This content is from: Brazil

Brazilian Supreme Court ruling on the exclusion of ICMS from PIS/COFINS

Leandro Lucon, Juliana Camargo Amaro Fávaro and Rodrigo da Cunha Ferreira of Finocchio & Ustra discuss a landmark decision by the Brazilian Supreme Court where ICMS is excluded from PIS/COFINS.

On May 13 2021, the Brazilian Supreme Court (STF) concluded the trial of one of the largest tax discussions in Brazil relating to the exclusion of ICMS (state sales tax) in the PIS/COFINS (federal contribution on total revenue) tax base (as discussed in Challenges and complexities of the Brazilian tax system).

March 2017 ruling 

After more than 20 years of intense judicial debate, on March 15 2017, the STF’s Justices started to analyse and decide on the issue and adopted a favourable understanding for taxpayers, recognising and ruling, at that time, that ICMS should be excluded from the PIS/COFINS (federal contribution levied on revenue) taxable basis, as it is not characterised as gross revenues.

It so happens that, shortly after this decision was passed, the Office of the General Counsel for the Federal Treasury (PGFN), in order to reduce the economic impact of the decision, filed a motion for clarification (Embargos de Declaração) claiming that the decision omitted the portion of the ICMS to be excluded from the calculation of PIS/COFINS (the amount effectively paid of ICMS or the amount indicated in the sales invoice).

The PGFN’s view was that companies would only be entitled to exclude the ICMS actually paid, that is, the amount of tax calculated by the company after discounting credits related to the inputs purchased and services taken in the production process (ICMS works as a non-cumulative tax, i.e. taxpayers recognise credits that offset debts). 

On the other hand, taxpayers argued that the ICMS to be excluded from PIS/COFINS is the total amount indicated in sales invoice, usually higher than the ICMS effectively paid.

For example, according to the calculation methodology adopted by PGFN, companies that accrual ICMS accumulate credits, due to the characteristics of their operation (e.g. sales that are exempt from ICMS, or that have a reduced output rate), would be unable to exclude any amount from the PIS/COFINS calculation basis, since they would never have ‘ICMS to pay’.

In addition, in the same motion, PGFN requested the application of the so-called ‘modulation of temporal effects’ to the March 2017 ruling, aiming at having the decision issued on March 15 2017 to only become binding and applicable as from the judgment of the motion, which, in practical terms, would prevent the recovery of the extremely high amounts unduly collected by companies during more than two decades of judicial debate.

It is worth mentioning that, after the presentation of the motion by PGFN, and taking advantage of the delay of the STF in concluding the judgment of the leading case, the Federal Revenue of Brazil issued normative instructions which restricted the right of taxpayers who had already obtained final and unappealable rulings, allowing only the recovery of the amounts effectively paid as ICMS from the PIS/COFINS’ calculation basis, even if other courts of the judiciary branch expressly recognised the right to exclusion of the ICMS indicated in the invoices.

May 2021 ruling

At the trial held on May 13 2021 the Supreme Court examined and ruled on the two requests made by PGFN, bringing more legal certainty for taxpayers.

In this judgment, the Justice-Rapporteur's understanding (Hon. Justice Carmen Lúcia) prevailed in the sense that the ICMS to be excluded from PIS/COFINS is the one indicated in the sales invoice and not the amount actually collected or paid by the company, therefore the Brazilian Supreme Court upheld the rule of law.

With regard to the temporal modulation of effects, the Supreme Court restricted the effects of the decision as from March 15 2017 (i.e. the decision is only binding and applicable to taxable events as from March 2017), except, however, for companies that had filed lawsuits or administrative requests before that date, for whom it is assured the right to recover and amounts unduly paid in the five years prior to the respective filing date.

Therefore, although the final decision has not yet been drafted and published by the STF, it is possible to observe that the decision will have different impacts on companies located in Brazil that seek recognition of the right to refund or compensate the amounts unduly paid due to the requirement inclusion of ICMS in the calculation of PIS and COFINS, depending on their specific situation.

Company situation

Impact of the STF decision

Companies that filed lawsuits prior to March 15 2017.

Companies may exclude the value of the ICMS indicated in the sales invoice from the calculation of PIS/COFINS, as well as recover the amounts unduly paid since the five years preceding the filing of the lawsuit.

Companies that filed lawsuits after March 15 2017and there was no final decision (lawsuit in progress).

Companies may exclude the value of the ICMS indicated in the sales invoice from the calculation of PIS/COFINS, but onlyrecover overpaid amounts paid as from March 15 2017.

For those who filed a lawsuit after March 15 2017 and have already been finalised (res judicata) ensuring the refund of the last five years prior to filing.

Hon. Justice Carmen Lúcia's decision does not clarify this situation. However, under the terms of the Federal Constitution, to overturn a final and unappealable judicial decision, PGFN will have to file another judicial measure (i.e. a motion for relief from judgment), which has specific requirements and a two-year deadline.

Finally, until the decision is formally published, some doubts will remain, especially for companies that either (i) filed the lawsuit after March 15 2017; or (ii) did not file a lawsuit and whether they can recover overpaid amounts directly through administrative claims and procedures. 

The decision of the Supreme Federal Court is in line with the expectations of Brazilian tax lawyers and scholars, that is, it maintained the exclusion of the ICMS indicated in the sales invoice and at least preserved the right of those taxpayers who had already filed a lawsuit before the trial.

Leandro Lucon
Partner, Finocchio & Ustra 
Juliana Camargo Amaro Fávaro
Head of tax litigation, Finocchio & Ustra 
Rodrigo da Cunha Ferreira
Head of tax litigation, Finocchio & Ustra 

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