Originally published in the April 20 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com )
Brazil’s Regional Federal Court of Appeals for the First Region (TRF) has concluded that a utility company can exclude unpaid utility bills from the tax basis for P.I.S. (Program for Social Integration contribution) and COFINS (Contribution for the Financing of Social Security).
The taxpayer, Águas do Amazonas S/A, filed a lawsuit (case no. 2006.32.00.004301-1) before the First Federal Court of the state of Amazonas (in the Amazon region), seeking to exclude customers’ unpaid water bills from its P.I.S. and COFINS tax basis. The taxpayer said unpaid water and waste bills have soared in the past few years, from BRL 26.5 million (approximately US $13.12 million) in 2003 to BRL 52.4 million (approximately US $25.9 million) in 2004 and BRL 72 million (approximately US $35.6 million) in 2005. It said its obligation to pay 9.25 percent in social welfare taxes (7.6 percent as COFINS and 1.65 percent as P.I.S.) on those unpaid bills further erodes its financial stability.
The court was not moved, however, and denied an injunction that would have allowed the company to exclude unpaid receivables from its P.I.S. and COFINS basis. The taxpayer then appealed to the TRF, where Justice Maria do Carmo Cardoso, delivering the court’s opinion, granted the injunction allowing Águas do Amazonas to exclude unpaid receivables from its P.I.S. and COFINS tax basis.
In its decision, the appeals court reviewed the statutes that define both the P.I.S. and COFINS bases and concluded that in both cases, the intention of Congress was to include in the bases only income earned by the taxpayer. The court defined income earned as income obtained by the taxpayer that increases the taxpayer’s wealth. To conclude otherwise would be a violation of the constitutional principle of taxpaying capacity, under which a taxpayer must have the capacity to pay tax. In the case at issue, the paying capacity would be nonexistent, as the taxpayer would be required to pay taxes on income it has not yet received because of consumers’ default.
Although not binding, the decision is interesting from an economic point of view and may be used by other taxpayers in similar situations. Companies with a large consumer sales base and high levels of default, and those with significant unpaid receivables, could claim the same tax treatment, as paying P.I.S. and COFINS on unearned income would represent a double financial burden (not earning income and having to pay taxes anyway).
However, there is no guarantee that the same rationale will be adopted by other courts. Also, one of the taxpayer’s arguments in the aforementioned case was that most of its customers are low-income individuals, which the court might have taken into account in making its decision.
David Roberto R. Soares da Silva