ICMS Interstate Agreement No. 42/2016 was issued by the National Council of Treasury Policy (“CONFAZ”) in May 2016 to allow the States and the Federal District to (i) demand the taxpayers to perform cash deposits of an amount correspondent to, at least, 10 percent of their corresponding ICMS benefit in a public fund, or to (ii) reduce the amount of the ICMS benefit in, at least, 10 percent.

Each State may elect which of the conditions above will be applied. Also, the Interstate Agreement authorizes the enforcement of these conditions to ICMS benefits granted or that may be granted in the future.

If the tax authorities decide to limit the granting of ICMS benefits by demanding the cash deposit, a fund should be created by the State or the Federal District in order to maintain the balance of the public finances. The amount to be deposited in the fund would be calculated monthly, according to the applicable legislation.

If the taxpayers do not comply with the requirements above for three months, consecutive or not, the ICMS benefit will be definitively cancelled.

In our view, this limitation of the ICMS benefits may be challenged in Court. First, because the reduction of the ICMS benefits can only be applied by the tax authorities in specific situations (e.g. ICMS benefits that were not granted for a specific period of time and under certain conditions). Second, because there is no legal basis to demand the cash deposit in a public fund due to the granting of an ICMS benefit.

Also, it is not specified in the Interstate if these restrictions would be applicable to the ICMS benefits granted by the States without prior approval of CONFAZ (in the so-called ‘tax war’).

Although many ICMS benefits were declared unconstitutional by the Federal Supreme Court, the issue related to the ‘tax war’ was not solved yet and the implementation of these restrictions can aggravate it, depending on the procedures to be adopted by the States.

Finally, it is important to mention that said restrictions to the ICMS benefits are not immediately applicable, meaning that they will only be enforced if and when the States and the Federal District enact a legislation to regulate them.