The multiple rates constitutional rules concerning consumption taxation in Brazil is an instrument to mitigate the tendency to regressivity of these taxes and, therefore, an instrument for the realisation of the ability to pay principle.
The multiple rates rules apply to ICMS (state level VAT-like tax) and IPI (federal VAT-like tax). The multiple rates regarding the IPI are mandatory, whereas, concerning the ICMS they are under legislative discretion. In the case of ICMS, if the legislator opts for a multiple rates taxation, the goods’ essentiality is the only possible criterion for the definition of rates.
In Brazil, the Federal Constitution prescribes that the ICMS can be selective, according to the essentiality of the goods and services. Therefore, in order to mitigate the tendency to regressivity, it is logical and rational that the most essential products should have lower rates than the superfluous ones.
However, some member states adopted rates higher than the general internal rate (usually 18%) to tax electric energy and telecommunication services (which are clearly essential goods and services), disregarding the constitutional rule of selectivity. Furthermore, in some states, like Amazonas, electric energy rates are the same as the ones applied to luxury cars, yachts and other recreation vessels or aircraft, weapons and ammunition and even jewellery items.
If the purpose of the selectivity is to reduce the regressivity of the consumption taxes, it is logical that the essential products should have rates, at least, equal to other non-essential products, but never superior. Due to this scenario, taxpayers filed lawsuits challenging the difference between the rates, specially concerning this issue.
Increased ICMS
On June 11 2021, the Brazilian Supreme Court (STF) started again (the trial had been interrupted in 2020) to decide the Extraordinary Appeal (RE) No. 714,139 that discusses the increased ICMS levied on electric energy and telecommunication services in the State of Santa Catarina, in total disagreement with the constitutional principles that govern de ICMS. The trial returned on November 12 2021, and, until now, its counts three votes for the taxpayer and two dissenting votes.
The reporter of RE No. 714,139, Minister Marco Aurélio Mello, understood that the selectivity applied to the ICMS levied over electric energy and telecommunication services violate the constitutional principles, by determining higher rates to essential goods and services than general products. Ministers Dias Toffoli and Carmen LuciaAntunes Rocha voted agreeing with him.
Conversely, Ministers Gilmar Mendes and Alexandre de Moraes voted a dissenting opinion. On November 12 2021, Minister Gilmar Mendes, following Alexandre de Moraes’ vote, understood that only the telecommunication services’ rate is unconstitutional, because in the specific case of Santa Catarina, there is a reduced rate for electric energy for some groups, like home use and agricultural production with a low consumption of energy. So, the dissenting vote understood that, for the other groups, the higher rate is constitutional since it encourages the rational use of electric energy.
Although, the dissenting vote does not solve the problem, because in other states, like Amazonas, Pará and Paraná there is not a reduced rate for some groups. In fact, in the state of Amazonas, the electric energy consumed by home use and rural production is taxed by a 25% rate and the telephone communication services at a 30% rate, the two highest rates of that state’s legislation.
Furthermore, it is noteworthy that the essentiality to which the constitutional text refers is a criterion of the burden-sharing function of tax rules (fiscal or revenue function). In this way, the essentiality must be according with tax constitutional principles, like the ability to pay, which in consumption taxation is objectively assessable by the products or the services consumed (or their essentiality, to be more precise).
In other words, the essentiality is not a criterion for driving economic agents stimulating them to certain behaviours or not, rather a criterion for assessing the ability to pay in the consumption of income. As aforementioned, it is an instrument of burden-sharing (or Lastenausteilungen, as it is deeply and often discussed in the German literature). For this reason, electric energy rates shall not be higher than the general rate as a justification to discourage the excess of electric energy consumption, for example.
In this sense, the increased rates of ICMS levied on electricity and telecommunication services, violate the ability to pay principle and the specific rule that prescribes that in case ICMS has multiple rates, they must be set according to the essentiality of goods and services not, since they could, otherwise, overburden an essential good consumed by the less favored classes. This rule prescribes only this criterion, not any other, like the ones based on behavioural policy. The reason for this is quite simple.
To enable member states’ legislators to choose among fiscal (ability to pay) criteria or economic-behavioural criteria, the constitution could simply do what it did concerning the majority of the other taxes: say nothing. If the constitutional wording prescribes a criterion (essentiality) it shall not be interpreted in a way that implies an effect that would exist even in the silence of the Constitutional Assembly.
In this way, although the voting still has three votes against the higher rates and two dissenting votes, the expectation is that the Supreme Court recognises the clear incompatibility between the general rate and the rate applied to electric energy and telecommunication services. Indeed, these rates are in total disagreement with the Federal Constitution and overburden the less favoured class, increasing the regressivity of the ICMS.
Paulo Victor Vieira da Rocha
Partner, VRBF Advogados
Professor, Instituto Brasileiro de Direito Tributário, State of Amazonas University, São Paulo University (temporary)
E: paulo.vieiradarocha@vrbf.com.br
Marina da Silva Fernandes
Associate, VRBF Advogados
