Originally published in the June 25 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Justice Maria do Carmo Cardoso of Brazil’s Federal Regional Appellate Court (TRF) for the First Region has granted an injunction allowing a taxpayer to exclude municipal service tax (ISS) receipts from its P.I.S. (Program for Social Integration contribution) and COFINS (Contribution for the Financing of Social Security) tax bases. The decision was delivered May 15 in Case 2007.01.00.017041-3.
The case originally was filed by TNL Contax S/A, a call center corporation affiliated with Telemar, one of Brazil’s largest telecom groups, before the Third Federal Court of the Federal District (the equivalent of the District of Columbia). After an injunction was denied there, the company successfully appealed to the TRF for the First Region, which has jurisdiction over many Brazilian states.1
The injunction allows the company to exclude from its P.I.S. and COFINS calculation any ISS received in connection with the provision of its services. ISS rates vary from municipality to municipality, with a maximum rate of 5 percent. In most large locations, the ISS is 5 percent.
The case mirrors a similar ongoing dispute before the Supreme Court involving the exclusion of the state VAT (ICMS) from the COFINS basis. On August 24, 2006, five Supreme Court justices delivered opinions that ICMS should be excluded from the COFINS tax base because it is not part of taxpayers’ gross income because it is remitted to state governments. With one other vote to that effect delivered years earlier, 6 of the 11 Supreme Court justices now have decided in favor of the taxpayers.
Although the Supreme Court judgment has not yet been concluded, and both Supreme Court cases relate specifically to ICMS (and not ISS), Cardoso used the Supreme Court’s rationale in granting the May 15 injunction. Because ISS is remitted to municipal governments, it should not be considered part of taxpayers’ gross income and, accordingly, should be excluded from the P.I.S. and COFINS basis, Cardoso concluded.
The injunction now may be used by other taxpayers (service companies) to exclude ISS from their P.I.S. and COFINS basis. Experts estimate that the tax dispute could cost the government as much as BRL 2.7 billion (approximately $1.42 billion) if large numbers of taxpayers claim refunds for excess COFINS levied on ISS during the past few years. If they seek to exclude ISS from future COFINS bases, the dispute could cost the government an additional BRL 520 million per year in reduced tax revenues, they say.
FOOTNOTE
1 The Federal Regional Appellate Court for the First Region has jurisdiction over the states of Acre, Amapá, Amazonas, Bahia, the Federal District, Goiás, Maranhão, Mato Grosso, Minas Gerais, Pará, Piauí, Rondônia, Roraima, and Tocantins.
END OF FOOTNOTE
David Roberto R. Soares da Silva