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Brazil: Brazilian Supreme Court rules ‘Total Output ICMS’ to be excluded from ‘PIS and COFINS’ tax base

July 2021

In brief

The Brazilian Supreme Federal Court (the “Court”) on May 13 concluded the judgment of the final motion on its 2017 precedent-setting decision, holding that the Brazilian State-level VAT (‘ICMS’ in Portuguese) should not be included in the tax base of the Federal Social Contributions on Gross Revenues (‘PIS and COFINS’). The Court’s latest ruling confirms the methodology for calculating the PIS and COFINS tax credit claims to which the taxpayers are entitled to - reaffirming that the claimable amounts correspond to the total output ICMS included in sales invoices. The justices ruled, however, that the precedent only applies as of March 15, 2017, except for taxpayers who already were litigating the matter before that date.

The takeaway: The conclusion of this judgment ends one of the largest tax litigation cases in Brazilian history, which has important implications for businesses, as well as for the market in general. The ramifications and credit monetization options derived from this decision should be analyzed on a taxpayer-by-taxpayer basis.

In detail

The final ruling by the Supreme Court has upheld the taxpayers' position regarding the methodology to calculate the credit claims. The amount claimable as a PIS and COFINS tax credit is the ‘total ICMS debits’ included in the sales invoices (i.e., the total output ICMS), as opposed to the ‘net ICMS’ (output debits minus input credits). The Brazilian tax authorities argued the latter position in this final motion of clarification. 

The Court decided, however, that its binding precedent is effective as of March 15, 2017, when the Court decided the legal grounds of the claim. However, for taxpayers who have filed legal or administrative disputes on the matter before that date, who may be able to claim credits from transactions of prior periods as from the date of their initial claim under dispute. Taxpayers that did not file a legal or administrative claim up to March 15, 2017, should be able to recover any amounts unduly paid retroactively, since that date, and may claim these credits immediately. Taxpayers may monetize these credits either via tax credit offsets, cash refunds, or structured transactions (e.g., securitization). 

Observation: Taxpayers who have filed claims in which a final decision was issued after March 15, 2017 should confirm whether the decision in their particular case has followed a different calculation methodology than the one that the Supreme Federal Court set forth in the final ruling. In such situations, taxpayers should work with legal advisors in identifying the best way to recover any potential overpayment according to the recent decision. In this regard, taxpayers should revisit, for instance, whether the calculation methodology in the judicial decision could impact their respective cases considering input tax credits under industry or taxpayer-specific tax regimes, such as prepayment of ICMS at the beginning of the production chain (ICMS-withholding regime). 

Observation: Important financial reporting and corporate tax impacts may result from the realization and recognition period of the tax credits recovered, as full value of the asset no longer is contingent; the moment of registration of the tax asset for book and tax purposes, however, may differ from taxpayer to taxpayer. This could lead to potential overpayments or underpayments of corporate income taxes (‘IRPJ and CSLL’). 

Finally, taxpayers also should consider other impacts, such as compliance requirements.

Contact us

Luis Vargas

Partner, International Tax, PwC US

Maria Bel

Director and International Tax Services, PwC US

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