Today’s agenda includes a Supreme Court review of excluding ISS from PIS and Cofins calculations

08/28/2024

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Marcelo Montalvão — Foto: Divulgação

Four disputes about excluding taxes from the base for calculating other taxes, to be settled by the Federal Supreme Court, could impact the Brazilian government’s finances by R$118.9 billion, according to estimates from Brazil’s Federal Revenue Service included in the 2025 Budget Guidelines Bill (PLDO). One significant case involving the exclusion of Services Tax (ISS) from the PIS and Cofins (social contributions) base is set for discussion Wednesday (28) and could reduce tax revenue by R$35.4 billion.

These disputes all carry general repercussions, which means the Supreme Court’s decisions will affect all related cases across the judicial system. In the ISS matter, taxpayers see parallels to the landmark “Thesis of the Century”—the exclusion of Tax on Circulation of Goods and Services (ICMS) from the PIS and Cofins base. Yet, the outcome in secondary legal arguments and interpretations, known in Brazil as “teses filhotes,” adjudicated in both the Supreme Federal Court and the Superior Court of Justice, has been largely unfavorable for taxpayers.

Research conducted by Machado Associados and BVZ Advogados, upon request from Valor, indicates that in the higher courts, taxpayers have lost four of these secondary arguments concerning taxes on the tax base and have won three. Six additional cases remain undecided.

The most notable victory for taxpayers occurred in 2017 with the “Thesis of the Century.” In this decision, the justices clarified the constitutional definition of turnover and ruled that the state tax, ICMS, should not be included in the base for calculating federal social contributions as it does not represent corporate revenue. The majority opinion held that ICMS collections are merely transient within a company’s cash flow and are ultimately directed to state coffers (Issue 69).

Companies are leveraging the same argument in the ISS case, which involves a municipal tax and mirrors the ICMS scenario. This case was initially taken up in the Virtual Plenary in 2021 but will be reevaluated from the beginning due to a procedural request by Justice Luiz Fux. Although the votes of the justices who have since retired will be preserved, the current score stands at three votes to zero against the federal government, with room for the remaining justices to potentially revise their positions.

During the initial Virtual Plenary deliberations, the vote reached a deadlock of four to four. The rapporteur, now-retired Justice Celso de Mello, sided with the taxpayers, a stance supported by Justices Cármen Lúcia, Rosa Weber, and Ricardo Lewandowski. Justice Dias Toffoli represented the opposing viewpoint, favoring the National Treasury, with Justices Alexandre de Moraes, Edson Fachin, and Luís Roberto Barroso aligning with his perspective.

The decisive votes were pending from Justices Gilmar Mendes, André Mendonça, and Luiz Fux. Given that in 2017, during the Thesis of the Century, Justice Fux sided with the taxpayers and Justice Mendes with the federal government, tax experts speculate that the outcome could hinge on Justice Mendonça’s decision. Nunes Marques, who will not vote on the main judgment due to succeeding the former rapporteur, will act as the rapporteur for any subsequent clarifications (Issue 118).

The Attorney General’s Office of the National Treasury (PGFN) commented on the matter, stating, “The PGFN has been addressing this issue with the utmost seriousness” and “believes that Justice Toffoli’s comprehensive vote addressed the issue adequately by correctly distinguishing between Issues 118 and 69.”

Marcelo Montalvão, a partner at Ayres Britto Advocacia, who represents the National Confederation of Services (CNS) in the ISS case before the Federal Supreme Court, asserts that the underlying logic of the theses is identical. “This case was even put on hold for some time because the reporting justice, Celso de Mello, had indicated that they were connected,” he explains.

“Everything hinges on the concept of revenue or billing, which is defined as the entry of wealth into the legal entity that becomes part of its assets. ISS, like ICMS, does not fit into this category of wealth because they are transitory values,” he adds, emphasizing that “legal certainty” needs to be ensured.

Besides this case, the thesis that could most significantly impact public coffers is the exclusion of PIS and Cofins from their own tax base. A negative outcome for the Treasury could cost R$65.7 billion. The taxpayers’ argument follows a similar rationale, advocating for the exclusion of these taxes from the concept of billing. This issue (Issue 1067) is not yet expected to be included on the agenda.

Another significant matter involves the exclusion of PIS and Cofins from presumed ICMS credits, a tax benefit granted by the states, which could potentially cost the federal government R$16.5 billion.

The Superior Court of Justice ruled in April 2023 on a related issue, the exclusion of the Business Income Tax (IRPJ) and Social Contribution over Net Profit (CSLL) from benefits, resulting in a decision unfavorable to taxpayers. However, Law No. 14973/2023 altered how investment grants are taxed, rendering the justices’ decision effective only until the end of the previous year. Despite this, judges and appellate judges have dismissed the new law’s effectiveness (Issue 1182).

During the Superior Court of Justice’s deliberation on this issue, a preliminary injunction by Justice André Mendonça, the rapporteur for the PIS and Cofins lawsuit before the Supreme Court, interrupted the session, nearly halting the judgment. Granting the injunction, Justice Mendonça cited the “intrinsic relationship” between the cases as justification for suspending or nullifying the judgment in the Superior Court of Justice, given the potential “dissonance” with any Supreme Court decision.

About a week later, Justice Mendonça withdrew the injunction due to the “monetary amount discussed.” This case has been highlighted and is not expected to be on the agenda soon (Issue 843).

The discussion also extends to the exclusion of PIS and Cofins from the tax base of the Social Security Contribution on Gross Revenue (CPRB), which will impact R$1.3 billion. No judgment is expected on this issue either (Issue 1186). Both the Supreme Court and the Superior Court of Justice have previously ruled on similar cases involving ICMS in the CPRB base, with outcomes unfavorable to companies (Issues 1048 and 994).

“Although the CPRB is levied on revenue, the prevailing view was that the same rationale as in Issue 69 [Thesis of the Century] could not be applied due to the lack of legal provision,” explains tax lawyer Renato Silveira, a partner at Machado Advogados.

He notes that these discussions align with the constitutional concept of billing, which underpins the calculation of PIS/Cofins. “These are discussions that end up having something to do with the Thesis of the Century because they were developed based on the premises set out in Issue 69, but they won’t necessarily have the same outcome because they are absolutely controversial matters,” Mr. Silveira states. “The Supreme Court has been creating some distinctions,” he adds.

Taxpayers contest the Federal Revenue Service’s impact estimates. According to the tax risk annex itself, forecasts often consider the total revenue loss for that year and five years retroactively, a period during which beneficiaries can claim reimbursement of overpaid taxes in court. “The figures represent ‘the maximum impact on the treasury, which may not materialize in its entirety,’” the document says.

For instance, a study by Tendências Consultoria estimated the impact of the ISS thesis at R$2.8 billion. João Leme, a public finance consultant at Tendências Consultoria, mentions that tax estimates are only calculated when lawsuits have become final and unappealable. He notes that eventual modulation, which limits the effect of the judgment to the future, could also reduce this deficit.

Unlike macroeconomic risks, tax actions represent fiscal risks that the government has limited control over. “For specific risks, it ends up not depending on the actions of the federal government,” he states.

He explains that Ordinance No. 68 of 2022, issued by the Federal Attorney General’s Office (AGU), serves as a benchmark to gauge the impacts estimated by the Federal Revenue Service. “The total number of taxpayers is taken into account, and an estimate of refunds has been made over the last five years. So it’s always the worst-case scenario,” he clarifies. This upward estimate, he adds, can be leveraged as an argument with the ministers, “which creates pressure on the judging body.”

Frederico Bastos of BVZ Advogados notes that the outcome of the ISS case is likely to influence the judgment on other pending issues, given the similarity of the discussions. “Taxpayers still have high expectations as to whether the effects of the decision will be modulated and what criteria will be adopted in the judgment, given the high impact on both taxpayers and public coffers.”

When contacted by Valor, the Federal Revenue Service had not responded by the time this edition was published.

*Por Marcela Villar — São Paulo

Source: Valor International

https://valorinternational.globo.com/