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Preliminary controversies over the new rule that conditions state VAT benefits

Júlio M. de Oliveira and Fernando Telles da Silva of Machado examine the impact new rules will have on the way Brazilian states grant VAT benefits.

Amid the measures to reverse the decrease of tax collection arising from the economic crisis affecting Brazil, the Brazilian states recently issued, in a joint decision, State VAT (ICMS) Agreement 42/16, which authorises states to condition the grant and maintenance of ICMS benefits and incentives to:

·         the deposit of an amount equivalent to 10% of the benefit; or

·         the reduction of the benefit by 10% (minimum reduction).

Additionally, if the benefited entity fails to comply with such conditions for a period exceeding three months, the states may withdraw the benefits and incentives granted.

Should the state opts for the deposit, this will be calculated monthly and the amounts collected should be destined to a fund (to be set up) aiming to balance said state’s finances. The calculation should be performed in accordance with that state’s legislation (to be issued).

Regarding the fund to be set up, the Brazilian Constitution establishes that its conditions and operation is a matter reserved to Supplementary Law - article 165, paragraph 9, item II. Thus, the fact that the fund is to be established via an ICMS Agreement may give rise to taxpayers’ questionings.

Additionally, ICMS Agreement 42/16 establishes that the new benefit reductions should apply to present and future benefits. In the case of benefits that were granted under pre-established conditions and periods, our view is that such reduction is clearly unlawful, as the article 178 of the National Tax Code (CTN) clearly states that exemptions (it should be noted that benefits can be deemed a form of exemption) granted under pre-established conditions and periods of time cannot be altered.

Taxpayers should note that generally, the granting of benefits depends upon economic requirements to be met by the benefited party (ie generation of employment, established value of investments, infra structure investments, etc.). Hence, considering the bilateral nature of the granting process, if such benefits were to be reduced unilaterally by the states, the rule of good faith between parties would be totally shattered.

Another controversial issue is whether the reduction rules related to the new benefits should apply to benefits that were granted without the approval of all states. At this point we must highlight that, in accordance with Supplementary Law 24/75 and the Supreme Court’s rulings, all ICMS benefits should be decided and granted unanimously, and must be approved by the CONFAZ (a public agency that reunites all states’ tax authorities), or it will be deemed unconstitutional.

Therefore, despite Agreement 42/16 not expressly establishing that the reduction is solely applicable to benefits granted within the CONFAZ, our understanding is that the reduction should not apply to the benefits that were granted unilaterally. If that were to be the case, Agreement 42/16 would be implicitly validating benefits deemed unconstitutional.

In that sense, it must be recalled that the validation of ICMS benefits granted without the CONFAZ’s approval was already an issue pending in ICMS Agreement 70/14 (which drafted the text that established the due procedure and requirements for the validation of ICMS granted unilaterally). 

Considering the above context, some states have begun the process of incorporating the reduction authorized by ICMS Agreement 42/16 in their local laws (ie Bahia, Alagoas, Mato Grosso do Sul, and Pernambuco), and have chosen the deposit option (due to their urgent need for cash flow). Nevertheless, the regulation that will allow its implementation is still pending.

In summary, we can foresee difficulties for the benefited ICMS taxpayers, which should be aware of contradictions in the new reduction rules and, therefore, must not be intimidated by the states’ collection eagerness, as the rule of law must prevail and limit it.

Júlio M. de Oliveira ( and Fernando Telles da Silva ( are members of Machado Associados’s indirect tax team.

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