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The displeasures of the greatest tax dispute in Brazil

Taxpayers are still waiting for clarity in one of Brazil’s most important tax disputes, which cost the federal government around BRL 250 billion ($68 billion) when it was concluded in March 2017.

After more than 15 years of a judicial wrangling, the majority of individual cases are still waiting for a definitive decision.

The taxpayer (Imcopa Importação, Exportação e Indústria Óleos)  intended to obtain a decision ensuring the exclusion of ICMS from the calculation base of PIS/COFINS (taxes on the revenue obtained from the sale of goods), which was assured by the Federal Supreme Court for understanding that the tax contained in the price of the goods (ICMS) could not be considered the taxpayer’s revenue, since it already had a proper destination: the Treasury itself.

In spite of acknowledging the taxpayer’s intention, the Treasury has been seeking to limit the effectiveness of this decision to a future and uncertain moment. This appeal is still pending judgment, and there are also appeals pending in individual cases.

The expectation is that this last appeal presented in the leading case will be unsuccessul, at least, not in the extension craved by tax authorities.

So much so that the local courts have already been applying the Federal Supreme Court’s favourable interpretation to individual lawsuits, which have remained suspended for years waiting for a definition in the leading case.

What was seen in the last year in these individual cases was a number of appeals, with the clear purpose of postponing or avoiding the final and unappealable decision of the individual lawsuits. This is an essential step toward enabling the release of judicial deposits carried out during the course of the lawsuits and the recovery of the amounts collected in the past.

The judiciary, in turn, has been firm in rejecting tax authorities’ delaying appeals, which ended up allowing the individual cases to start becoming final and unappealable.

To mitigate the impact of the loss, however, tax authorities have been trying to raise subsidiary theses that would reduce the amount of the credits in favour of the taxpayers. In our view, these theses do not subsist an accurate legal analysis and the judiciary is therefore likely to reject them.

As if the subsidiary theses were not enough, the Federal Government, concerned with the imminent drop of collections by force of the compensations that should start to take place soon, issued Law No. 13.670/2018 bringing – among others – two relevant restrictions to compensation on tax matters. The first is a veto to compensation of the monthly estimates of tax incurring on profit (ensuring the Treasury a minimum monthly collection). The second is a veto to compensation (by means of imposing stricter sanctions) in the event of a creditor having its liquidity under inspection proceedings.

To clarify the impact of this change, it is necessary to mention the complexity of the old procedure. After the favourable March 2017 decision became final and unappealable, the taxpayer would take to the Treasury’s attention information proving the definiteness of the judicial decision and, with that, the taxpayer would obtain preliminary authorisation to start the compensation. This would take up to five years to be analysed by the tax authorities, which could either accept it or not (whether by adopting an erroneous procedure or even by insufficiency of credit), an event which would give rise to a new administrative and/or legal discussion to validate the adopted procedure (compensation).

In cases that involve such a large amount, it is expected that it will not be possible to compensate taxpayers in a single installment – normally there are months and various federal taxes settled with the use of the credit originated in a single lawsuit.

Therefore, with the legislative change, if just after the first compensation the inspection for ascertaining the taxpayer’s liquidity is installed, the compensation of all the other installments shall be suspended until the ascertaining of said liquidity is concluded – which could take years, especially if the tax authorities take this opportunity to raise subsidiary theses regarding the composition of the assigned credit.

So, in spite of the countless years in which this theme was discussed and the final favourable decision in the leading case given by the Federal Supreme Court, it shall be no surprise if we face a new judicial discussion in the next few years to give effectiveness to the decision that acknowledges the taxpayer’s right.

We believe that this new obstacle imposed by the federal government will delay taxpayers being able to exercise their rights, but we envision solid arguments in their favour that can enable the delivery of decisions that remove said obstacles and ensure – even if by means of injunctions – the effectiveness of the final and unappealable court decisions.

This article was prepared by Gabriela Lemos ( of Mattos Filho.

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