A recent ruling by the Brazilian Supreme Court denied the appeal filled by the Federal Treasury deciding in favour of the taxpayer in an important case regarding Programa de Integração Social (PIS) and contribuição para financiamento da Seguridade Social (COFINS) (Extraordinary Appeal N. 606,107).
According to the applicable legislation (Article 25 of Complementary Law N. 87/96), taxpayers are entitled to transfer to third parties their excess balance of ICMS credits related to export transactions, contingent upon the specific regulation of each state. According to the understanding of the federal tax authorities, such amount (transferred to third parties) should be subject to PIS and COFINS, which are social contributions calculated upon a company’s turnover. In other words, the tax authorities considered that the amounts received in consideration for the ICMS credits should be subject to turnover taxes.
The main point of the discussion related to the nature of the amount received from the transfer of ICMS credits. On one hand, the Federal Treasury was alleging that the amounts would be revenue and, consequently, subject to PIS/COFINS. On the other hand, the taxpayer claimed that the transfer of ICMS credits should not trigger PIS and COFINS as such transfer was merely a mechanism to monetize tax credits.
The Supreme Court accepted the taxpayer’s argument and ruled that the amount received in consideration upon the transfer of the ICMS credits should not be subject to PIS and COFINS, as it would in fact consist of recovery of costs (which is different from the concept of revenue). In addition, the levy of PIS and COFINS would overtax the export transaction and harm the constitutional immunity rules. Grounded on these premises, Minister of the Supreme Court Rosa Weber settled the issue, concluding for the non-levy of PIS and COFINS upon the amount of the ICMS credits transferred to third parties.
The decision is still pending publication but it is indeed a very favourable precedent on this issue.