambuco, São Paulo and Minas Gerais, respectively, which allowed the final seller to claim a refund of the ICMS paid in advance when its sales price was lower than the deemed taxable basis. On the occasion, the STF ruled in favour of the taxpayers, but against its own precedent from 2002, establishing that the refund is constitutional and a right of the taxpayers.

The effects of the decisions were “modulated” (restricted effects), to allow the refund only to taxpayers that have ongoing lawsuits related to the matter. If the taxpayer is not already discussing the matter by means of a lawsuit, it may request only future ICMS overpayments, as the STF has not authorised new requests in relation to past transactions.

Although at a first glance, such ruling benefits the taxpayers, some new controversies are arising:

  • states will need to establish an efficient ICMS refund system;

  • even if the debated thesis revolved around the refund of the ICMS paid in advance, it is highly possible that the states might charge the complement of the ICMS paid in advance, stating that the new STF understanding is that the ICMS paid in advance is not definitive;

  • states may establish ancillary obligations to allow the refund that in practice may be extremely difficult to comply with, making the refund virtually impossible; and

  • as commonly happens with other tax refunds, states might subject the claims to a lengthy tax audit, that can last over a year.

It can be noted that, even though the STF ruled in favour of the taxpayers, granting them the right to request an overpaid tax, new controversies might arise, bringing more uncertainty and tax disputes. For the time being, taxpayers might need to wait and see what happens and, if the states fail to establish a system to allow such refund, we believe that taxpayers will be able to file specific lawsuits to ensure their rights.

Ricardo M. Debatin da Silveira ( and Gabriel Caldiron Rezende ( are members of Machado Associados’ indirect tax team.

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