Brazilian financial institutions have until February 28 to decide whether they will give up disputing billions in federal taxes and pay them with significant discounts.
For taxpayers disputing taxes in court — administrative or judicial — eligibility for Brazil’s special tax payment schedule created by Law No. 11,941/2009 is contingent on the taxpayer filing a waiver with the competent court ending the dispute. February 28 is the deadline for filing that waiver. The tax payment schedule, which offers discounts for penalties and interest that may reach 100 percent, has attracted a record number of applications: more than 1.17 million individual and corporate taxpayers. The deadline for applications was November 30, 2009.
Financial institutions are under pressure because of possible changes to the Brazilian Supreme Court’s (STF) definition of gross income taxable by the Program for Social Integration contribution (P.I.S.) and the Contribution for the Financing of Social Security (COFINS).
Itaú Unibanco, Brazil’s largest financial institution, has agreed to pay BRL 1 billion in unpaid P.I.S./COFINS, according to a January 23 article in Folha de São Paulo. That information has since been confirmed by Federal Revenue Department Chief Commissioner Otacilio Cartaxo.
P.I.S./COFINS Dispute
For years financial institutions have argued in court their right to subject to P.I.S. and COFINS only fees charged to clients; gross income from financial transactions would not be subject to those taxes based on a 2005 STF precedent ruling that only gross income from sales of goods and services is taxable by P.I.S. and COFINS. Lower courts have backed financial institutions and granted injunctions freeing them from P.I.S. and COFINS payments on financial income. The total amount involved in the disputes is estimated at BRL 20 billion (about $10.8 billion).
However, when reviewing a motion in August 2009, STF Justice Cesar Peluso rejected similar arguments from an insurance company and said that the definition of gross income should be updated to include not only gross income arising from the sales of goods and services but also operational gross income arising from any activities included in a company’s corporate purposes. That would be the modern concept of gross income, he said, concluding that insurance premiums fell under the definition of gross income taxable by P.I.S. and COFINS as insurance activities included in the taxpayer’s corporate purpose.
Although the case deals only with insurance premiums, Justice Peluso extended his arguments to include financial income earned by financial institutions as liable to P.I.S. and COFINS. The judgment was suspended after STF Justice Aurelio requested the case files to deliver his opinion on the case. Eight other justices must review the case and deliver their opinions.
Conclusion
This new interpretation of gross income for insurance companies and banks has brought a high degree of uncertainty regarding future nonpayment of P.I.S. and COFINS by those companies. What for years was an almost certain victory for taxpayers may turn into defeats totaling billions. Bank executives facing this uncertainty and the February 28 deadline to waive disputes and enjoy generous discounts now have one month to make a decision that may or may not be regretted in the future. One thing is certain: The STF will not deliver a final decision on the P.I.S./COFINS liability by February 28.
David Roberto R. Soares da Silva