08/10/24
The VAT Sales Tax (“ICMS”) is a tax under the jurisdiction of the Brazilian States and the Federal District, levied on the circulation of goods and on the provision of intermunicipal transportation and communication services. Its calculation regime is governed by non-cumulativeness, which means that the tax amount will be calculated by offsetting the outstanding ICMS in previous transactions: through a setoff of credits and debits, the taxpayer appropriates the tax collected in the production chain and pays only the difference in ICMS incurred on the transaction, to avoid cascading effects and ensure tax neutrality.
Considering the non-cumulativeness directive and the possibility of appropriating the ICMS value collected in previous transactions, States and the Federal District often grant presumed tax credits, which consist of granting a percentage or fixed amount to reduce the tax burden of the operation. Essentially, presumed ICMS credits are a state fiscal policy instrument that, on one hand, establishes a special tax regime for beneficiary taxpayers and, on the other hand, attracts businesses and companies with the aim of promoting regional development, job creation, income distribution, among others.
Due to the economic and financial repercussions arising from the granting of presumed ICMS credits, the Federal Union has long adopted the position that the tax credits are revenues earned by taxpayers and, therefore, constitute their operating result and must be subject to taxation under Corporate Income Tax (“IRPJ”), Social Contribution on Net Profit (“CSLL”), Profit Participation Program (“PIS”) Contribution, and Tax for Social Security Financing (“COFINS”). In the reasoning of the Brazilian Federal Revenue Service, presumed ICMS credits represent a kind of aid from the State Public Administration to the taxpayer, configuring revenues of the governmental subsidy type, originating from tax incentives.
Although it is undeniable that the granting of presumed ICMS credits affects the cash flow and expenses incurred by beneficiary companies, the incidence of federal taxes (i.e., IRPJ, CSLL, PIS, and COFINS) must be interpreted considering the principles and other rules of the Brazilian tax system. In this context, the Brazilian Federal Constitution grants autonomy to the States and the Federal District to establish their fiscal policies, which must be considered as an entrenched clause, that is, a constitutional guarantee that should not be altered by new laws or restricted by Public Authorities.
This jurisdictional conflict between the Federal Government and the States/Federal District did not go unnoticed by taxpayers, who sought the Judiciary to dismiss the requirement of IRPJ and CSLL, PIS, and COFINS on presumed ICMS credits. After extensive debate, the Higher Courts expressed their intention to settle the controversy. Or, at least, that was the expected.
Initially, in a decision published on February 1, 2018, the Superior Court of Justice (“STJ”) held that the incidence of income taxes (i.e., IRPJ and CSLL) on the fiscal benefits of presumed ICMS credits would be illegal, as it would represent interference by the Brazilian Federal Government in the fiscal policy adopted by the States/Federal District, violating the federative pact. This is a precedent established in Divergence motions (EREsp 1,517,492/PR), which is a type of appeal aimed at unifying legal discussion that, until then, had conflicting decisions within the STJ itself. This means that the result of this jurisprudential precedent also standardizes the position of the Superior Court and must be observed by other Regional Federal Courts when judging the incidence of income taxation on presumed ICMS credits.
In the dominant interpretation of the STJ, if the requirement of IRPJ and CSLL on presumed ICMS credits were allowed, the consequence would be, indirectly, to withdraw the fiscal incentive granted, under the sovereignty of the tax competence of the States and the Federal District, and with the purpose of boosting social and economic development through the relief/reduction of the constitutionally provided tax burden.
In turn, in 2021, the Supreme Federal Court (“STF”) analyzed the incidence of PIS and COFINS on presumed ICMS credits and removed the requirement of contributions on the grounds that the amounts granted by the States do not represent revenue receipts of taxpayers or increase in assets. However, the thesis of Theme 843/STF, which will have binding effect on the Courts and other Public Bodies, is currently suspended until the judgment is resumed and finalized.
It is evident that presumed ICMS credits are a reduction of the tax burden due on the transaction, which does not constitute the triggering event for the incidence of IRPJ, CSLL, PIS, and COFINS. However, a new chapter in jurisprudence regarding the taxation of ICMS fiscal benefits has substantially modified the legal regime applicable to such instruments, including implications for the presumed tax credit modality.
In 2023, the STJ began to analyze whether other fiscal benefits of ICMS, such as exemptions and reductions in the tax basis and rate, could enjoy the same treatment established in EREsp 1,517,492/PR, as highlighted above, for presumed ICMS credits, i.e., whether other types of incentives and fiscal benefits would also be subject to exclusion from the IRPJ and CSLL tax calculation basis.
The 2023 judgment was justified by several factors: other types of fiscal benefits have particularities that differ from the granting of presumed ICMS credits; there was a specific legal provision to exclude such benefits from the tax basis of federal taxes (Article 30 of Law No. 12,973/2014 and Article 10 of Complementary Law No. 160/2017); and finally, the new analysis would have a binding effect on other Courts and Public Bodies judging individual actions involving the taxation of other fiscal benefits of ICMS.
However, before the issue was addressed by the STJ, the Federal Government publicly expressed, in press conferences of the Ministry of Treasury, its rejection of the thesis defended by taxpayers. The argument brought was essentially revenue-related, claiming that the exclusion of ICMS fiscal benefits from the tax basis of federal taxes would affect the Public Treasury and have harmful consequences for the Union’s budget.
Well then! In a controversial judgment session, held on April 26, 2023, the Court ruled that other fiscal benefits of ICMS cannot enjoy unconditional exclusion from the IRPJ and CSLL tax basis, as had been authorized for presumed ICMS credits.
For exemptions, reductions in the tax basis and rates of the tax to be excluded from the taxation of IRPJ and CSLL, the amounts should be recorded in a specific account (profit reserve account – Fiscal Incentives), and should have a specific destination, i.e., it should be proven to the Brazilian Federal Revenue Service that the resources obtained through state concessions would be used to enable the activities of companies.
Not satisfied with the resolution given by the Superior Court on Theme No. 1,182/STJ, the Federal Government decided to solve the alleged revenue loss through its own means. This is what it did with the enactment of Provisional Measure No. 1,185/2023, currently converted into Law No. 14,789/2023.
Law No. 14,789/2023 revoked all legal provisions that allowed the exclusion of ICMS fiscal benefits from the tax basis of federal taxes, with emphasis on the rules of Article 30 of Law No. 12,973/2014 and Article 10 of Complementary Law No. 160/2017. The new legal regime provides for a mechanism of tax credit that can be used to offset taxes only for fiscal incentives granted for the implementation or expansion of economic enterprises, the so-called investment subsidies.
Investment subsidies are types of governmental assistance granted by the Public Authority with the specific purpose that the taxpayer initiates or expands its operations in a certain location. In practice, Law No. 14,789/2023 restricts the use of the legal regime only to ICMS fiscal benefits that fall into this category, that is, where the fiscal grant of credits, exemption, or tax reduction exists only as a direct counterpart to the creation/expansion of the company’s economic enterprise in that region.
Furthermore, the new legislation prohibits the exclusion of benefits from the tax basis of federal taxes. From now on, the values will be taxed by IRPJ, CSLL, PIS, and COFINS, but the taxpayer may obtain a tax credit, calculated at a rate of twenty-five percent (25%) on the “product of subsidy revenues,” a concept introduced by the law that considers all revenues and expenses related to the economic enterprise. However, this treatment is conditioned on the prior qualification of the taxpayer before the Brazilian Federal Revenue Service, in an administrative procedure that will analyze all information, assets, and revenues linked to the state grant to authorize (or not) the use of the tax credit regime.
For the Brazilian Federal Revenue Service, the effectiveness of Law No. 14,789/2023 renders all pronouncements of the Judiciary regarding the taxation of ICMS fiscal benefits as of 2024 ineffective. According to Consultation Solution Cosit No. 253/2023, the new legal regime of tax credit would apply to all types of benefits and incentives of the state tax, so that presumed ICMS credits would also be subject to taxation by IRPJ, CSLL, PIS, and COFINS.
It is a fact that the changes imposed by the Federal Government are controversial. The new legal regime of tax credit disregards the materiality of the incidence of federal taxes that, as a rule, should be calculated on the actual revenue receipts and respective asset increases earned by the taxpayer. It diminishes the effects of ICMS fiscal benefits which, let us not forget, are instruments of fiscal policy for the promotion of social and regional development.
However, the main point of debate is whether Law No. 14,789/2023 could alter the consolidated tax treatment by the Higher Courts to presumed ICMS credits.
In our view, the answer to the question is negative.
Firstly, because the provisions revoked by Law No. 14,789/2023 (Article 30 of Law No. 12,973/2014 and Article 10 of Complementary Law No. 160/2017) were not applicable to the taxation of presumed ICMS credits. In the judgment of Theme No. 1,182/STJ, the STF left no doubt that the rules of accounting and destination of resources from the benefits would not be applicable to the granting of state tax credits, which would continue to observe the treatment endorsed by EREsp 1,517,492/PR.
Secondly, because the exclusion of such values from the taxable basis of IRPJ, CSLL, PIS, and COFINS is grounded on rights and guarantees provided for in the Federal Constitution, which could not be altered by an infra-constitutional law. In this perspective, Law No. 14,789/2023 is, above all, in our view, unconstitutional and should foster a new trend of litigation against the incidence of taxes on fiscal benefits and the legal regime of Law No. 14,789/2023, of tax credit.
Examples confirming this perspective are the recent interim decisions issued in favor of taxpayers, excluding presumed ICMS credits from the legal regime imposed by Law No. 14,789/2023. The judgments recognize that the mechanism of tax credit distorts the incentives granted by the States and the Federal District, infringing on tax competence and the federative pact.
It seems that the Federal Government’s attempt to annul the judgments of the Higher Courts, which excluded the incidence of federal taxes on ICMS fiscal benefits, resulted in another controversy to be resolved by the STJ, which recently indicated resources to be judged as paradigms in this new chapter of taxation of presumed ICMS credits.
While the Higher Courts do not provide their definitive answer, the legal regime of Law No. 14,789/2023 continues to limit the fiscal benefits of presumed ICMS credits. For this reason, taxpayers must seek to ensure the right to exclude presumed ICMS credits from the tax basis of federal taxes (i.e., IRPJ, CSLL, PIS, and COFINS) through their individual lawsuits.
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