Originally published in the October 22 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s Supreme Court will review the constitutionality of the inclusion of the state value added tax (ICMS) in the tax basis of P.I.S. (Program for Social Integration contribution) and COFINS (Contribution for the Financing of Social Security) levied on imports of goods into the country.
Depending on the outcome of the judgment, Brazil’s executive branch may face another major defeat regarding inclusion of ICMS into other taxes’ bases. (The first is an ongoing judgment in which 6 of 11 Supreme Court justices on August 24, 2006, delivered opinions that ICMS should not be included in the COFINS tax base in domestic sales.)
In a decision September 26, 2007, when the court debated Extraordinary Appeal 559,607, all justices decided that the subject is of general interest for Brazilian society, and, thus, all identical disputes in lower courts should be suspended until the Supreme Court delivers a final rule.
The legal provision under the court’s review is article 7, Item I of Law 10,865/04, which provides that the 1.65 percent P.I.S. and 7.6 percent COFINS levied on imports of goods must be calculated over the customs value of the good plus the amount paid by the importer as ICMS, usually at rates that vary from 12 percent to 18 percent. As a consequence, importers are required to pay P.I.S. and COFINS over another tax, which clearly increases the P.I.S. and COFINS tax base and, consequently, the tax burden over imports.
The taxpayer in the relevant case argued that such a calculation of a tax over another tax was unconstitutional because ICMS is not part of the customs value but rather an item that will be remitted to the state government.
Because of the relevancy of the issue, the Supreme Court understood that all pending cases over the same subject should be suspended until a final judgment of Appeal 559,607.
The taxpayer should have at least five favorable votes in its side, based on the positions taken by justices in the similar case of August 24, 2006. If the exclusion of ICMS from P.I.S. and COFINS levied on imports is confirmed, thousands of taxpayers may be entitled to not only reduce its tax burden over imports, but also to file for tax refunds of excess P.I.S. and COFINS paid over imports since 2004.
David Roberto R. Soares da Silva