The Brazilian state VAT (ICMS) is a tax on transactions involving goods. For decades, there have been debates concerning the triggering events for ICMS. On the one hand, states tend to argue that the tax should be levied upon simple shipments of goods (i.e., outbound from a taxpayer's establishment); on the other hand, taxpayers argue that ICMS should only be levied on commercial transactions that result in the transfer of goods ownership.
As an example, the levy of ICMS on temporary imports of goods (i.e., when there is no transfer of ownership, as the goods are to be returned abroad) was broadly debated, until the Brazilian Federal Supreme Court (STF) decided that ICMS on imports will only be triggered if ownership of the goods is transferred to the Brazilian party.
Another aspect of this debate – which is the topic of this article – was the levy of ICMS on a simple movement of goods between branches of a company. Taxpayers point out that the movement of goods between branches does not result in any change of ownership of the goods, as they are only circulating within a taxpayer, while the states argue that as the goods are being shipped from a taxpayer’s establishment (outbound), ICMS should be levied.
Declaratory Action of Constitutionality 49 brings clarity – and fresh concerns
The above matter was discussed for years, but finally, in 2021, the STF handed down Declaratory Action of Constitutionality 49, in which it decided in favour of the taxpayers, stating that the movement of goods between a taxpayer’s establishments does not trigger ICMS, even if interstate, and thus the tax will only be levied if the transaction results in a transfer of the ownership of the goods to another party.
Although the decision brought clarification, it also prompted major concerns, especially regarding the effect on ICMS credits.
ICMS is a non-cumulative tax, and thus the ICMS levied on a tax acquisition may be booked as a credit for offsetting against the ICMS levied on the following transactions. Non-taxed transactions do not grant credits to the receiver of the goods and, as a rule, demand the cancellation of credits booked in relation to such non-taxed goods.
Considering this, a motion to clarify the position was filed, and the STF evaluated the matter of ICMS credits.
The STF expressed the view that a movement of goods does not impair any credits previously booked, and that a taxpayer has the right to transfer such credits between its establishments when shipping the goods. Furthermore, the STF provided that the procedures for transferring such credits must be regulated.
New regulations under ICMS Agreement 178/2023
Aiming to regulate the matter, the states issued ICMS Agreement 178/2023, which, in summary, determined that in an interstate shipment of goods between establishments of the same ownership, the transfer of ICMS credit from the sender to the destination is mandatory. Such a transfer of credits is made by applying the ICMS rates on the goods’ acquisition or manufacturing cost.
In practical terms, ICMS Agreement 178/2023 results in the same effect as the ICMS levy on the movement of goods between establishments of one company. Also, it provides that the transfer of credits is mandatory, which appears to go against the STF decision that mentions such transfers as a right of the taxpayer, and thus, in theory, it could keep the relevant credits in the shipper’s establishment.
Supplementary Law 204/2023 regulates transfers of credits
Supplementary Law 204/2023 was subsequently enacted to legally determine that:
The shipment of goods between establishments of one company is not subject to ICMS;
ICMS credits are maintained in favour of taxpayers, and on interstate transactions they will be guaranteed by (i) the state of destination, up to the applicable interstate rate (4%, 7%, or 12%) and (ii) the state of origin, if the credit is higher than the transferred amount (e.g., in the event of an acquisition at 18% and a transfer at 12%, 6% will be maintained at the origin); and
Alternatively to a transfer of credits, the taxpayer may choose to equalise the shipment of goods to a taxed transaction.
Although Supplementary Law 204/2023 is an adequate legal instrument to regulate the transfer of credits and the law does not, in any instance, determine that a transfer of credits is mandatory, the states have been demanding it, based on ICMS Agreement 178/2023.
Based on the states’ interpretation, Supplementary Law 204/2023 demands transfers of credits on interstate shipments of goods, and ICMS Agreement 178/2023 only regulates the relevant procedures.
Nevertheless, the author believes that the states’ interpretation is unlawful and may be challenged, especially because of the following factors:
When deciding on the matter, the STF determined that the transfer of credits is a right of the taxpayer, and not an obligation. Accordingly, it recognised that an establishment may ship goods to another establishment of the same company and not transfer the credits; instead, accumulating them.
Supplementary Law 204/2023 does not have any provisions expressly demanding a transfer of credits but, rather, limits the amount of credits to be transferred on interstate shipments of goods.
Supplementary Law 204/2023 regulates transfers of credits by allowing, according to the choice of the taxpayer, the equalisation of the shipment to a taxed transaction.
The future of the debate, with a silver lining
Considering that the discussion revolves around interpreting the extension of the STF’s decision in Declaratory Action of Constitutionality 49, it is expected that the matter will continue to be widely debated in the years to come.
The silver lining is that this will be an issue of the past once ICMS is brought to an end by the full implementation of the consumption tax reform.
