The drawback is a special customs regime created by the Brazilian government to reduce the production costs of manufactured products that will be exported. Basically, the regime allows the suspension, exemption or refund of the taxes levied on the local acquisition or import of raw materials and inputs to be applied in the production of goods to be exported.
This customs regime is mostly used in the suspension modality, in which the government grants the suspension of these taxes levied on the acquisition of raw materials and inputs:
- the Import Duty (II);
- the Excise Tax (IPI);
- the Social Contributions (PIS and COFINS); and
- the State Value-Added Tax (ICMS).
To benefit, the manufacturer must settle an export commitment of a certain amount of products that, if complied with, converts the tax suspension into an exemption.
Historically, the Brazilian Federal Revenue Service (RFB) understands that taxpayers can only comply with the export commitment if all the goods acquired with the tax suspension are used in the production of the exported products.
To this effect, a taxpayer would be considered in breach of the regime in the event of non-use of products acquired with the tax benefit in the production of the exported goods, even if the beneficiary exports the amount of products committed by using other raw materials and inputs of same quality and characteristics, acquired outside of the regime.
Accordingly, these authorities used to understand that the beneficiaries of the drawback suspension regime have to segregate their raw materials and inputs stocks, separating those acquired with the benefits of the customs regime from those acquired without it.
Even so, in practical terms, most situations have shown this segregation to be unreasonable, difficult to comply with and costly, implying absurd situations, such as the duplication of warehousing areas as a condition to segregate inputs and raw materials stocks and, eventually, the temporary interruption of the manufacturing process due to the need to import new products with the benefits of the customs regime, even if the company has the same item in its stock. These situations have led to a disincentive in using the drawback suspension regime and, in several cases, in the issuing of tax assessments, whenever the tax authorities’ understanding has not been seen to be accurate.
Considering this situation, several taxpayers have defended simplifying the drawback suspension customs regime compliance, sustaining that the regime requires only compliance with the export commitment, which may be fulfilled with products manufactured by using raw materials and inputs acquired outside of the regime. In essence, there is no need to segregate the stocks of raw materials and inputs, splitting those acquired outside of the regime, if it has the same quality and characteristics of the input acquired under the regime.
After decades of legal disputes, Law 12350, issued on December 20 2010 (arising from the conversion of Provisional Measure 497, of July 27 2010), established that compliance with the drawback suspension regime could be achieved by using other inputs of the same kind, quality and quantity, imported or purchased domestically without the benefit, in accordance with the limits and conditions to be established by the executive branch.
Accordingly, after taxpayers had waited for four years, the RFB and the Brazilian Secretariat of Foreign Trade (SECEX) enacted Joint Ordinance 1618/14 in September 2014, settling the terms and conditions for the substitution of inputs and raw materials for the drawback suspension regime compliance purpose.
Such regulation has immediate and retroactive effects on taxable events that have occurred since July 28, 2010, which is excellent news for the drawback suspension beneficiaries, as it provides great flexibility in procedures to comply with the regime in future operations, as well as settles the disputes related to events that have occurred since 2010.
However, considering that the effects of the Joint Ordinance are only retroactive from July 28 2010, it is certain that disputes relating to prior periods remain under discussion. Even so, in our view, taxpayers have strong legal arguments to further support compliance with the regime by input substitution, with good chances of success in defences against tax assessments issued on the subject in the past.
Carlos Eduardo de Arruda Navarro (firstname.lastname@example.org) and
Gabriel Caldiron Rezende (email@example.com) are members of the customs and indirect tax team of Machado Associados, the principal Brazilian correspondents for the Indirect Tax channel of www.internationaltaxreview.com.
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