In March 2017, the Federal Supreme Court (“STF”) ruled on Extraordinary Appeal (“RE”) No. 574,706, which established the unconstitutionality of the inclusion of the Tax on Circulation of Goods and Services (“ICMS”) in the calculation basis of the contribution to the Social Integration Program (“PIS”) and the Contribution for Social Security Financing (“COFINS”) – the so-called “thesis of the century”.
According to the Ministers, the ICMS canot be classified as revenue or billing, which is used as a base when calculating said contributions.
The effect of this decision were only judged on in May 2021, at which time the STF decided that the ICMS to be excluded is the one highlighted in the invoice, and that only taxpayers who filed the relevant steps by March 2017 are entitled to reimbursement for past undue payments, limited to 5 years prior to the filing of the judicial measure or administrative request.
As for other taxpayers, that is, those who did not protect themselves with the relevant steps or who did so after March 2017, will only be able to recover amounts unduly paid from March 15, 2017 onwards.
It so happens that, in view of the enormous impact on the public coffers resulting from the judgment of the thesis of the century, the Federal Revenue Service started to adopt a new strategy to try to minimize this billion dollar shortfall, issuing notices to several companies.
This strategy consists in demanding that companies use as calculation criterion for accounting for credits arising from the acquisition of goods and inputs the same criterion adopted for payments to the Federal Government – without the built-in ICMS.
In practice, the PIS and COFINS (9.25%) paid by companies that are subject to the non-cumulative regime (most large companies) in the acquisition of inputs, represents a credit, which can be used later to reduce the total amount due to these contributions.
However, as it was decided that the ICMS on the output bill does not make up the calculation basis for PIS and COFINS, the Federal Revenue Service started to adopt this understanding for input bills, stating that part of the value in the acquisition of inputs corresponds to ICMS and, therefore, the PIS and COFINS credit must be reduced.
The Undersecretary of Collection and Collection, Frederico Faber, adds that the Federal Revenue is awaiting an official statement from the Supreme Court on the interpretation and operationalization of the decision handed down by the Ministers, and that the agency has suspended assessments.
Once such a statement is issued, the undersecretary stated that the Federal Revenue Service will open a period for taxpayers to adjust their declarations, if they deem it necessary, and only after this period will the IRS proceed with new audits, assessments and fines.
According to Faber, the Federal Revenue will need to review its own policies to maintain, readjust or exclude internal interpretations, according to the new understanding of the STF, reinforcing that the national guideline, until the judgment arrives, is to wait for the publication of the judgment and the pronouncement of the Attorney General of the National Treasury (“PGFN”).
These assessments were, in a way, signaled by the Federal Revenue in 2019, when Normative Instruction (“IN”) No. 1911 was published. In IN, the old provision which expressed the possibility of taking credit from PIS and COFINS on the installment of ICMS has been removed.
Regarding the “new” understanding of the Federal Revenue, it is necessary to keep in mind that, according to the PIS and COFINS legislation, the output is based on articles 1 and 2, while the credit is based on article 3 °. Therefore, the law cannot be ignored when it provides the possibility to take credit on all expenses incurred with services and goods purchased as input. For possible exclusion of ICMS in the credit taking stage, a change in legislation would be necessary.
Written by Camila Cabral, Tax Consultant at Drummond Advisors