Originally published in the April 2 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s Federal Revenue Department has denied a taxpayer’s ability to take P.I.S. (Program for Social Integration contribution) and COFINS (Contribution for the Financing of Social Security) tax credits on sales expenses related to the display, tasting, and promotion of products it manufactures.
The Superintendence of the Federal Revenue Department for the 9th Fiscal Region, with jurisdiction over the Brazilian states of Paraná and Santa Catarina, made the pronouncement in Private Letter Ruling (Consulta) 40/2008, published in Brazil’s official gazette on March 6.
The taxpayer in the case, operating under the noncumulative P.I.S./COFINS regime, filed a request for a ruling to determine whether it could claim P.I.S. and COFINS credits for payments it made to a third-party company that provided services involving the display and promotion of the taxpayer’s products.
The Federal Revenue Department ruled that those expenses are not eligible for P.I.S./COFINS credits. The private letter ruling was based on article 3, Item II of Law 10,637/002 and article 66, paragraph 5 of Normative Instruction 247/2002 for P.I.S.; and on article 3, Item II of Law 10,833/2003 and article 8, paragraph 4 of Normative Instruction 404/2004 for COFINS. Those legal provisions allow P.I.S. and COFINS credits on materials used in the provision of services and the production or manufacturing of tradable goods. Under the normative instruction eligible materials used in manufacturing and production activities include: raw materials, intermediate products, packaging materials, and any other goods that undergo a physical or chemical change during the manufacturing process.
Based on that restrictive definition, the Federal Revenue Department concluded that sales expenses are not included in the definition of materials used in manufacturing and thus are not eligible for P.I.S. and COFINS credits.
As a result of that interpretation, the taxpayer now has two options: to follow the letter ruling and pay more P.I.S. and COFINS or to try to reverse the ruling before a court of law.
David Roberto R. Soares da Silva