Brazil’s Supreme Court Rejects Disputed Tax-on-Tax Calculation

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By Ed Taylor

Brazil’s highest court has given companies a victory—and forced a U-turn for the government—with a ruling that the state’s value-added tax (ICMS) can’t be included in the calculation of the federal PIS and Cofins social welfare taxes.

The Supreme Court’s March 15 ruling will reduce tax charges for companies by between 2 percent and 3 percent, attorneys estimate, and will lower government tax revenues by an estimated $8.7 billion a year, according to the government, and by $6.5 billion, according to the estimates of economists.

Everardo Maciel, former head of Brazil’s Receita Federal, the revenue department, called the decision “insane” because it will force the government to raise taxes. “The taxpayer will have to pay for this. There’s no other way,” he said at a March 15 news conference.

The far-reaching decision resolves an estimated 10,000 lawsuits brought by companies over the years to challenge the “tax on tax” policy. These suits had been on hold, waiting for the Supreme Court to resolve the question.

Retroactive Application

For the government, the situation could get worse if the court makes its decision retroactive. This could force the reimbursement of up to $80 billion in taxes paid since 2003. Officials said the government will now ask the court to restrict its ruling to the start of 2018.

In October 2014, the Supreme Court ruled against the inclusion of the ICMS in the calculation of the other two taxes. However, that decision applied to only one case, and since Brazil’s judicial system does not work with binding precedents, the issue has remained contentious.

However, the 6-4 ruling March 15 has been categorized as a ruling of “general repercussion,” which means it will serve as a precedent for lower courts to follow.

The head prosecutor of the revenue service, Fabricio Da Soller, said he will file an appeal immediately, seeking a definition of the extent of the court’s ruling. He stated that the new calculation will not take effect until a decision on the government’s appeal has been reached.

Attorneys, however, feel that companies now have the right to file suits to seek the reimbursement of PIS/Cofins tax payments that were excessive in the past based on the court’s ruling.

“The possibility of recovering past periods needs to be reviewed on a case-by-case basis. It may vary depending on whether the company has already filed its own claim or not,” said attorney Adriana Stamato of the law firm Trench Rossi Watanabe in an email to Bloomberg BNA March 16.

“For those who have not yet filed the claim, the refund is contingent on whether and how the court will modulate the effects of the decision,” she added.

Not Revenue

The court’s majority sided with companies in stating that the value-added tax doesn’t constitute revenue but instead a payment to state tax authorities. The revenue service argued that the state tax could be included in the calculation because the PIS and Cofins taxes are charged on gross revenues, which include all costs—taxes as well.

Speaking for business, Jose Augusto Coelho Fernandes, director of strategic affairs for the National Confederation of Industry, released a statement March 15 that industry “has always defended the non-incidence of one tax on another. All of the tax reform proposals in Brazil attempt to eliminate this distortion.”

Two Cases

In August 2016, Brazil’s second highest appeals court, the Superior Court of Justice, ruled against companies, accepting the inclusion of the ICMS in the calculation.

The court’s majority upheld the calculation, stressing that it had never been declared unconstitutional, which only the Supreme Court could do.

That ruling put pressure on the Supreme Court to resolve the question. At that moment, there were two cases before the court, one challenging the constitutionality of the calculation and the other dealing with the same question but without the constitutionality issue. This was the case ruled on by the court, and in its decision, the majority stated that the ruling fell in the category of “general repercussion,” which means it will serve as a precedent for lower courts to follow.

The court’s decision came as a surprise to legal experts. The 2014 case actually originally was 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, of the six justices who voted against the taxation calculation in 2006, five were no longer on the court and their replacements did not vote in the final decision in 2014, leaving their positions unknown until March 15.

Court minister Gilmar Mendes, who sided with the minority, spoke out angrily after the decision, which he warned will “implode” the Brazilian tax system. Another tax, the municipal services tax, also uses the ICMS in its calculation, and this too has been challenged by companies.

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

To contact the editor responsible for this story: Penny Sukhraj at

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