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Brazilian Supreme Court to tackle historic tax disputes in the second half of 2020

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The changes enlarge the list of ICMS taxpayers and parties liable for payment

Gabriela Silva de Lemos and Samantha Maria Peloso Reis Queiroga of Mattos Filho discuss how the STF has taken the initiative to improve certainty in the Brazilian tax system amid widespread tax reform.

In early 2020, tax reform has dominated headlines in Brazil’s tax world and continues to be a reason for both hope and concern for all those who do business in the country. 

However, several aspects of Brazil’s current tax system still causes great anxiety. Brazilian taxpayers are expecting rulings by the judicial branch for a number of tax disputes that have pending on a decision for more than a decade.

On the heels of the expected tax reform, which aims to reduce bureaucracy and facilitate both the taxpayers' and the tax authorities' obligations by providing greater legal certainty to the tax system, the Brazilian Federal Supreme Court (STF) intends to also play its part. 

The court has announced intentions on closing a large number of relevant tax disputes between tax authorities and taxpayers which have troubled the courts for years. However, due to the outbreak of coronavirus, it is most likely that the cases closure will happen by the end of the year.

In this sense, more than 30 cases dealing with tax issues, are expected to be ruled in the second half of the year. Composed of eleven justices, the court is considered the competent jurisdiction to decide on these leading cases.

Cases to watch out for in 2020

The first ruling came in February 2020, when the STF decided that the collection of the Funrural tax (a contribution due on the sale of rural production) was unconstitutional in cases in which there was indirect exporting carried out by trading companies. Although the impact of this decision is yet to be calculated, it is noted that the commercial activity of the trading companies in 2015 itself was $89.5 billion and the use of these intermediary companies may further stimulate exports by small and medium-sized companies.

Next, a relevant issue in the technology sector concerning the ISS (service tax) levied on the licensing/assignment of software developed on demand (Extraordinary Appeal No. 688.223). The case was scheduled for March 18 but was postponed owing to the coronavirus outbreak, and is now expected to happen between September and December.

Also in the list of the cases delayed is the motion for clarification filed by the Federal Government on the Extraordinary Appeal No. 574.706, which is expected to take place in the second half of the year. It deals with the exclusion of ICMS (tax on goods and services) from the PIS/COFINS (federal social contributions levied on gross revenue) calculation basis. The STF must define the portion of the ICMS that should be excluded, as well as assess the possibility of modulating the effects of the decision and other repercussions.

In terms of economic impact, this is the most relevant tax dispute in Brazil. If the judgment occurs, a discussion that has an estimated impact of BRL 246 billion in reimbursements and an estimated collection loss of BRL 27.12 billion – about a third of the savings provided by the pension reform and more than five times the budget foreseen for 2020 for the entire judicial branch – will be concluded.

The judgment of Extraordinary Appeal No. 576.967 was also postponed. In this case, the court will decide whether the maternity leave salary (the remuneration granted to mothers during maternity leave paid by social security) should be included in the calculation basis of social security contributions due by the company. Far beyond a tax discussion involving a loss of BRL 6.3 billion in five years, the judgment may demonstrate the court's commitment to the pursuit of gender equality. The understanding will represent a great social impact that, in addition to relieving companies' payroll, means another step taken in the direction of equal conditions for men and women in the labour market.

Furthermore, the Extraordinary Appeal No. 603.624, which discusses the subsistence of contributions levied on employee remuneration – since 2002, after the advent of Constitutional Amendment No. 33/2001 – destined to INCRA (National Institute for Colonisation and Agrarian Reform) and SEBRAE (Brazilian Micro and Small Enterprises’ Support Services) was expected to be judged on April 30, but it was rescheduled considering the national health scenario. Besides the economic impact on companies’ payroll expenses, this ruling may affect other discussions involving social contributions for third parties, what justified the returns of this discussion by the end of the year.

For a dimension of the impact, according to data from the CNJ (National Council of Justice), there are 2,307 lawsuits filed around the country awaiting this decision. Along with the social reflection that this decision may cause, the impact can reach BRL 31.8 billion, according to the Brazilian Federal Revenue.

Also, the ADIs (direct action for the declaration of unconstitutionality) No. 5862, 5835 and ADPF (action against the violation of a constitutional fundamental right) 499 that were predicted to happen on April 15, were also suspended. These cases are related to the Complementary Law No. 157/2016, responsible for changing the ISS taxation authority from the municipality of the service provider to the municipality of the customer's domicile in some activities, such as credit and debit card companies and healthcare plans. The decision to be taken by the STF may affect the way in which these companies operate, especially as it may trigger a large increase in the ancillary obligations to be followed by the taxpayers (service providers), that may be different in more than 5,500 Brazilian municipalities.

There are several other relevant tax issues that are expected to be judged on the second round of 2020, and many others that will continue to wait, but it is certain that the agenda is full of discussions that, most likely, will put an end to several tax disputes and benefit the contributors.

Creating solutions

In fact, in addition to the tax reform that improves the business environment in Brazil, it is up to the STF to definitively resolve existing conflicts and, thereby, provide legal certainty to taxpayers already operating in the Brazilian market.

The solutions brought by the STF to tax disputes are crucial to solve the problem of the slow and overloaded trial courts, which affects not only the legal certainty of these decisions, but also result in a significant impact on companies’ bank accounts.

The coronavirus pandemic has affected a number of ambitious and important judgments for the Brazilian tax system. However, solutions, such as trial sessions using video conferences, are being well-accepted by the justices. 

The tax reform will only bring the effective and expected simplification of the system, as well as legal certainty, if accompanied by an initiative of the judicial branch, especially that of the STF to end the significant amount of ongoing cases. 

With the disclosure of the STF’s judgment agenda for the first and second half of 2020, it seems that the first step has been taken.

Gabriela Silva de Lemos

T: +55 11 3147 7831


Samantha Maria Peloso Reis Queiroga

T: +55 11 3147 7618


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