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A look at Brazil’s recent Supreme Court decisions on indirect tax

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Ricardo Marletti Debatin da Silveira and Mercia Cristina de Paiva Braga of Machado Associados discuss recent decisions from the Brazilian Federal Supreme Court on the topic of indirect taxes.

The past few weeks were marked by the judgment of significant tax issues by the Plenary of the Brazilian Federal Supreme Court – STF, mainly referring to lawsuits that had dragged on for years and generated many uncertainties for taxpayers. These decisions (except for ADPF No. 198) were now rendered in the system of ‘general repercussion’, being therefore valid for all taxpayers.

In the judgment of Extraordinary Appeal (RE) No. 598677, the STF understood that it is unconstitutional that a state decree obliges the taxpayers to make the advance payment of the state VAT ‘ICMS’ – related to subsequent transactions – at the entry of goods in its territory, even without a provision for the application of the ICMS tax substitution regime.



According to the justices, the advance payment requirement must be established by law, since demanding the ICMS before the occurrence of the tax triggering event (circulation of goods) is not a mere regulation of the tax payment term (which could be carried out by a state decree), but rather the creation of a presumed tax triggering event.



Although the decision was directed to the State of Rio Grande do Sul, it can be applied to all the states that carry out such collection based on a state decree. Taxpayers can file lawsuits to plead for the termination of such ICMS collections and the refund of amounts of ICMS unduly paid in the past five years.



Another very important case, with high impact to imports and resales in the domestic market, has been decided in the judgment of RE No. 946648. After years of discussion and changes of interpretations by the courts, the STF finally decided that it is constitutional that the levy of the federal excise tax ‘IPI’ (tax on manufactured products) on the customs clearance of industrialised products and also on their exit from the importing establishment for domestic resale, even if no manufacturing is carried out by the importer.



In summary, the importers questioned the levy of the IPI at the domestic resale stage alleging double taxation as, between the import and the resale, the imported goods are not subject to any manufacturing process, which could justify the valid IPI incidence. Furthermore, the violation of the constitutional principle of tax isonomy has been argued, as the situation places an excessive burden on the importer in relation to the national manufacturer.



However, most STF justices construed that it is not a case of double taxation, as the taxable events are different. Upon the customs clearance, the taxpayer pays the IPI as importer and, due to the domestic sale, it is held by law equivalent to a manufacturer and, therefore, obliged to pay the IPI again. The IPI is a non-cumulative tax, subject to a debit and credit system, but usually the price of the domestic sale is considerably higher than the import price, situation that undoubtedly increases the tax burden in these transactions.



With regard to the tax isonomy, contrary to the importers’ interest, the STF understood that the non-levy of the IPI in the domestic resale would place the domestic manufactured products at economic disadvantage. This judgment has been considered a victory of the domestic manufacturers, but surely represents higher prices for imported products sold in the country.



The STF also judged RE No. 601967, deciding that, regardless of the constitutional provision that the ICMS is a non-cumulative tax (i.e. that tax credits shall apply), a supplementary law can postpone the initial term for the booking of ICMS credits arising from the entry of goods intended for the use or consumption of the establishment (i.e. not used in the manufacturing process). Therefore, taxpayers will be entitled to book such credits only as of January 1 2033, unless another supplementary law is enacted postponing even more the initial term.



The court has also concluded the judgment of ADPF No. 198, deeming as constitutional the requirement for unanimous votes of the states at the National Finance Policy Council (CONFAZ) to grant state tax incentives, as the unanimity helps to fight the tax war among the states, and preserves both the federal pact and the revenue collection of states. The tax war is a very controversial matter in Brazil, which generates uncertainty and innumerous tax assessments.



Another relevant judgment, mainly for import companies, concerns RE No. 1178310. The STF recognised that the collection of an additional of 1% of the federal contribution “COFINS” on imports (Cofins-Importação) is constitutional, and that it is intended to guarantee the equalisation of the taxation between domestic and imported products. Another impact to the cost of importers arises from the recognition of the constitutionality of the prohibition of the relevant credit offsetting arising from such additional taxation (1%).



Also regarding the import sector, the Supreme Court judged RE No. 1090591, in which taxpayers claimed that conditioning the entry of goods in Brazil to the payment of a tax difference determined by the tax inspector through arbitration was a coercive means for collecting the tax, which would violate STF Precedent No. 323.



However, the STF justices understood that, if the law establishes that the taxes on imports should be paid upon customs clearance, it is a necessary condition for the regular conclusion of the import procedures. In this sense, they established that “to bind the customs clearance to the payment of tax differences determined by arbitration by the tax authority is constitutional”. 



Hence, import companies should be alert because, for example, in the event of divergence regarding the tax classification of products, they would only be able to customs clear the goods if they pay the difference arbitrated by the tax authority. Therefore, this decision, unfortunately, means a major case law setback and may bring more problems for importers.



It is noticeable that the STF has been very active during the pandemic crisis – is spite of all current difficulties – issuing several important decisions. Their impacts need to be carefully assessed by companies with business in Brazil to avoid being taken by surprise by the Brazilian tax authorities. 






Ricardo Marletti Debatin da Silveira

T: +55 11 3819 4855

E: rms@machadoassociados.com.br



Mercia Cristina de Paiva Braga

T: +55 11 3819 4855

E: mpb@machadoassociados.com.br



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