Key case this month addresses the exclusion of ISS from PIS/Cofins calculations
02/08/2024
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Saul Tourinho — Foto: Divulgação
At least 32 critical tax cases against the federal government, states, and municipalities, with a combined estimated impact of R$712 billion on public finances, are currently pending before Brazil’s Supreme Court. Three of these cases are scheduled for this month, including one highly anticipated by taxpayers, known as the “thesis of the century.” It concerns the exclusion of the Services Tax (ISS) from the social taxes PIS and Cofins tax base.
The analysis was conducted by Machado Associados law firm and includes cases mentioned in the Fiscal Risks Annex of the 2025 Budgetary Guidelines Bill (LDO). Although the potential financial impact remains substantial, experts note that the most significant cases have already been adjudicated by the higher courts in recent years. For instance, at the Superior Court of Justice, all items listed in the LDO have been reviewed on their merits, leading to an estimated R$80.4 billion being reclassified as having a “remote risk” of impact.
One of the most eagerly anticipated tax rulings, set for August 28th, involves an appeal concerning the exclusion of ISS from the PIS and Cofins tax base at Brazil’s Federal Supreme Court. Should the appeal fail, it could result in a fiscal impact of approximately R$35.4 billion on the federal government.
This case is underscored by the landmark decision made in 2017, often referred to as the “thesis of the century,” which involved the removal of the ICMS (a state tax on goods and services) from the PIS and Cofins tax base. The current case could set a precedent affecting related secondary legal arguments and interpretations, known in Brazil as “teses filhotes.” Taxpayers argue that the reasons for excluding ICMS should similarly apply to ISS. However, the Attorney General’s Office of the National Treasury (PGFN) holds a contrary position.
The issue had initially split the justices, resulting in a tie after eight votes when it was first addressed in an online session in August 2020 (RE 592616). With the case now moved to the physical courtroom, the trial will restart, though the opinions of retired justices will remain influential.
“There is great anticipation among service providers who have awaited a resolution for many years,” states Maria Andréia dos Santos, a partner at Machado Associados. She believes the prospects are promising, likening the case to the influential “thesis of the century.” However, she cautions that outcomes may vary in other related teses filhotes, such as the one involving PIS and Cofins within the tax base itself (RE 1233096), which has a projected impact of R$65.7 billion, where taxpayers might face challenges.
This expectation reflects the Supreme Court’s previous rulings, like the decision that upheld the inclusion of ICMS in the calculation basis of the Social Security Contribution on Gross Revenue (CPRB)—RE 1187264—as constitutional. “We anticipate decisions that will delve into the specifics of each case, aligning with the court’s established jurisprudence. However, the general outlook for teses filhotes is not favorable,” she notes.
Additionally, on the same day as the review of the ISS exclusion from the PIS and Cofins tax base, the justices may also finalize their analysis of the collection of the Rural Workers Assistance Fund (Funrural) from individuals—this sector’s social security contribution (direct action for the declaration of unconstitutionality – ADI 4395), with a potential financial impact of R$20.9 billion. This charge has already been deemed constitutional, and the current discussion centers on the concept of subrogation, which involves early collection or a form of tax substitution.
The August agenda also includes a case of significant interest to states and municipalities. The justices are set to determine whether ICMS or ISS should be levied on industrialization operations to order when such operations serve as an intermediate stage in the production cycle of goods (RE 882461).
According to the LDO, however, the cases with potentially the most substantial impact have not yet been scheduled. These include a dispute over the limits on deducting education expenses from income tax, estimated to impact R$115 billion (ADI 4927), and a case addressing the requirement for a complementary law to levy PIS/Cofins on imports, which could affect up to R$325 billion (RE 565886).
Tiago Sbardelotto, an economist at XP Investimentos, notes that the lawsuits listed in the Fiscal Risks Annex are unlikely to impact public accounts in 2024. Even if the scheduled items are adjudicated, their effects will only materialize once the decisions are final and unappealable, a scenario not expected to occur in the latter half of the year.
Mr. Sbardelotto outlines three phases of consequences stemming from tax judgments. The most immediate involves offsetting, where companies can claim credits they would have received and use them to offset the taxes they owe. However, Law 14873 of 2024 has introduced limits on the use of these credits, aiming to enhance predictability in tax revenue.
Tax decisions significantly influence tax computations, according to the economist. For example, if the Supreme Court determines that ISS should not be included in the PIS and Cofins tax base, Brazil’s Federal Revenue Service will be required to cease its collection, markedly affecting future tax revenues. However, he notes that with tax reform, although historical amounts would be maintained, the impact of such a decision would not be felt in the future.
The third phase, as outlined by Mr. Sbardelotto, involves the reimbursement of overpaid amounts through court-ordered refunds, which has been a significant concern in recent years. “While it takes time to materialize, it has a considerable impact on the budget,” he explains.
Saul Tourinho Leal, a partner at Tourinho Leal Drummond de Andrade Advocacia, observes that there is considerable pressure from the federal government on judicial outcomes that favor public finances. Despite this, he anticipates that with ongoing tax reform and potential new government budget measures, the Judiciary may face less pressure to resolve public account issues in the second half of the year as it has in the past.
Felipe Salto, chief economist at Warren Investimentos and former director of the Senate’s Independent Fiscal Institution (IFI), adds, “The Fiscal Risks Annex outlines, among other elements, factors that could incur costs for the federal government, such as judicial rulings, especially those involving tax matters. These represent potential expenses that must be monitored closely, one by one.”
According to Mr. Salto, there have been instances where the National Treasury has successfully contested disputes that could have led to significant costs or revenue losses for the federal government, which is commendable. He points to the social security debate around the “lifetime review” and references the legislative response to the decision that excluded ICMS from the PIS and Cofins base, culminating in Law 14592 of 2023. This law mandates the exclusion of ICMS in the calculation of social contribution credits.
At the Superior Court of Justice, though not accompanied by an impact estimate or mentioned in the LDO, tax attorney Maria Andréia dos Santos is closely watching the debate concerning the nature of stock option plans to determine the applicable income tax rate and the timing of its imposition—special appeal (Resp) 2069644.
Ariane Guimarães, a partner at Mattos Filho, draws attention to other significant issues pending before the Superior Court of Justice in repetitive appeals. One involves the potential refund of overpaid amounts as ICMS-ST—special appeals (REsps) 2034975, 2034977, and 2035550. Another pending decision will clarify whether providing a surety or bank guarantee can suspend the enforceability of a non-tax credit (REsps 2007865, 2037317, 2037787, and 2050751).
The PGFN declined to comment on the matter.
*Por Beatriz Olivon — Brasília
Source: Vaslor International