Brazil Court Maintains Controversial Tax Calculation

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By Ed Taylor

Aug. 12 — Brazil's second highest appeals court has dealt companies a serious setback with its ruling on one of the country's most controversial tax issues.

The Superior Court of Justice ruled Aug. 10 that Brazil's state value-added tax (ICMS) can be included in the calculation of the federal PIS and Cofins social welfare taxes. For years, companies have been challenging this “tax on tax” policy, filing thousands of suits claiming that it is unconstitutional.

In October 2014, the Federal Supreme Court, Brazil's highest court, ruled against the inclusion of the VAT in the calculation of the other two taxes. That decision, however, applied to only one case, and since Brazil's judicial system doesn't work with binding precedents, the issue has remained alive since then (121 TMIN, 10/10/14).

In its Aug. 10 ruling, the superior court dealt with a case involving a Brazilian auto parts manufacturer, Hubner Fundicao Ltda, which was challenging the calculation of its PIS and Cofins taxes. The court's majority upheld the calculation, stressing that it has never been declared unconstitutional, which only the supreme court could do. The court also said its decision should serve as an orientation for lower courts dealing with this issue.

Questioned Ruling

Attorneys, however, questioned the ruling, arguing that even without binding precedents, the superior court should have taken into consideration the 2014 decision of the supreme court against the calculation.

The superior court “ignored the fact that the supreme court has already ruled on this matter,” attorney Mariana Zechin Rosauro of law firm Andrade Advogados told Bloomberg BNA by e-mail Aug. 12.

She added that because of the conflicting rulings, it is possible the issue will be dealt with again by the higher court before the end of the year. “This decision shows that the jurisprudence needs to be resolved by the supreme court,” she said.

There are currently two cases before the supreme court, one challenging the constitutionality of the calculation of the federal taxes and the other dealing with the same question, but in this case, the court has announced its ruling will fall in the category of “general repercussion,” which means it will serve as a precedent for lower courts to follow.

In its 2014 decision against the calculation, the supreme court's majority stated that the VAT payments don't constitute company revenues on which the PIS/Cofins taxes are charged. It isn't known when the court will rule on the constitutional request and the general repercussion case, or in what order. Attorneys representing companies challenging the calculation have said since the 2014 ruling, they are unsure whether the court will maintain its position on these two crucial cases.

Major Problem

One major problem is that the 2014 case actually began to be heard by the court in 2006. After one of the justices asked for more time to consider his vote, the final decision was delayed for eight years. When it was completed, out of the six justices who voted against the taxation calculation in 2006, five were no longer on the court and their replacements didn't vote in the final decision in 2014, leaving their positions unknown.

Another factor is the pressure being put on the court by the government, which has claimed that a ruling against the calculation, if made retroactive for 10 years, would drain public coffers to the tune of more than $80 billion. The tax department has estimated the losses at $8.5 billion a year in reduced PIS/Cofins collections.

For companies, the impact of the removal of the VAT inclusion in PIS/Cofins tax calculations has been projected by attorneys as reducing company costs by between 2 percent and 3 percent.

Attorney Anete Mair Macedo Medeiros of the law firm Gaia, Silva, Gaede and Associates represented the auto parts firm Huber in the superior court case, and told Bloomberg BNA Aug. 12 that her client will wait until the full text of the court's ruling has been released before deciding what to do next.

To contact the reporter on this story: Ed Taylor in Rio de Janeiro at

To contact the editor responsible for this story: Rita McWilliams at

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