Originally published in the September 8 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s Supreme Court (STF) on August 19 suspended judgment of a case dealing with possibly the most relevant tax issue facing insurance companies and financial institutions: the levy of the Contribution for the Financing of Social Security (COFINS) and the Program for Social Integration contribution (P.I.S.) on their gross income.
In a motion to Extraordinary Appeal No. 400,479, filed by insurance company AXA Seguros Brasil S/A, the taxpayer argued that P.I.S. and COFINS could not be levied on insurance premiums it received because insurance premiums do not fall under the concept of “gross income arising from sales of goods or services,” which the Supreme Court, in November 9, 2005, defined as the P.I.S. and COFINS tax base.1
Citing many commentators, STF Justice Cesar Peluso extensively detailed the evolution of the concept of gross income. Afterward, he rejected the company’s arguments and said the definition of gross income must 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 is the modern concept of gross income, he said, concluding that insurance premiums fall 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. Banks have argued that only fees charged to clients, and not interest earned in intermediating financial transactions, are liable to P.I.S. and COFINS because only those fees can be included in the concept of gross income arising from sales of goods and services.
Justice Marco Aurelio requested the case files for a better review of the case. Therefore, the judgment was suspended sine die until Justice Aurelio delivers his opinion on the case. Eight other justices must review the case and deliver their opinions.
If Justice Peluso’s arguments prevail, insurance companies as well as financial institutions would have to pay P.I.S. and COFINS on their entire premiums/financial income, which would have a substantial impact on their profitability. Although most banks and insurance companies have made provisions in their balance sheets in case they do not prevail before the STF, a ruling that subjects premiums and financial income to P.I.S. and COFINS would be a major defeat.
FOOTNOTE
1 Extraordinary Appeals 357,950; 390,840; 358,273; and 346,084 of November 9, 2005.
END OF FOOTNOTE