Significant tax decisions in Brazil
27 November 2014
Posted by: Author: Douglas Mota
Author: Douglas Mota (Demarest)
Court decisions involving tax issues that are extremely important to taxpayers have recently been announced. In some cases the appellate decisions have not been published yet, thus preventing an in-depth analysis of their terms. However, that is no obstacle to analyzing the merits of the discussion.
This article does not purport to delve into the details of the trials or even to exhaust the alternatives that may be adopted; the intention is to shed light on these discussions so as to underline their importance.
The first of these decisions was rendered by the 1st Section of the Federal Superior Court (STJ) (formed by the First and Second Panels), which, when deciding on the Appeal Against a Divergent Decision in Special Appeals 1411749, 1384179, 1393102, 1398721, 1400759, ruled out - by a majority vote - the obligation to pay the Tax on Manufactured Products (IPI) on the exit of imported products from importers' establishments.
Even though said Court did not disclose the full content of the appellate decision, according to news reports and to the only opinion disclosed, the decision was, in short, that the IPI tax should be due on the manufacturing process, and not on resales of foreign products in the domestic market, given that the IPI is not levied on profit margins. Furthermore, there would be no point in establishing equality parameters - with national operations - to such situations.
Despite the unquestionable importance of this decision, it is also important to note that companies should analyze this precedent very carefully, as its application may have undesirable consequences, such as preventing products from being imported or even preventing customers from realizing credits from purchased inputs.
The second significant decision is that rendered by the Federal Supreme Court (STF) on an Extraordinary Appeal with recognized widespread repercussion, wherein the STF found for the unconstitutionality of preventing the deduction of unconditional discounts from the IPI tax calculation base, as the ordinary law could not provide for such limitation, given the constitutional character associated with Supplementary Laws.
Said decision results in commercial benefits for companies, as, should this understanding by adopted, they may expressly record on their invoices the unconditional discount that is being given. Should the Federal Government's understanding prevail, said discount would have to be considered as a part of the IPI tax calculation base, differently from what occurs with the PIS/COFINS contributions and the ICMS tax.
The third decision worth mentioning is that rendered by the STF on Extraordinary Appeal 540.829, which found that the Tax on Circulation of Goods (ICMS) is not due on imports under lease agreements without option to purchase, as in these cases there is no transfer of ownership.
This decision is extremely important, as it was made following the publication of Constitutional Amendment 33/11, which made all imports of assets (and not just the imports of goods) subject to the ICMS taxation, regardless of the classification of the importer.
The fourth decision refers to what became known as virtual sales or distance shopping. Upon the issuance of Protocol 21, in 2011, where the signatory States are the recipients of goods purchased from a distance, they started levying the ICMS upon the entry of the goods into their respective States and demanding the payment of that tax from the shipper of the goods.
When trying the Action for Declaration of Unconstitutionality (ADI) no. 4628, the STF justices understood that the Protocol violates the Constitution, as it has no power change the tax collection method provided for in the Federal Constitution. Moreover, this practice would lead to double taxation of the operation, given that both the State of origin and of destination would pay the allegedly-due ICMS tax.
Lastly, there is the decision referring to the levy of Service Tax (ISS) on export of services. As it is known, Article 2 of Supplementary Law 116/03 establishes that the ISS tax is not due on services exports. However, the services that are both provided and produce results in Brazil would not fit into said classification, even if the payment for said services was made by a resident of a foreign country.
In view of that, taxpayers have been facing difficulties in recognizing what exactly characterizes an export of services, as the tax authorities adopt the understanding that if the services are completed in Brazil there is no export of services.
Nevertheless, according to the understanding adopted by the 14th Public Law Chamber of the São Paulo Court of Appeals (Appeal 0038110-26.2011.8.26.0053), which granted the claim filed by a pharmaceutical company, it is practically impossible that the export of services provided in Brazil be completed abroad, as a literal interpretation of the law would require. Therefore, the correct interpretation of the rule is that, where the services are provided nationally and produce their results abroad, the ISS is not due.
No doubt, other significant decisions that might be worth mentioning have been rendered this year. However, the decisions above were chosen in view of the large number of taxpayers affected by them.
This article first appeared on mondaq.com.