On July 6 2023, the Lower House of Representatives approved a Brazilian tax reform by approving Constitutional Amendment Bill (PEC) No. 45/2019. The tax reform focuses on goods and services taxation, especially on the replacement of current consumption taxes by a dual VAT (CBS - Federal VAT and IBS - States and Municipalities VAT). Hereafter, we are going to examine a specific provision of PEC 45 which limits VAT compensation. This provision changes the scenario previously settled by the Superior Court of Justice (STJ) and will drastically jeopardise the constitutional principle of non-cascading taxation, according to which amounts paid in previous transactions may be credited in following ones.
According to Article 156-A, paragraph 5, a complementary law may limit the compensation of VAT when there is no proof of the effective payment by the supplier (of goods or services) in the previous stage. It means the acquirer of a good or service can only take a credit of the tax invoiced in the previous steps upon verification of its previous payment by the supplier.
The problem is that there are no mechanisms to allow the acquirer to hold that level of information about the supplier’s tax payment. Thus, this requirement is excessive, especially amid a tax reform that purports to establish a modern VAT: simple, with a broad basis of calculation, efficient and with full right to credit.
Aware of this issue, experts on the reform recommended that this limitation could only apply when the acquirer is sure that the supplier has duly paid its VAT. Based on this recommendation, two conditions, known as “split-payment”, were added to the provision. The first is that the credit can be conditioned to tax payment when the acquirer can collect the tax itself. The second solution is when the collection of the tax occurs in the financial settlement of the operation. Yet, the problem does not seem to be solved.
Although the tax reform revived the issue, the discussion is not new, having been analysed by Administrative Tax Courts of member states like Sao Paulo and Minas Gerais and by the STJ in 2010. As evidenced, the provision added to the PEC goes against principle of legal certainty and non-cascading taxation, which guided the STJ’s decision.
Administrative and judicial decisions
In some member states, taxpayers used to gain credits through simulated transactions to reduce the amount of tax due. When tax administrations identified the fraudulent documentation, it declared the taxpayer's “tax disreputability” (inidoneidade fiscal). From then, all the transactions carried out by this taxpayer were disregarded and all tax documents issued by them were considered nullified.
For instance, in the State of Sao Paulo, other taxpayers who transacted with the “disreputable taxpayer” were also audited under an absolute presumption that all transactions registered by between them were simulated. Further, considering that the transactions were simulated, taxpayers who acquired goods or services from the fraudulent companies had all the credits of the previous transactions nullified. However, by this point (when the fraudulent taxpayer was identified), these acquirers had already taken these credits or offset the tax.
The Administrative Court of Sao Paulo analysed several cases on this matter. As a rule, the court assumed that the acquirer was equally fraudulent and that it was his burden to prove that he:
Carried out the operation;
Paid the price; and
Received the goods.
In one of the decisions, for example, the court also stated that the acquirer "could have sought from the tax authority information about his supplier”.
Finally, in 2010, the STJ analysed this matter (Recurso Especial No. 1,148,444/MG). In short, the STJ declared the credit must be granted to “good faith” taxpayers who can prove that the transaction really occurred. Thus, the taxpayer – whose good faith is assumed – has the burden of proof concerning the actual occurrence of the transactions.
It seems that the court's conclusion is based on a mistaken premise that a bona fide taxpayer would potentially take part in a fraud based on simulated transactions. However, logically, those who are in good faith could not, in good faith, simulate transactions and, thus, should never face the burden of proving that the reported transactions had took place. Otherwise, they are presumed criminals who face the burden of proving they did not commit fraud.
Essentially, the court means that the taxpayer's good faith is only presumed after demonstrating that the transactions had really occurred. So, if there is a sign that the transaction could not have occurred, a presumption is construed, according to which the transaction had not occurred. In case this presumption of non-occurrence is overridden, and a new one is construed, then the taxpayer’s good faith is assumed. In any case, the STJ’s decision, in practical terms, has denied tax administrators the practice of setting an absolute presumption of non-occurrence of transactions. It has also construed a presumption of good faith, to be applicable if the taxpayers proves that the transactions have really taken place. Therefore, there was an advance in relation to the former scenario, granting the taxpayer more safety.
Commentaries on the provision included in PEC 45/19
The provision included in PEC 45/19 authorised a Complementary Law Act (a specific type of legislative act made by Parliament) to outline situations in which using the VAT credit would be conditional to the verification of the effective payment in the previous stages. Notably, the provision in question goes against principles that guide the STJ’s decisions: despite a presumption of good faith, it adds more proof to grant the tax credit.
It is unsurprising that this article was the subject of plenty of criticism and concern. The Lower House Working Group (WG) prepared a report and highlighted that the right to credits should be guaranteed to the acquirer, regardless of the proof of payment by the supplier. The Group added that conditioning the credit to the payment would only be appropriate if there were enough mechanisms to make sure that the acquirer could control this information. For example, this could be via the implementation of an instrument that, at the time of payment, identified it and sent this information to the administration and acquirer. In fact, according to a report made by the lower house, this provision stemmed from the belief that an instrument like this would be implemented.
