Originally published in the September 19 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
In a surprising unanimous decision, Brazil’s Supreme Court on September 17 granted an injunction to prevent the Federal Revenue Department from assessing a taxpayer for excluding its export income when calculating the 9 percent Social Contribution on Net Income (CSL).
The injunction was granted to Embraer (Empresa Brasileiras de Aeronautica SA), Brazil’s state-owned aircraft manufacturer, which had prevailed at the lower court level but then had that decision reversed by an appellate court. The Supreme Court injunction (no. 1738) is temporary, remaining in force only until the Supreme Court rules on the appeal filed by Embraer against the appellate court’s decision.
The financial impact of that decision on Embraer is significant, as most of the company’s income comes from exports. During the period between 2002 and 2006, the company reported total income of BRL 42 billion (approximately $21 billion).
Debate over the CSL on export income started with the enactment of Constitutional Amendment 33 of December 11, 2001. That amendment exempted export revenue from many types of social contributions, and many tax practitioners contended that the CSL was among them. However, despite some initial favorable decisions and injunctions, the CSL exemption for export income has not been accepted by the appellate courts. Embraer’s is the first case on the subject to reach the Supreme Court.
Despite its temporary nature, the injunction is important because it signals the position of specific Supreme Court justices. According to Justice Cezar Peluso, who delivered the court’s opinion in the case, the exemption contained in Constitutional Amendment 33 does appear to exclude export income from any type of social contribution, including CSL. The Supreme Court’s ultimate ruling in the matter is of major importance to taxpayers in the export business. Perhaps it will encourage other taxpayers to seek court protection to exclude CSL from their export income.
David Roberto R. Soares da Silva