Brazilian government overhauls PIS and COFINS to boost tax collection
Júlio Oliveira and Gabriel Caldiron Rezende of Machado Associados discuss the measures taken by the Brazilian federal government to boost tax collection.
In the aftermath of the COVID-19 pandemic and with the recovery of economic activities, the Brazilian government is seeking to boost tax collection by implementing legal and interpretative changes to social contributions on revenues (PIS and COFINS).
PIS and COFINS regulation
PIS and COFINS have undergone several changes during the years, and thus different tax treatments apply depending on the taxpayer’s activity and/or the product sold or imported. Considering this, in 2019, the Brazilian Federal Revenue Service (RFB) issued Normative Instruction 1911/2019 to compile one set of rules based on several laws.
Seeking to improve the compilation, on December 20 2022, the RFB issued Normative Instruction 2121/2022. This revoked Normative Instruction 1911/2019, and granted some subjectivity on the applicability of PIS and COFINS laws, bringing legal certainty in some aspects, and controversies in others.
To this end, Normative Instruction 2121/2022 incorporates some interpretations of the PIS and COFINS non-cumulative credits, provided by the Administrative Tax Court based on relevant disputes. As such, it is objectively stated that the RFB accepts PIS and COFINS credits calculated, among others, on:
Amounts borne by the employer relating to the transportation voucher paid for the labour employed in the production process or provision of services, as well as the amount of expenditure on hiring a legal entity to transport the labour;
Materials and services for the disinfection and fumigation of assets used at any stage of the production of goods or provision of services;
Contracting a legal entity to supply labour to act directly in the productive sector or in the provision of services; and
Freight and insurance in the national territory when acquiring and importing goods to be used as inputs, goods for resale and fixed assets.
On the other hand, said rule brings new controversies. It states that the amount of Federal Excise Tax (IPI) levied on the acquisition of goods does not grant the right to book PIS and COFINS credits, even when the IPI is non-recoverable by the acquirer. This is a new and restrictive interpretation of the PIS and COFINS law by the RFB, as there are no legal provisions on such restriction. In addition, the Normative Instruction 1911/2019 did allow the booking of credits on the IPI amount, when non-recoverable by the acquirer.
Accordingly, although Normative Instruction 2121/2022 certainly brings some clarity on the booking of PIS and COFINS credits, reducing litigation on the matter, it also brings new controversies, by reducing the scope of such credits, even in situations previously accepted by the RFB.
PIS and COFINS on financial revenues
Since 2015, when Decree 8426/2015 was enacted, financial revenues have been subject to PIS and COFINS at a combined rate of 4.65%, with some specific transactions subject to a zero rate.
Aiming at boosting economic recovery, on December 30 2022, the federal government published Decree 11322/2022. This legislation provided for a 2.33% combined PIS and COFINS rate on financial revenues as of January 1 2023, maintaining the zero rate when applicable.
Nevertheless, in January 2023 the newly-elected president and his economics team reverted the tax reductions, by means of Decree 11374/2023, revoking Decree 11322/2022 with immediate effect.
However, the Brazilian Federal Constitution determines that the increase of PIS and COFINS will only be enforceable after 90 days of the publishing of the law. Considering this, several taxpayers have been taking matters to court, to avoid the rate increase until April 2 2023, even obtaining preliminary injunctions.
The federal government, however, has stated that it does not agree with the taxpayers’ interpretation, stating that Decree 11322/2022 did not become enforceable due to the immediate effects of Decree 11374/2023. To this end, the federal government filed Constitutionality Declaratory Action 84 on February 03 2023, with a declaration from the Brazilian Federal Supreme Court (STF) that Decree 11374/2023 is constitutional and effective.
PIS and COFINS credits calculation
As previously discussed, the STF ruled that the inclusion of the state VAT (ICMS) on the PIS and COFINS taxable basis is unconstitutional (Extraordinary Appeal 574706). To this effect, the STF concluded that, although the ICMS is charged by the seller as part of the sales price, such amounts will be transferred to the state treasury department. Therefore, these amounts will not be added to the legal entity’s assets, thus not falling within the legal concept of gross revenue, which is the taxable basis for the contributions.
Despite this decision, the RFB did not quietly accept its outcome, and issued Opinion 10/2021, in which it stated that companies subject to the PIS and COFINS non-cumulative system must exclude the ICMS from the contributions’ credits bases.
However, the Attorney General's Office of the National Treasury (PGFN) published SEI Opinion 14483/2021/ME, with comments on the effects of the decision rendered by Extraordinary Appeal 574706. The Opinion clarified that this decision by itself does not authorise the recalculation of PIS and COFINS non-cumulative credits excluding the ICMS, and that this measure would require a change in laws.
In response to the request of the RFB, on January 12 2023, the federal government published Provisional Measure 1159/2023, which amended the PIS and CONFIS laws. The government determined that the ICMS levied on the acquisition of goods will not be entitled to PIS and COFINS credits. In practical terms, for the calculation of credits on the acquisition value of goods, the ICMS amount levied must be excluded, reducing the amount of credit as per the current rule.
This new rule will be effective as of May 1 2023. In any case, the Provisional Measure must be subjected to the scrutiny of the National Congress and may or may not be confirmed and converted into law.