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Brazilian constitutional amendment affects the ICMS on interstate transactions

Júlio de Oliveira and Flavio Tabach, of Machado Associados, discuss the new criteria for ICMS revenue allocation in interstate transactions to end consumers.

On April 17 2015, Constitutional Amendment 87 (CA 87/15) was published in the federal government’s Official Gazette, which amends the wording of items VII and VIII of paragraph 2, article 155 of the Federal Constitution, significantly modifying the way proceeds from the ICMS (state VAT) collection levied on interstate transactions and deliveries, by which goods and services are shipped to the end consumer, are allocated.

The original wording of the provisions established the applicable ICMS rate in accordance with the condition of the goods or services’ recipient.

If the recipient was a taxpayer, the ICMS was paid to the state of origin, computed using the interstate rate of 4%, 7% or 12%. The difference between the interstate rates used in the transaction and the rates applicable to internal transactions in the destination state (usually between 17% and 19%) was paid to the destination state.

If the recipient was not a taxpayer, the tax was paid to the state of origin based on the tax rate applicable to internal transactions and deliveries in this state, without payment of ICMS to the destination state.

The CA 87/15 means that the ICMS must be paid to the state of origin at the interstate rate in all interstate transactions and deliveries to end consumers. The internal rate of the state of origin is no longer paid in cases where the recipient is not the taxpayer.

Furthermore, the ICMS will be paid to the destination state in such transactions, calculated from the tax rate differences, which will be paid by the recipient, if it is the taxpayer. Otherwise, it will be paid by the sender.

With these new provisions, both states of origin and destination will receive a portion of the ICMS in any interstate transaction or delivery to end consumers.

According to the justification presented for the issuing of the constitutional amendment, these new rules are necessary to establish the economic balance in interstate transactions aimed at end consumers. This is because, according to the previous manner of distribution, with the growth of e-commerce, end consumers have been buying more and more goods from e-commerce companies that are mostly established in the states in the south and southeastern regions, which ended up getting all the ICMS payable on such transactions.

It is worth noting that under article 99 of the Transitory Constitutional Disposition Act (ADCT), included by CA 87/15, the rate difference will not be immediately fully payable to the destination state. From 2015 to 2019, the destination states will receive this amount in a staggered manner – they will be entitled to 20% in 2015, rising to100% by 2019.

Finally, CA 87/15 does not bring accurate information as to when it will become active. In accordance with article 3, the CA “shall come into force on the date of its publication, producing effects in the subsequent year and after ninety (90) days therefrom".

In our view, because of the principle of non-retroactivity – which establishes that a tax cannot be charged in the same fiscal year as the law that established it, and not before 90 days of its issuing, as provided for in the Federal Constitution – the states could not apply the new rules defined in CA 87/15 before 90 days from its publication nor in 2015, as the tax burden related to these transactions may be increased. Such increase would arise from the possibility that the sum of the interstate rate and the difference of the interstate and internal rates of the destination state is higher than the internal rate of the state of origin.

Júlio M. de Oliveira (joliveira@machadoassociados.com.br) and Flavio N. Tabach (ftabach@machadoassociados.com.br) are members of Machado Associados’ indirect tax team.

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