PIS and COFINS are social contributions levied on a company's total turnover. The concept of 'turnover' for PIS and COFINS has been under debate for a while. In 2017, the Brazilian Supreme Court ruled the leading case RE 574.076 in favor of taxpayers, deciding that the inclusion of ICMS in the PIS and COFINS tax basis was unconstitutional.
However, the decision is not yet final, as the National Treasury filed a Motion for Clarification - still pending analysis - requesting (i) that the unconstitutionality produces effect only after 2018 or from the judgment of the Motion for Clarification (the so-called effect modulation) and (ii) further clarification regarding the value of ICMS to be excluded from the PIS and COFINS taxable basis.
The case was ruled in favor of taxpayers in a so called general repercussion system, whereby the decisions, once final, are binding to judges - but not to the Brazilian IRS. They will only become binding to the tax authorities upon formal manifestation of the Attorney General of the National Treasury and this has not yet happened.
Given the magnitude of the decision, it was expected that the Brazilian tax authorities would take an aggressive approach and try to limit its scope and reach. In this context, the Brazilian IRS published an Internal Ruling (Clarification Nº 13/2018), which clarifies their interpretation that the amount to be excluded is the ICMS effectively collected to the State, upon the deduction of credits and potential tax incentives granted by States. In other words, the authorities understand that it is the net amount of ICMS that can be excluded from the PIS and COFINS tax basis, and not the amount indicated in the tax invoice.
For instance, in a given month where the ICMS debts were of BRL 100 and the ICMS credits of BRL 20, the authorities consider that the amount which can be deducted is only BRL 80 (i.e. 100 minus 20, which is the amount effectively collected to the State) and not the full BRL 100 charged to customers and which was effectively included in the PIS and COFINS tax basis.
Moreover, the ruling also states that:
(a) The authorities will only accept the 'full' exclusion in case the decision granted to the taxpayer effectively indicates this possibility
(b) The monthly value of ICMS collected should be segregated between the various monthly bases of contributions, according to the corresponding status code (CST) attributed to the revenues earned.
(c) The segregation of the monthly ICMS to be collected, for purposes of appropriation of the portion to be excluded in each of the calculation bases of the contributions, will be determined based proportionally to the gross revenue related to each tax treatment (CST) corresponding to the contributions and total gross revenue, earned each month.
This interpretation of the tax authorities is highly debatable, as it is contrary to the decision of the Brazilian Supreme Court and may be challenged before the judicial courts. The core of the discussion analyzed by the Supreme Court was related to concept of revenues for purposes of defining the PIS and COFINS tax basis, and it is clear that the ICMS which is included in the tax basis is the one included in the price of goods/services, regardless of any credits which may reduce the amount of ICMS effectively collected to the tax authorities. Considering the PIS/COFINS tax basis is the amount of revenue recorded from the sales of goods and such amount is directly affected by the ICMS charged on these transactions (ICMS-debit) and expressly referred in the sales invoice, it is possible to defend that the amount of ICMS credits effectively accrued by the taxpayer is irrelevant in this discussion.
It is expected that the decision in the motion for clarification will bring more clarity and security to this matter. Nevertheless, while it is not rendered, the risk of challenge will remain latent, as the Ruling clearly indicates that the authorities will challenge in case companies adopt a different position.