As previously discussed, in 2017 the Brazilian Federal Supreme Court (STF) ruled that the inclusion of the state VAT (ICMS) on the social contributions on gross revenue (PIS and COFINS) taxable basis is unconstitutional.
In the case, the STF held that even though ICMS amounts are charged by the seller as part of a product’s price, the amounts will be transferred to the state treasury and therefore they will not be added to the company’s assets and will not fall within the legal concept of gross revenue, which is the taxable basis for PIS and COFINS.
Although the Brazilian Federal Revenue Service (RFB) did not duly accept the decision, the attorney general of the National Treasury ended up issuing binding opinion SEI 7698/2021/ME, accepting the outcome of the judgment, and provided guidance for the RFB to comply with the decision.
Furthermore, in 2023 the PIS and COFINS laws were amended to expressly determine that the ICMS levied on transactions should be excluded from the contributions’ taxable basis.
Nevertheless, on March 28 2024, the RFB issued COSIT Ruling 61/2024, stating its interpretation that the ICMS rate surcharge for financing the state fund for combating poverty and social inequality (FECP) should be included in the PIS and COFINS taxable basis, as such amounts do not have the same legal nature as the ICMS.
To clarify, the Brazilian Federal Constitution provides that, as a rule, ICMS revenues cannot be linked to any entity, fund, or public expense and thus must be destined for the general public budget. However, exceptionally, the states are authorised to create funds for combating poverty and social inequality, and finance it by means of the revenues arising from a surcharge of up to 2% on the ICMS rate. The FECP has been instituted by several states, each one with their own particularities and list of products to be surcharged.
In view of this, the RFB understood that as the FECP revenues are linked to a specific fund, it would not bear the same legal nature as the ICMS, as the revenues arising from this tax are destined for the general public budget. As a result, the RFB concluded that the legal provision and STF judgment – in the sense that the ICMS is not included in the PIS and COFINS taxable basis – should not apply to the FECP.
Nevertheless, this approach is highly questionable, as it disregards that the FECP is only an ICMS rate surcharge and is subject to the same rules, such as those concerning a tax-triggering event, the taxable basis, and the liable party. To this effect, the destination of the tax revenue should not be a key factor in determining the legal nature of the FECP, especially because the Brazilian Federal Constitution provides for the destination while addressing the FECP as an ICMS rate surcharge.
In any case, the RFB will likely begin to broadly impose the interpretation found in COSIT Ruling 61/2024, and controversies will arise. However, as commented before, there are strong legal arguments to challenge this interpretation.
