Originally published in the June 20 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
In a recent decision, Brazil’s Superior Court of Justice (STJ) has concluded that a taxpayer cannot exclude unpaid sales from the tax basis for P.I.S. (Program for Social Integration contribution) and COFINS (Contribution for the Financing of Social Security).
The taxpayer, Companhia Hering, filed a lawsuit to exclude from the P.I.S. and COFINS basis the value of sales on credit that had not been paid by customers. To support the exclusion, the taxpayer argued that unpaid sales are equivalent to canceled sales, which are excluded from the P.I.S. and COFINS basis by way of express legal provision.
However, the taxpayer’s argument was rejected at both the court and appeals levels. In mid-2005, the taxpayer filed a special appeal to the STJ (Appeal 751,368) in a final attempt to reverse the unfavorable decision. On reviewing the case, the STJ rejected the taxpayer’s argument that unpaid sales are equivalent, by analogy, to canceled sales. In the court’s opinion, a canceled sale differs from unpaid sales because in the former, the seller (the taxpayer) receives back the merchandise originally sold to a customer. When a customer simply does not pay for a purchase, no return of merchandise occurs and the taxpayer is required to file a claim against the customer to collect the unpaid sales receipts.
The court said an unpaid sale may result in a canceled sale if the customer returns the merchandise. If that is the case, then the situation is of a canceled sale, rather than an unpaid sale, and the corresponding income may be excluded from the P.I.S. and COFINS basis.
The STJ’s decision differs from a recent decision by the Regional Federal Court of Appeals for the First Region (TRF), which concluded that a utility company could exclude unpaid utility bills from the tax basis for P.I.S. and COFINS (Case 2006.32.00.004301-1). Unlike the STJ’s ruling, the TRF’s decision concluded that the intention of Congress was to include in the tax bases only income earned by the taxpayer. The TRF defined income earned as income obtained by the taxpayer that increases the taxpayer’s wealth. To conclude otherwise, it said, would be a violation of the constitutional principle of taxpaying capacity, under which a taxpayer must have the capacity to pay tax.
The TRF case will eventually reach the STJ. The question is whether the STJ will change its rule, which sometimes occurs, or sustain its position and overturn the TRF’s decision.
David Roberto R. Soares da Silva