Tax overhaul discussed in Congress does not provide mechanism for when current taxes lapse
07/17/2023
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Luis Wulff — Foto: Divulgação
Companies may find it difficult to receive part of the tax credits they are entitled to — used to pay taxes — because of the tax overhaul making its way in Congress. According to a study by the holding company Banco Fiscal, the combined credits of the 10 largest agribusiness companies and the 10 largest retailers amounts to R$70.1 billion. This possibility exists because the current proposal, passed by the Chamber of Deputies and sent to the Senate, does not provide a clear form of compensation or monetization of credit balances after the extinction of PIS/Cofins, IPI, ICMS, and ISS taxes. The courts could be the only way out, experts say.
The authors of Banco Fiscal’s study, which is based on the financial statements published by the 20 companies until December 31, point out that both “business segments, as a rule, accumulate credit balances of taxes to be recovered due to their business models,” said Luis Wulff, a co-author of the study.
Agribusiness and retail companies, among others, tend to accumulate a lot of credits. Exporters, for example, receive credits when they purchase inputs for production, but since they are exempt from taxes on exports, they cannot use all their credits to reduce the taxes to be paid.
Currently, PIS/Cofins credits, which are federal contributions, can be used to pay any federal taxes. The effect of the accumulation of ICMS credit balance is more serious because this credit can only be used to pay this state tax. In addition, since each state has the autonomy to levy the ICMS in a different manner, companies that make many interstate transactions typically have more difficulty using these credits and end up amassing a high amount.
The agribusiness companies highlighted in Banco Fiscal’s study – JBS, Ambev, Marfrig, Cargill, Copersucar, BRF, Raízen, Suzano, Cosan, and Coamo – combined have just over R$38 billion in tax credits due to their “large volume of exports.” Of this amount, R$23.6 billion are federal taxes and R$14.3 billion are state taxes. The total represents 3.44% of the annual net sales of the 10 companies, but individually can exceed 10%. Ambev was classified as an agribusiness because of the volume of raw materials it uses as inputs.
The 10 retailers analyzed are Carrefour, Assaí, Magalu, Via Varejo, Drogasil, Lojas Americanas, Mateus, BIG, Pão de Açúcar, and Lojas Renner, whose combined credits amount to nearly R$33 billion. Of this total, R$11.8 billion are federal credits and R$21 billion are credits with states. The amount represents 8.96% of the annual net income of the 10 companies, but in the most extreme cases it reaches 22%.
The tax overhaul is expected to have a positive impact on the results of the companies in general due to the simplification resulting from the unification of the PIS/Cofins, IPI, and ISS taxes levied by municipalities into a dual value-added tax (VAT). The tax on goods and services (IBS) and the contribution of goods and services (CBS) will be created to replace five taxes.
Specifically with respect to credits, the tax overhaul provides that any expenditure will generate IBS or CBS credits. These credits will be approved and reimbursed by the tax authority or used in compensation – which will be managed by the Federal Council.
The government expects the simplification to reduce litigation. “Most of the litigation that exists today in relation to taxes on goods and services will certainly cease to exist with the tax reform, because most cases discuss what generates ICMS, PIS, and Cofins credits. In the new system, everything will generate credit,” said Bernard Appy, special secretary of tax reform of the Ministry of Finance, in an interview with XP analysts on Thursday.
A transitional rule establishes that during 2026, when 0.1% of IBS and 0.9% of CBS are levied to verify the collection potential of the new taxes, companies will be able to use old credits to write off debt from new taxes. If the company is unable to offset them, they can be reimbursed within 60 days.
However, when PIS/Cofins cease to exist in 2027 and ICMS lapses in 2033, for example, agricultural and retail companies may still have a large amount of credits. For this scenario to change, lawmakers would have to change the main text or deal with the matter in a supplementary law.
The current text does not include a specific rule for companies that still have a balance of PIS/Cofins credits at the end of 2026. “If neither the Senate nor a supplementary law creates rules for this specific situation, either the Secretariat of Federal Revenue will accept compensation based on the current rules, or there will be litigation,” said Anderson Trautman, a partner at the Souto Correa Advogados law firm.
For Eduardo Fleury, a partner at FCR Law, it would not be a problem not to have a more detailed provision for the PIS and Cofins balance in the transition to CBS. “There are already mechanisms in place,” he said.
However, Camila Galvão, a partner at Machado Meyer Advogados, says it is impossible to know how the tax authority will interpret the issue. “As a last resort, companies can go to court.”
Isac Falcão, president of the national union of tax auditors (Sindifisco Nacional), expects the use of credits to be regulated by a supplementary law. “It is important that society is present in the debate on this law, which affects public assets,” he said, adding that changing tax laws without solving problems like these leaves the judiciary branch with a task that in democracies should be left to the legislature.
With regard to the ICMS credit that exists at the end of 2032, the reform provides that it will be authorized by the states and the Federal Council will determine the compensation, which must be done within 20 years (240 months). However, some companies may still have ICMS credits after this period.
Others fear being forced to use these credits in 240 installments, which would have a strong impact on their liquidity, said Renata Emery, a partner at TozziniFreire. “Without these clarifications through supplementary legislation, this could generate new litigation,” she said.
André Passos Cordeiro, executive president of the Brazilian Chemical Industry Association (Abiquim), said the 20-year term is unworkable. “This term must be shorter because the credit balance is a decisive factor for our competitiveness, since importing does not generate an accumulation of credits.”
The tax overhaul also provides that, from 2033, Brazil’s official inflation index (IPCA) will be used as an index for the correction of ICMS credits, which does not exist today and could speed up authorizations and compensation. “The problem is that there is a company with a truckload of credits and this correction of the credit balance will only start in 10 years,” Ms. Emery said.
For the president of the Retail Development Institute (IDV), Jorge Gonçalves Filho, some adjustments are necessary. He says the ideal would be a period of 120 months for the compensation of ICMS credits and that the correction was made by the Central Bank’s key interest rate Selic, “an index more appropriate to the financial balances of companies.” He also proposed a forecast for the compensation of the balance of PIS/Cofins with CBS.
In a note, retailer Magalu said several aspects of the tax overhaul are still expected to be regulated by supplementary legislation and that, in general, the changes are likely to be beneficial to the retail sector.
The other companies did not reply to Valor’s request for comment or declined to comment.
*Por Estevão Taiar, Beatriz Olivon, Laura IgnacioEstevão Taiar, Beatriz Olivon, Laura Ignacio — Brasília, São Paulo
Source: Valor I|nternational