Brazil: State-level sales tax (ICMS) and implications for calculating social contributions (PIS and COFINS)

A judgment concerning implications for calculating social contributions (PIS and COFINS)

A judgment concerning implications for calculating social contributions (PIS and COFINS)

The Supreme Court (Supremo Tribunal Federal—STF) on 13 May 2021 issued a judgment holding that the amount of ICMS listed on an invoice can be excluded for purposes of calculating the social contributions referred to as PIS and COFINS. The high court held that the holding from this judgment applies retroactively as from 15 March 2017.

  • ICMS—Imposto sobre Circulação de Mercadorias e Serviços—is a state-level sales tax imposed on the physical movement of merchandise.
  • PIS (programa de integração social) refers to an employees’ profit participation program, and COFINS (contribuição para o financiamento da seguridade social) refers to a social contribution program for social security financing.

Summary

Since the early 2000s, when the non-cumulative regime for PIS and COFINS was established, one area of discussion concerned what was the effect of ICMS on the basis for calculating the gross revenue contributions of PIS and COFINS.

In 2017, the Brazilian Supreme Court held that including ICMS in the calculation basis for PIS and COFINS was not constitutional; however, the high court did not decide which amounts would be excluded—that is, whether the amount of ICMS listed on the invoice or the amount of effectively paid ICMS that reflected the application of credits applied—or the time effects of the decision (that is, whether the decision affected past periods or whether it only applied prospectively).

The May 2021 decision clarifies application of the rules relating to ICMS and the interplay with PIS and COFINS. According:

  • For judicial challenges filed before 15 March 2017—Taxpayers can recognize credits from past periods and can exclude ICMS from the calculation basis of current PIS and COFINS.
  • For judicial challenges filed after 15 March 2017—Taxpayers can recognize PIS and COFINS credits for periods after 15 March 2017 and can exclude ICMS from the calculation basis of current PIS and COFINS.
  • For no judicial challenges—Taxpayers can exclude the listed ICMS from the PIS and COFINS calculation basis, beginning 15 March 2017 onwards. Recovery of the credit from 15 March 2017 will depend on a specific tax ruling or action by the executive authority.

The Supreme Court also clarified that the amount of ICMS that was relevant for these purposes was the amount listed on the invoice (regardless of the amount of ICMS actually remitted).

KPMG observation

The Supreme Court’s decision is viewed as favorable for Brazilian taxpayers; however, taxpayers need to consider the implications of this decision on a case-by-case basis—such as the opportunity for refund of previously paid PIS and COFINS. The tax authority is expected to issue a formal opinion about the judgment.

Read a May 2021 report prepared by the KPMG member firm in Brazil

 

 

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