Originally published in the September 10 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
In an unprecedented decision, Brazil’s Superior Court of Justice (STJ) has ruled that an exporter may deduct as costs the accumulated tax credits of state value added tax (ICMS) if, because of its exempt export activities, the company cannot recover or use the credits paid on inputs.
The decision may affect thousands of exporters in similar situations and reduce the burden of corporate income tax and the 9 percent social contribution on net income.
The decision, published in Brazil’s official gazette of June 20, was delivered in special appeal No. 1011531 filed by the federal government after a lower federal court decided in favor of the taxpayer, Indústria de Madeiras Guilherme Butzke Ltda.
The taxpayer was an exporter of wood products that was subject to ICMS on purchases of materials, intermediate products, and packaging materials. Because of the ICMS credit/debit system, the taxpayer may take ICMS credits on those inputs, which may be used to offset ICMS levied on outputs. However, because exports are ICMS exempt, the taxpayer accumulated ICMS credits (paid on inputs) without having taxable outputs. The result is constant accumulation of ICMS credits.
In some states, exporters may be able to transfer at least part of ICMS credits to others, like suppliers and related parties; however, the transfer not only usually requires governmental approval, but may take several years. But most Brazilian states do not allow the transfer, and taxpayers end up with useless ICMS credits.
Because ICMS is creditable (that is, recoverable), income tax laws prevent taxpayers from deducting those credits as costs. Instead, they must be recorded as an asset in the company’s financial statements for future recovery — a procedure that makes sense if the taxpayer can use those credits in its daily business activities. But when that is impossible, or when a transfer is not allowed, accumulation of ICMS credits becomes a cost to the taxpayer’s business.
Indústria de Madeiras Guilherme Butzke Ltda. claimed the right to deduct as a cost the accumulated ICMS credits existing at the end of a fiscal year. And because it proved that it had no viable way to use those credits, the STJ ruled in favor of the taxpayer and allowed deduction of accumulated ICMS credits as a cost.
The decision affects taxpayers that calculate income tax according to the actual income tax calculation regime. Under the actual method, taxpayers calculate and pay income tax based on the balance between gross income and deductible costs and expenses.
Tax savings may reach up to 34 percent1 of the amount of accumulated ICMS credits, which is far from immaterial. Although exporters are among those who may benefit most from the decision, the issue is not limited to exporters. ICMS taxpayers that acquire products within their home state, but have significant sales to other states (interstate sales), may also benefit from the STJ rule. That is because intrastate purchases are usually subject to higher ICMS rates, such as 17 percent or 18 percent, while interstate sales are taxed at lower ICMS rates, like 7 percent or 12 percent. In those cases, the accumulation of ICMS credits is similar to that for exporters.
Although the STJ decision is not binding and benefits only Indústria de Madeiras Guilherme Butzke Ltda., it is an important precedent.
Taxpayers seeking the same treatment should first consult with their tax advisers to confirm the requirements for accumulated ICMS credits in their home states. Only if those credits cannot be used should the taxpayer file a lawsuit.
FOOTNOTE
1 Fifteen percent as standard corporate income tax rate, plus 10 percent of income tax surcharge applicable on annual taxable income in excess of BRL 240,000, plus 9 percent as CSL.
END OF FOOTNOTE
David Roberto R. Soares da Silva