Brazil's Supreme Court Deals Exporters a One-Two Tax Punch

Originally published in the August 18, 2010 edition of World Tax Daily (Copyrights Tax Analysts)

Brazilian exporters on August 12 suffered one of the most important tax defeats in recent years when the Supreme Court ruled constitutional the application of the 9 percent social contribution on net income (CSL) to export income. Based on similar arguments, the Court also ruled constitutional the application of the expired 0.38 percent bank transactions tax (CPMF) on export income.

The application of CSL to export income was one of the most important and controversial tax issues before the Court. The judgment had been suspended for months after a 5-5 vote until Justice Joaquim Barbosa, returning from a medical leave, sided with the government August 12 in a 6-5 vote for the application of CSL on export income.

The judgment reviewed two extraordinary appeals (RE 474,132, filed by Inlogs Logistica Ltda., and RE 564,413, filed by Incasa S/A.) in which the taxpayers had been denied the right to exclude export income from the CSL tax basis. At the same session, the Court reviewed extraordinary appeal RE 566,259, in which the taxpayer, Guerra Implementos Rodoviários, was trying to prevent the application of the expired CPMF on its export income. Because the CSL and CPMF issues were related (as the government used the same arguments to defend their application), the Court decided to review them together and put an end to nearly a decade of disputes.

Debate over the CSL and CPMF 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 and CPMF were among them. However, despite some initial favorable decisions and injunctions, the exclusion of export income from the CSL and CPMF tax bases had not been successful at the appellate level.

The majority of the Court’s justices took the position that the concept of net income (the CSL tax basis) is different from the concept of revenue, and that the tax exemption contemplated in Amendment 33 applied only to the latter.

The decision is extremely important because the Court has declared the cases to be subject to “general repercussion.” Under Brazilian constitutional and civil procedural rules, that means the constitutional issue at stake is so economically, politically, socially, or legally relevant that its effects may surpass the subjective interests of the appellant and reach a broader group of interested parties. Thus, all Brazilian lower courts from now on will have to follow the Supreme Court’s position on the matter.

Unquestionably, the decision is one of the greatest tax defeats for taxpayers. Experts and business associations estimate that the government would have had to refund more than BRL 40 billion (approximately $22.6 billion) in CSL and CPMF if the Court had sided with taxpayers.

Taxpayers now have to consider how to proceed with ongoing cases now that those cases will be decided on the basis of the Court’s August 12 ruling. Many taxpayers have been authorized by court injunctions not to pay CSL and/or CPMF on export income. The injunctions will certainly be revoked soon and those taxpayers will have to consider how to pay the CSL and CPMF at issue in their cases.

Business associations representing exporters may lobby Congress and the executive branch to establish a special payment schedule for exporters’ CSL liabilities. Considering the importance of the export sector to Brazil’s economy, such an outcome seems possible.

David Roberto R. Soares da Silva

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