Originally published in the August 15 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s executive branch on August 13 obtained an important decision suspending litigation on one of the most relevant tax issues before the Supreme Court: the exclusion of the state VAT (ICMS) from the P.I.S. (Program for Social Integration contribution) and COFINS (Contribution for the Financing of Social Security) tax base.
The Supreme Court granted an injunction in Direct Action of Constitutionality (Ação Direta de Constitutionalidade, or ADC) 18, filed by President Luiz Inácio Lula da Silva on October 15. ADC 18 was an attempt by the government to avoid refunding billions in P.I.S. and COFINS to corporate taxpayers after 6 of 11 Supreme Court justices voted in favor of taxpayers in August 2006.
In a 15-minute court session, 9 of the 11 justices voted that all cases litigating the exclusion of the ICMS from the P.I.S./COFINS tax basis be suspended until the Supreme Court rules definitively on the matter.
For the government, it was an unquestionable victory, although temporary, because the injunction stalls the judgment of all cases on the subject before all courts in the country. No decision may be delivered until the Supreme Court rules on the matter, which is expected to occur within 180 days.
For taxpayers, the injunction frustrates any attempt to immediately exclude ICMS from P.I.S./COFINS tax basis and thus lower P.I.S./COFINS tax payments. Based on the Supreme Court’s six favorable opinions delivered in 2006, thousands of taxpayers have filed lawsuits before federal courts to not only exclude ICMS from the P.I.S./COFINS tax base in the future, but also to recover excess payments made in the last 5 to 10 years.
While some specialists believe the injunction anticipates the Court’s final position on the issue, some believe the Supreme Court injunction was delivered only to suspend litigation on a topic on which the Court will soon rule. Skeptics, however, argue that since the 2006 favorable opinions, the Court’s composition has changed and now only two justices can be considered pro-taxpayer, which could reduce the chances for taxpayers to prevail.
With billions at stake, taxpayers or the government will soon celebrate a victory.
David Roberto R. Soares da Silva