Originally published in the August 17 edition of World Tax Daily (Copyrights Tax Analysts)
Brazilian exporters suffered one of the most significant defeats in the history of tax litigation in Brazil on August 13 when the Supreme Court ruled that the extra federal excise tax (IPI) credit for exporters, which exporters have claimed for almost 20 years, expired in 1990.
The decision puts an end to one of the most important tax disputes before Brazilian courts — one that generated reversing and conflicting decisions over the years — and gives the government the opportunity to claim billions in unpaid taxes.
By unanimous vote, the Supreme Court ruled that the extra IPI credit, created in 1969 to stimulate exports, was revoked in 1990 because the tax benefit was not confirmed by Congress within two years after the promulgation of the 1988 Federal Constitution.
- Background
The extra IPI credit was created in 1969 by Decree-Law 491/1969 (and eventually amended by Decree-Law 1,248/1972) to enable exporters to recover some of the tax costs of goods produced in Brazil and exported. The legislation granted a 15 percent presumed tax credit that exporters could use to offset against IPI liabilities and other federal taxes. In 1979, Decree-Law 1,658 established a gradual reduction of the extra credit, which would lead to its expiration in 1983. Over the years, subsequent legislation revoked the expiration of the extra credit and extended it indefinitely.
In 1988 a new Federal Constitution was promulgated. Article 41 of its Transitory Dispositions required federal, state, and municipal governments to review all tax incentives granted to business sectors existing at the time the constitution entered into force. Paragraph 1 of article 41 provided that those tax incentives should be deemed revoked if not confirmed by law within two years after the promulgation of the new constitution.
Disputes began after 1990 over whether the extra IPI credit had expired because it had not been confirmed by law. Taxpayers have argued for years that the extra IPI credit was not granted to a given business sector but to exporters in general. Therefore, exporters could not be deemed as a separate business sector; exports would be one income component of any trading business (such as automobile, furniture, food, or beverage businesses) but not a separate sector.
- Judgment of the Supreme Court
Upon reviewing Extraordinary Appeal 577,302, filed by Pettenati S/A Indústria Têxtil, the Supreme Court ruled that the extra IPI credit was granted to a specific business sector, exporting, and that the extra credit expired in 1990 because it has not been confirmed by a law enacted within two years after the 1988 constitution.
Observers estimate that the government will be entitled to claim BRL 50 billion in unpaid taxes as a result of offsets made with the extra IPI credit.
After the decision, representatives of the Federal Revenue Attorney General’s Office (Procuradoria Geral da Fazenda Nacional) said that taxpayers disputing the extra credit should seriously consider applying for the new federal tax payment schedule, which allows unpaid taxes to be paid in up to 180 months with significant discounts for interest and penalties. Applications can be filed between August 17 and November 30. Attorneys present at the Supreme Court session said they will try to bring other similar cases for the Court’s review in a last attempt to reverse the defeat.
David Roberto R. Soares da Silva