The ruling sheds some light after many years of controversy between companies and the tax authority.
The ruling establishes that wholesalers and retailers are entitled to record PIS and Cofins credits related to the acquisition of inputs, based on the essential nature of the expense incurred by the taxpayer.
In accordance with Article 195, I, “b”, of the 1988 Federal Constitution, the PIS and Cofins are two federal social contributions levied on the receipt of revenue or earnings. With the enactment of Constitutional Amendment 42/03, the non-cumulative taxation of social contributions levied on revenues was introduced in the constitutional text.
Based on this non-cumulative principle, Article 3 of Law 10637/02, combined with Article 3 of Law 10833/03, states that, from the PIS and Cofins debts ascertained, the legal entity subject to the non-cumulative taxation method may offset credits calculated, among others, related to the acquisition of goods and services used as input in the rendering of services and in the production or manufacturing of goods or products intended for sale.
Although the legislation grants such credit rights related to the acquisition of inputs, it does not clarify the meaning of inputs for PIS and Cofins purposes. Therefore, many controversies arise between taxpayers and the Brazilian Federal Revenue Service (RFB).
The RFB’s view
In this scenario, the RFB made a restrictive interpretation of the term ‘inputs’, stating that the aforementioned laws only allows manufacturers and service providers to calculate PIS and Cofins credits on expenses with inputs, disallowing such credits for commercial taxpayers.
Furthermore, the RFB said that inputs that grant PIS and Cofins credits are those defined by the excise tax (IPI) legislation, understood as:
- when used in the manufacturing of goods intended for sale,
- the raw materials, intermediary products, packaging material, and any other goods that are altered – such as being worn, damaged or having lost physical or chemical properties, given the direct action on the product being manufactured – as long as they are not included in the company’s fixed assets; and
- the services provided by a legal entity domiciled in Brazil, applied or consumed in the manufacturing of the product.
- when used in the rendering of services,
- the goods applied or consumed in the rendering of services, if they are not included in the company’s fixed assets; and
- the services provided by a legal entity domiciled in Brazil, applied or consumed in the rendering of the service.
However, in ruling 3301-002.978 of May 2016, the CARF stated that the PIS and Cofins credits on purchases of inputs should also be included in the case of companies operating in the trade sector (wholesalers and retailers).
According to the reporting judge, the constitutional rule makes no reference to any restrictions that can prevent the non-cumulative taxation of contributions for such companies. As a result, the credits established by the lower laws are mere examples. What really matters to credit appropriation purposes is whether the cost or expense is essential to generate revenue subject to the PIS and Cofins levies.
Moreover, in accordance with the recent CARF judgments, this decision reaffirmed the court’s case law, under which the concept of inputs for PIS and Cofins credits purposes is different from the one stated in the IPI legislation. This case law states that an interpretation of input has been built for PIS and Cofins purposes, according to which the credit can be calculated in relation to expenses that are demonstrably essential for generating revenues. Following the CARF understanding, there is a specific criterion for PIS and Cofins, establishing that the goods and services considered as expenses essential for the development of the taxpayer’s corporate purpose and, consequently, for the yielding of revenue, should grant the right to book PIS and Cofins credits as inputs.
Although the decision might be re-analysed by CARF’s Superior Chamber of Tax Appeals, it is a very important precedent, as it reaffirms the court’s case law in connection with the interpretation of the term ‘input’ for PIS and Cofins credits purpose, once again driving away the RFB’s narrow understanding, and, especially, because it recognises the commercial entities’ right to calculate credits arising from the acquisition of inputs.
This article was written by Júlio M. de Oliveira (firstname.lastname@example.org), and Carolina Romanini Miguel (email@example.com), members of Machado Associados’ indirect tax team, Brazil.
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