Brazilian tax authorities and taxpayers have long contested the inclusion of ICMS (a tax on the circulation of goods, interstate and intercity transportation and communication services) when calculating COFINS and PIS contributions, two complex social taxes.Tax authorities consider that the ICMS involved the revenue received by the taxpayer in the sale of merchandise and, therefore, should be included in the basis of calculation of both social taxes. On the other hand, taxpayers argued that they receive the amounts corresponding to the ICMS with the obligation to pay the state with jurisdiction to collect such tax.
The topic gained relevance in 2006 when the Federal Supreme Court indicated, for the first time, that the ICMS could not be included when calculating PIS and COFINS. The ruling then was suspended and was resumed eight years later when the court finally confirmed this. However, the court’s decision in 2006 did not have a strong impact on other judicial proceedings related to this topic, and it failed to settle the dispute between tax authorities and taxpayers.
In March 2017, the Federal Supreme Court restated its 2006 understanding – this time when ruling on a case that affected other pending lawsuits on this topic. As such, the legal controversy regarding the issue seems to be over. However, reimbursement of improperly collected amounts is still uncertain.
Brazilian tax laws guarantee restitution for unduly collected taxes, observing a five-year statute of limitations.
Nonetheless, the procedural legislation permits that the Federal Supreme Court can limit the impact of the decision or impose a timeframe on its application that it finds appropriate.
Following this latest case in March 2017, the government declared that the full refund to taxpayers of the amounts paid correspond to the disbursement of BRL 240 billion ($77.2 billion), which is an amount higher than the government fiscal deficit in recent years.
Due to this large amount, the Treasury pleaded to the court to postpone the effective date of the decision to 2018, when the public budget could be amended to reflect the reduction on the basis of calculating ICMS imposed by the Federal Supreme Court decision. This, in practice, would make it impossible to recover the excess taxes paid by taxpayers.
The Treasury's claim, however, would provoke significant inequities.
Before the March ruling, some taxpayers secured court decisions that permitted the exclusion of ICMS from the basis of calculating COFINS and PIS contributions, but others did not. This inconsistency was due to the lack of a definitive position from the Federal Supreme Court on this topic. Accordingly, removing the ICMS from the basis of calculating PIS and COFINS retroactively would never accommodate the consequences arising from the existence of conflicting court decisions on this topic.
If the exclusion of ICMS is applied to future events, the taxpayer who initiated a court proceeding in a timely manner, had a favourable decision in line with the understanding of the Federal Supreme Court and did not collect the amounts in recent years, would be required to collect such taxes. However, it does not make sense to require a taxpayer, who adopted the understanding in line with the position of the Federal Supreme Court, to collect such amounts.
On the other hand, preserving the situation of the taxpayer who has a favourable decision by exempting him from the duty to collect such amounts would hurt taxpayers that also filed lawsuits but have not obtained a favourable decision yet.
In this situation, taxpayers that had unfavourable court decisions would not be able to recover the amounts they were charged in excess. This would deny them of such amounts solely because, in their cases, the judges had rendered decisions in disagreement with the guidance now set by the Federal Supreme Court.
In order to avoid this unfairness, the Federal Supreme Court, when limiting the effects of a decision in time, typically reserves the right to recover taxes improperly collected by all those with pending lawsuits by the time the court issued its understanding on this topic.
Therefore, in case the Federal Supreme Court limits the effects of its decision in the ICMS case, it seems more reasonable to preserve the right of taxpayers who have already filed lawsuits.
In addition, the scale of the amounts involved in such reimbursements to taxpayers should not limit their rights to recover amounts unduly collected.
We have seen similar situations in the past in which taxpayers were repaid in instalments. This was the outcome of the Collor Plan, involving income tax and social contribution in 1990, and the denial of application of inflation to FGTS (Fundo de Garantia do Tempo de Serviço, or employee's dismissal fund) accounts in the beginning of the following decade.
|By Paulo Camargo Tedesco, partner at Mattos Filho in São Paulo. firstname.lastname@example.org |
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