Corporate income tax consequences of state VAT (ICMS) exclusion from PIS/COFINS in Brazil
Alice Oliveira, Fernanda Sampaio and Bruno Santo of Finocchio & Ustra discuss the corporate income tax consequences of the Brazilian Supreme Court decision regarding the exclusion of ICMS from PIS/COFINS.
The exclusion of state VAT (ICMS) from the calculation basis of the federal contributions on total revenue (PIS/COFINS), known as the 'thesis of the century' among lawyers, businessmen and the media, ended on May 13 2021, when, after a succession of postponements, the Brazilian Supreme Court (STF) modulated the effects of the first decision handed down in 2017.
The May13 ruling clarified that the definition in relation to the amount of ICMS to be excluded from the PIS/COFINS basis is the one indicated in the sales invoice and also modulated the temporal effects of the decision passed in March 2017.
After this long journey in the judiciary, the next steps are still not very clear. One of the most important steps is how the Brazilian revenue authority, the Receita Federal do Brasil (RFB) will adjust and publish new regulations on the matter, both to revise the current legislation and also to bring a binding effect to the decision, in line with what the Attorney General of the National Treasury (PGFN) office has done (in a nutshell, the PGFN has issued a decree stating that it will not appeal in cases related to the ICMS exclusion from PIS/COFINS).
Many companies, due to the ruling, are analysing the following:
How to recognise on their balance sheets the asset derived from the PIS/COFINS tax credits; and
The mechanisms for effectively recovering past periods of overpaid PIS/COFINS (i.e. generating tax credits for the overpaid amounts).
These issues raise questions as to when corporate income tax should be paid over the tax credits resulting from overpayment of the PIS/COFINS.
The recognition of the asset is closely linked to the company´s accounting methods and is not the subject of this article. However, depending on the judgment and estimates done by management in order to apply the Brazilian IFRS rules, companies that book the tax asset from PIS/COFINS could be liable to pay income tax over such amounts when they insert this asset in their accounting books.
Also, the mechanisms of Brazilian law on how to recover the overpaid amounts of PIS/COFINS will impact on the moment when the tax credits become taxable income for the company. Many taxpayers filed lawsuits before the judiciary in order to obtain their right not to pay PIS/COFINS over ICMS and now have final and unappealable decisions on the matter.
Where there is a final decision given in favour of a specific taxpayer, after it becomes res judicata, in order to recover the tax credit, the taxpayer can choose either:
To file for ‘proof of claim’ by an administrative recognition of the tax credit before the RFB (known as habilitação de crédito) and then to use the electronic filing system used by taxpayers to offset federal taxes due with tax credits (PER/DCOMP) in order to effectively use the credit to offset PIS/COFINS or other federal taxes due; or to
Have a judicial issued IOU and receive the amount in cash from the government (Taxpayers that have chosen to use writ of mandamus in order have their right not pay PIS/COFINS on ICMS will generally have to file a new lawsuit to have the IOU, although they can use the habilitação de crédito mechanism from the outset).
There could potentially be six different views of when corporate income tax should be paid:
When there is res judicata;
When the taxpayer files a proof of claim and the RFB recognises the right to the tax credit (habilitação de crédito);
When the taxpayers file the electronic PER/DCOMP system, offsetting the credit with other federal taxes due; or
When the PER/DCOMP is finally tacitly or expressly confirmed by the RFB (this can take up to five years);
When the judicial IOU is issued; and
When the judicial IOU is paid in cash.
Currently there is no straightforward answer to this and variables such as how the company recorded the tax credits on the balance sheet, what is the company´s current judicial position in relation to their lawsuits on the matter and the type of action filed could lead to one or another interpretation. A baseline view would be in favour of having corporate income tax due only upon the moment when there is the request before the RFB for a proof of claim (habilitação de crédito).
However, the RFB might have a different approach (using res judicata approach) and the judiciary might have yet another approach (there are some precedents from Federal Court decisions ruling that corporate income tax should only be paid when there is an acceptance of the PER/DCOMP by the RFB), resulting in a necessary case-by-case analysis to determine the most advisable method for each company.
Lawyer, Finocchio & Ustra
Senior lawyer, Finocchio & Ustra
Partner, Finocchio & Ustra