Brazil: ICMS tax reform gets closer but war is still not settled

Those familiar with the Brazilian ICMS tax war situation of the past 25 years, know that our Federal Constitution provides that only those benefits that have been the subject of an agreement signed by all the states in the CONFAZ (Council Of States Representatives, with particular competences) are valid.

Even so, the states never hesitate to grant ICMS benefits without this agreement and this has been causing repeated initiatives of the local authorities to recover losses in this situation, not only in relation to interstate transactions, but also particularly in connection with concerns of the investors in Brazilian companies that benefit from those incentives, with regards to the reliability.

As the ICMS paid on the acquisition of a certain good or service is generally a tax credit to be offset against the tax due in the subsequent transaction, companies that buy their inputs from other companies located in the states that have benefits are normally assessed for the excess of credits that were the objects of the benefit.

On the other hand, companies that benefit from ICMS incentives in the basis aforementioned have to face the risk of the benefits being declared unconstitutional, with retroactive effects, meaning that all the tax discounts arising from the benefits would have to be collected.

This chaotic scenario has been getting worse for the past three years, with repeated Declarations of Unconstitutionality of certain benefits by the Brazilian Supreme Court. The Public Attorney initiatives against the benefits and the repeated ICMS tax reform Bills that have tried to address that problem, have not resulted in any concrete solution.

On July 30 2014, one more step was taken to reduce the impacts of the tax war, with an agreement signed by 21 states (out of 27) that allows an amnesty for tax debts arising from incentives that have not been the subject of CONFAZ, under certain conditions to the complied by states, Senate, Congress; extends benefits for 15 years as a transition; and allows other states that do not grant those benefits to do so, providing the rates are regressive.

The solutions for the potential liabilities are not close, though, as many challenges will have to be faced. Not only do the remaining states have to participate in this agreement, but also the compliance of other conditions by the States, Congress and Senate are still to be implemented. The end of tax war is still something to be pursued.

Renata Correia Cubas (rcorreia@mattosfilho.com.br) is a tax partner of Mattos Filho Veiga Filho Marrey jr e Quiroga, the principal Brazilian correspondents of the Tax Disputes channel on www.internationaltaxreview.com

Share this article