Over 70% of Brazilian state VAT assessments - and the administrative and judicial disputes related to them - refer to credits considered undue by virtue of a wide range of situations. This has generated discussions between taxpayers and states and penalties that sometimes amount to four times the value of the tax assessed
State VAT, called ICMS, is charged on the acquisition of goods and communication and transportation services and should be a tax credit offset against the VAT due on a subsequent transaction with the same goods or services. Nevertheless many restrictions are usually imposed on the credits, generating a discussion in Brazilian Courts on their legality in certain approaches.
Based on decisions from the Superior Court of Justice (STJ), VAT taxpayers have started to see discussions emerging about undue VAT tax credits. These discussions may broaden not only the scope of analysis for investors in Brazilian companies, but may also change the management rules when it comes to the need to keep invoices, tax books and returns for a longer period than provided for in legislation.
National Tax Code provisions on the statute of limitations for VAT
According to article 150 of the National Tax Code (Code), the time period during which the Brazilian Revenue Service may assess an additional VAT tax is five years counted from the date of the fact subject to taxation. This rule should be applicable regardless of the fact that additional assessment is related to state VAT debts or credits.
This time period may be extended if tax returns are considered fraudulent and if there is a complete lack of payment of taxes. As provided for in article 173 of the Code and held by the STJ, instead of counting the five year period from the tax event, the statute of limitations should be counted from the first day of the base period following the one when tax should have been paid. That rule may result in a statute of limitations of almost six years counted from the taxable fact.
Although taxpayers have been defending the application of a five year period counted from the taxable event regardless of the conditions aforementioned, the STJ has decided that a higher period should be applied whenever there is a complete lack of payment of taxes or evidence of tax evasion, in which case the time period for the Brazilian tax authorities to claim taxes is five years counted from the first day of the following year in which the payment of taxes should have been made.
Legislation and jurisprudence have held that once (i) tax is paid and declared (even if partially paid), and (ii) taxpayers have no criminal offense or fraudulent initiative related to tax assessment, any additional VAT tax charged could no longer be assessed after five years from the taxable fact.
Unfortunate trends for taxpayers on statute of limitations for VAT credits
The rules derive from the provisions of the National Tax Code which refer to a five year period, but which calculate the period in different manners: article 150 counts from the date of the fact subject to taxation and article 173 counts from the base period following the one when tax should have been paid, which could reach almost 6 years.
Besides the guidance provided in legislation and jurisprudence Brazilian courts have lately introduced a new interpretation for the statute of limitations for VAT tax credits, based on the understanding that (i) article 150 refers to obligations and not to rights, (ii) as credits are rights, article 150 (five years) would not be applicable; (iii) credits arise only after tax calculation and payment, and article 173 should be applicable (up to six years).
Apparently, the lack of payment related to VAT credits in the cases decided by the STJ led the judges to this conclusion, based on legislation and jurisprudential precedents which always existed. But this also introduces a new conception of the legislation referring to statute of limitations.
Taxpayers should hold the position for the five year period based on the fact this new trend lacks an in-depth analysis of the VAT credits arising from an obligation of payment.
From these latest undesirable decisions, which do not provide much clarity, credits can be seen as merely rights that do not relate to obligations, when actually, VAT tax credits derive from constitutional command and are directly related to the events taxable by VAT.
To make matters worse, taxpayers should expect new costs for keeping information (for companies) and obtaining information (for investors) as well as difficulties in the production of evidence in the cases of credits that depend mainly on proof (since the companies had been keeping their tax reporting documents for the five year period).
Although from a merely legal standpoint taxpayers have a very good chance of success in this dispute, considering the lack of substance in the precedents mentioned, the new jurisprudential scenario will at least lead them to review their procedures to face and manage future tax liabilities related to VAT credits and potential investments, and most importantly follow very closely the evolution of this matter.
Renata Correia Cubas is a tax partner at Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados
