Carolina Romanini Miguel from Machado Associados comments on the decision of the Brazilian Federal Supreme Court which recognised the constitutionality of the inclusion of excise tax in the social contributions taxable basis.
It is well known that the Brazilian tax system is convoluted. One of the reasons for this complexity is that many taxes are included in their own taxable basis, which gives rise to many doubts and lawsuits.
On March 15 2017, the Brazilian Supreme Court (STF) concluded the judgment of binding leading case Special Appeal (Recurso Especial – RE) 574.706/PR, deciding, by a majority vote, that the inclusion of ICMS in the social contributions on revenues (PIS and COFINS) taxable basis is unconstitutional.
According to the Justices’ decision, although the ICMS is charged by the seller as part of the sales price, the corresponding amount is not considered as gross revenue (which is the PIS and COFINS taxable basis), as it is transferred to the state treasury department and not added to the legal entity’s assets.
After the judgment of the so-called ‘thesis of the century’, which took more than 10 years to be concluded, the composition of the PIS and COFINS taxable basis has been challenged by taxpayers in other lawsuits. Special Appeal 592616 addresses the unconstitutionality of the inclusion of the municipal tax on services (ISS) in the PIS and COFINS taxable basis. This case is pending decision and will probably be judged soon.
Another tax that is included in the social contributions calculation basis, and that has been challenged by the taxpayers, is the state VAT paid according to the tax substitution system (ICMS-ST), which is an advance payment system, under which a taxpayer (substitute) pays the ICMS levied on future transactions with the same goods by other resellers taxpayers (substituted).
In this case, the STF understood that there is no general repercussion (i.e. constitutional relevance beyond the individual case) on the matter, so that the discussion will not be decided by the STF, but rather by the Superior Court of Justice (STJ) as it allegedly does not involve the interpretation of constitutional rules. According to the tax authorities, only the ICMS amount levied on the transactions carried out by the substitute should not be included in the PIS and COFINS taxable basis.
The STJ has already been provoked by taxpayers into deciding about the PIS and COFINS taxable basis composition. On August 23 2021, this court decided that the social security contribution on gross revenue (CPRB) should be included in the PIS and COFINS taxable basis.
Although the STF has concluded that the inclusion of CPRB and ICMS-ST in the PIS and COFINS taxable basis is not a constitutional matter, on November 11, 2021, the court decided that the inclusion of IPI (tax on manufactured products) in the taxable basis of these social contributions is constitutional when they are paid by vehicle producers and importers under the tax substitution regime.
As set forth by Article 43 of the provisional measure 2158-35/2001, vehicles producers and importers, in relation to their sales, are liable, as substitute taxpayers, for the PIS and COFINS due by the retailers. In this case, the social contributions are calculated on the sales price fixed by the vehicle producer (substitute taxpayer).
In this case, based on Article 1, paragraph 3, item III, of Law 10833/2003, the revenue received by the substituted taxpayer (retailer) on the resale of goods is not included in the PIS and COFINS taxable basis as this amount is charged from the selling company.
According to the recent decision rendered by the STF in Extraordinary Appel 605506, it is not possible to exclude the IPI from the PIS and COFINS taxable basis due by the substitute taxpayer (producer or importer of the vehicles), because this tax amount is part of the cost of the purchased goods, as it is not recoverable by the reseller.
The Justices’ understanding is that the law excludes from the PIS and COFINS taxable basis due by the manufacturer or importer some values that are not considered as their revenue, which is the case of IPI included in the price paid by the reseller. However, when the producer acts as substitute of the reseller, the taxable basis of the social contributions must reflect the latter’s cost, which includes the IPI amount levied on the supplier’s sale.
As a result, the whole price received by the reseller is characterized as its revenue (including the IPI cost from its acquisitions) and must be considered as taxable basis of the PIS and COFINS to be paid by the producer or importer as substitute taxpayers.
As we can see, the total composition of the PIS and COFINS taxable basis is pending decisions to be rendered by the STF and STJ. Notwithstanding, these Courts seem to be seeking arguments to decide differently from the judgment of the ‘thesis of the century’, perhaps to avoid further financial losses for the federal government. Inconsistent arguments may bring uncertainty and disbelief for taxpayers.
Carolina Romanini Miguel
Partner, Machado Associados
This article was previously published in ITR. (Indirect Tax column)