Supreme Court confirms state VAT is excluded from calculation of the PIS/COFINS tax base
Brazil’s Supreme Court (STF) issued a decision on 13 May 2021 that lays to rest a nearly 20-year old debate in the national courts as to whether VAT levied by the Brazilian states on the sale of goods (ICMS) should be included in the tax base of two federal taxes levied on gross revenue (i.e., Contribution to the Social Integration Program (PIS) and Contribution for Social Security Funding (COFINS)). In a taxpayer-favourable decision, the court ruled that the amount of ICMS indicated on a sales invoice should be excluded in calculating the PIS/COFINS tax base, and the court specifically limited the temporal effects of its decision. It is estimated that the Brazilian public treasury may have to refund approximately BRL 250 billion (approximately USD 50 billion) of unduly paid PIS/COFINS to taxpayers as a result of the STF decision.
In Brazil, the final price of goods and services is calculated using a “gross-up” methodology. As a result, ICMS is included in the final price of goods and some services (transportation and telecommunications services), and was also included in the calculation of the PIS and COFINS, both of which are collected under a “non-cumulative” system (similar to VAT, i.e., credits on purchases as an offset against VAT charged on sales) and whose general rates are 1.65% and 7.6%, respectively.
In a decision issued on 15 March 2017, the STF held that ICMS should not be included in the calculation of PIS/COFINS contributions. As ICMS is levied on the sale of goods and collected by the Brazilian tax authorities, it cannot be part of a taxpayer’s gross revenue. The court stated that, since the amount collected as ICMS levied on the circulation of goods is not part of a taxpayer’s equity, it cannot be included in the calculation of PIS/COFINS, which are intended to finance unemployment insurance and social security. According to the court, including ICMS in the taxable base for PIS/COFINS purposes was unconstitutional. The STF decision impacted many Brazilian companies, some of which filed lawsuits.
It is worth noting that, although the STF decision was favourable to taxpayers, certain aspects of the dispute were not resolved, such as the amount of ICMS to be excluded from the PIS/COFINS taxable bases (i.e., the amount in the sales invoice or the amount the taxpayer actually paid after taking credits for the purchase of goods and services in its monthly calculation), whether the court’s decision applies retroactively and, if so, to what extent. The public treasury requested that the STF clarify these issues.
Ruling of the STF
In the May 2021 decision, the STF confirmed that the amount of ICMS included in the sales invoice is the correct amount to be excluded from the PIS/COFINS taxable base. ICMS is not part of a taxpayer’s revenue and, therefore, the portion of PIS/COFINS levied on ICMS (grossed up and included in the final price) may be refunded to taxpayers, depending on whether and when a taxpayer filed a lawsuit to obtain a refund. The STF decision generally applies as follows:
- Taxpayers that filed a lawsuit before 15 March 2017 may recover unduly paid amounts for the five-year period before the lawsuit was filed (the statute of limitations period in Brazil is five years); and
- Taxpayers that filed a lawsuit after 15 March 2017 or taxpayers that did not file a lawsuit may recover unduly paid amounts relating to taxable events taking place on or after that date.
It is the tax authorities' position that, based on the court’s finding of unconstitutionality, if production chains are considered as a whole, it seems clear that the exclusion of ICMS indicated on an invoice should be applied to both sale and purchase transactions. In other words, the effect of ICMS, PIS and COFINS on a purchase made by Company A actually represents the reciprocal ICMS, PIS and COFIN of the sale made by Company B. Looked at in this way, it should not be possible for the tax authorities to refund the PIS and COFINS/ICMS excess to Company B if this amount will be a credit in the hands of Company A for purpose of its PIS and COFINS tax calculation (this would entail a double impact on the fisc). The debate as to how this issue should be resolved continues.
Taxpayers that filed a lawsuit before 15 March 2017 can claim amounts receivable for five years before the filing date, taxpayers that filed a lawsuit after 15 March 2017 or that did not file a lawsuit can claim a refund for PIS and COFINS levied on ICMS amounts included on its tax base after that date. It should be noted that the five-year statute of limitations could impact the right of companies that have not filed a lawsuit. As the STF decision will affect all PIS and COFINS taxpayers, they should review their situations carefully to determine whether they are entitled to remove the ICMS from the calculation of the PIS/COFINS tax base and/or whether they are entitled to a refund of unduly paid tax.
Edilson Muniz da Silva