Tax authorities say that at least R$120 billion in incentives were unduly reduced
Bruno Marques Santo — Foto: Divulgação
Brazil’s Federal Revenue increased the pressure on companies that receive incentives on the sales tax ICMS and deducted these amounts of Business Income Tax (IRPJ) and Social Contribution over Net Profit (CSLL) in recent years. A new batch of notifications has been sent out, and this time, according to lawyers, their tone is harsher. Approximately 500 major companies are in the crosshairs.
These notifications are internally regarded as a final warning for the taxpayers to rectify their situation voluntarily.
For those still deemed non-compliant by the authorities, the next steps will involve inspections and, subsequently, penalties with a 75% fine on the amounts due.
In 2021 alone, R$120 billion in exclusions were recorded in the calculation of federal taxes, according to the Secretariat of Federal Revenue.
Recovering these amounts is a top priority for the inspection team. The economic team considers addressing subsidy issues as crucial to increasing revenue and achieving the target of eliminating the central government’s primary deficit next year.
The dispute between the tax authorities and companies that receive ICMS benefits has been going on for a long time but intensified significantly in the first half of this year following the Superior Court of Justice (STJ) ruling on the matter, which was binding for the entire Judiciary.
Finance Minister Fernando Haddad stated that the ministry’s projection for this ruling was to collect around R$90 billion. Brazil’s Secretariat of Federal Revenue indicated an impact of R$47 billion in the Budgetary Guidelines Act (LDO).
The Secretariat of Federal Revenue had sent out the first batch of notifications, involving 5,000 taxpayers, in May, a few days after the ruling but before the decision was officially published. The approach was more comprehensive, and the notifications were akin to an “invitation” to self-regularization. The assessment, however, is that it had no effect.
This second round of notifications is focused on the significance of the deductions of CSLL from business tax reporting. Taxpayers from various sectors have benefited from substantial amounts. It’s much more specific than the first round.
“We are convinced that, in these cases, there was an undue deduction of amounts, either in part or in full,” said one source.
In a statement to the press, the Secretariat of Federal Revenue reported that 60% of the approximately 500 companies that received the notifications in the second wave have already contacted the agency, and “the technical department is dealing with their cases.”
Besides requesting information and accounting documents, the notifications from the Federal Revenue Service also outlined their interpretation of the STJ ruling, which has now been published.
This aspect, specifically, has received significant criticism from lawyers representing taxpayers and who had access to the notifications. They accuse the tax authorities of distorting the ruling.
The Secretariat of Federal Revenue basically said that only presumptive credit (a specific type of ICMS benefit) enjoys non-taxation guarantees. All others are subject to a rigorous analysis based on the requirements outlined in Article 10 of Complementary Law 160 of 2017 and Article 30 of Law 12973 of 2014.
Among these requirements “is the occurrence of an actual tax benefit resulting from the state norm that granted the incentive.”
The Secretariat of Federal Revenue’s position implies that in cases like exemption, reduction of the tax base, and reduction of rates, for instance, the tax benefit is not directed to the vendor of the goods but rather to the recipient, who, in many operations, is the end consumer.
“This is the guideline for auditors during inspections. They will scrutinize the company’s books to determine how the benefit was utilized. Was it used for investment? Was it disguised as profit distribution? Or was it passed on completely to the purchaser of the product?” detailed a source.
Taxpayer lawyers claim, however, that this approach is new — it would not have yet been discussed in lawsuits or administrative proceedings. “They are moving towards an economic argument that, in our view, lacks legal basis and is unsupported by the STJ decision,” evaluated Ricardo Varrichio, an attorney at RVC Law Firm.
“This is a mistaken interpretation of the ruling,” agreed attorney Fernando Solá Soares from the Gaia Silva Gaede Law Firm. “If these notifications evolve into penalties, it will trigger a new clash between the Tax Authorities and companies,” he stressed.
According to the attorneys, the requirement stipulated by the law — to exempt the taxpayer from taxation — is that the gains from the tax benefits are “recorded in profit reserves.” This means they can only be used within the company or offset fiscal losses. For example, distributing them to shareholders as dividends or interest on equity is not allowed.
Three clients of Mr. Soares’s firm received notifications. One of the companies is headquartered in Santa Catarina and operates in the food sector. It benefits from tax reductions in the tax base. The other two are in the fashion sector, based in Rio de Janeiro, and enjoy tax benefits under Brazil’s Fashion Act and the Logistics Incentive Act.
The attorney has advised his clients to respond to the notifications and state their disagreement with the interpretation given to the STJ ruling. “Failure to respond could be considered an obstruction to the inspection, and the taxpayer may face penalties as a result,” Mr. Soares cautioned.
At the Finocchio & Ustra Law Firm, 12 clients have been notified. Mr. Bruno Marques Santo, a partner at the firm, does not disclose the names of the companies but indicates that they belong to the electronics, textile industry, vehicle dealerships, paper industry, and machinery and equipment manufacturing sectors.
Seven of them benefit from the presumptive credit — which is not taxable. The others enjoy tax base reductions and are affected by the discussion.
“The IRS has not issued notices; they have issued intimidations,” Mr. Eduardo Barboza, a tax attorney at Nichele Advogados who also has clients in this situation. In his view, the Secretariat of Federal Revenue intends to persuade taxpayers to accept its interpretation of the case rather than what was ruled by the STJ.
The entire dispute between the tax authorities and taxpayers revolves around the amounts companies refrain from remitting to the state coffers. For example, a company that owed R$100,000 in ICMS but for being entitled to the base reduction paid only R$60,000. Can the federal government tax the R$40,000 difference?
The STJ decided in 2017 that presumptive ICMS credits cannot be taxed. The reasoning is that taxing these credits would nullify a benefit granted by states, thus violating the federal pact.
Hence the current debate: can this same ruling be applied to other types of benefits granted by states? This includes tax base reductions, rate reductions, exemptions, and deferments, to name a few.
In the April ruling, the STJ said no. However, the justices asserted that the Federal Government must consider the requirements established in Article 30 of Law 12973 of 2014 to determine whether or not to levy taxes. This article has caused interpretation disputes. The Ministry of Finance is even considering a legislative amendment.
The taxpayers filed motions for clarifications with the Court. They request that the justices apply the so-called “effects modulation” so that the decision only applies to future cases, and they seek clarification on how companies can use the resources recorded in their reserves.
“The Secretariat of Federal Revenue is getting ahead of itself [with the notifications],” said attorney Eduardo Barboza. “They are almost engaging in fortune-telling, imagining what the STJ will say in response to these motions to force the taxpayers to make payments.”
On the other hand, the Secretariat of Federal Revenue has positioned itself as a collaborator by presenting its interpretation and allowing taxpayers to pay the amounts owed to the government voluntarily. “We want to avoid litigation. Taxpayers who do not want to comply can contest administratively and then go through the judicial system. However, they must be aware that this could lead to years of discussion and significant expenses on legal representation,” said a source.
*Por Joice Bacelo, Beatriz Olivon — São Paulo, Brasília