Ruling 21/26 reiterates the Supreme Federal Court's understanding by allowing credit only on the ICMS (Value Added Tax) amount shown on the invoice.

The Brazilian Federal Revenue Service has informed taxpayers that they cannot calculate additional credits resulting from the exclusion of ICMS (a state sales tax) from the calculation basis of PIS and Cofins (federal social security contributions) using the so-called "inside" method.

Consultation Solution 21, published on Wednesday (February 25), outlines the limits of the tax authorities regarding the decision of the Supreme Federal Court (STF) in RE 574706 (Topic 69), which recognized that state tax is not included in companies' revenue.

The tax authority reiterated the understanding expressed in the Supreme Court's 2021 ruling on motions for clarification that the ICMS (Value-Added Tax) amount to be excluded from contributions must correspond to the ICMS amount shown on the invoice.

Some taxpayers, however, argued that it would be possible to calculate the tax using the ICMS incident method (which reconstitutes the ICMS "from within" the price of the transaction) to increase the amount excluded from the tax base and, consequently, expand the credits to be recovered.

“"The tax authorities understand that one should take the gross revenue value—which includes PIS, Cofins, and ICMS—and subtract the ICMS amount shown on the invoice. This gives the value without the ICMS, and then calculates the applicable PIS/Cofins. Some taxpayers haven't done this calculation. They took the gross value and subtracted the three taxes until they arrived at the net revenue. When recalculating 'from the inside,' they find a different value than the one calculated by the tax authorities. They removed all the tax from the price and, when doing the '‘gross up’'They only applied PIS/Cofins, since ICMS would not apply,' explained Thiago Motta, from the law firm Castro Barros Advogados.

Now, the consultation ruling states that the use of this technique represents only an alternative method of calculation without support in the judicial decision, and that the ICMS (Brazilian state sales tax) "inside" should be maintained in the calculation. Although linked to the company that raised the question, the clarification reflects the tax authorities' position on the matter.

According to Motta, there is still room for litigation due to the wording of Law 14.592/2023, which defines that the ICMS (State VAT) levied is not included in the calculation bases of PIS/Cofins (federal social security contributions), confirming the Supreme Court's ruling, but without using the word "highlighted". Some experts point out that there is a difference that is not merely synonymous, but legal, opening up possibilities for the recovery of credits.

“There is room for discussion at the Administrative Council of Tax Appeals (Carf), because when the Revenue Service does not accept the compensation, it will send a decision order to the companies. The taxpayer will contest it, the process will be judged by the Tax Appeals Offices (DRJ), and, if the understanding is maintained, it will proceed to Carf. If Carf confirms, taxpayers can assess the cost-benefit of taking the discussion to the Judiciary,” stated the lawyer.

According to the tax law expert and partner at Mazzucco & Mello Lawyers João Paulo Toledo de Rezende, The text increases the level of risk for taxpayers, since auditors will not be able to approve credits calculated based on the methodology of... gross up.

“"Given this scenario, taxpayers who adopt this methodology may await a decision of non-approval and discuss the matter in the administrative sphere, or adopt a preventive stance and seek judicial authorization recognizing the right to calculate credits based on this system, thus avoiding the risks of non-approval and the penalties arising from it (fines and interest).".

Source: JOTA.