Originally published in the August 21 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s Supreme Court (STF) on August 1 agreed to review a case involving the exclusion of a taxpayer’s outstanding sales income from the tax basis for P.I.S. (the Program for Social Integration contribution) and COFINS (the Contribution for the Financing of Social Security).
In Extraordinary Appeal 586,482, supermarket company WMS Supermercados do Brasil Ltda. appealed to the STF after a federal appellate court denied the exclusion of its unrealized sales income from the P.I.S./COFINS tax basis.
The STF’s decision to review the case was based on Constitutional Amendment 45/2004 and article 543-A of Brazil’s Code of Civil Procedure (included in Law 11,418/2006), which limit appeals to the Supreme Court unless they present “general repercussion,” a constitutional issue that, according to the STF, is economically, politically, socially, or legally relevant because its effects may surpass the subjective interests of the appellant and reach a broader group of interested parties. The STF held that the exclusion of unrealized sales income from the P.I.S./COFINS basis is relevant to corporate taxpayers.
The STF’s acceptance of the case represents an excellent opportunity for taxpayers to not only reduce their P.I.S./COFINS tax burden, but also to reverse the Superior Court of Justice’s1 position against the exclusion of outstanding sales income from the P.I.S./COFINS basis. The Superior Court ruled against such exclusion in mid-2007, and its decision became an important precedent (although not binding) in similar cases before the lower courts.
Generally, taxpayers argue that unrealized sales income is equivalent by analogy to canceled sales, which are excludable from the P.I.S./COFINS tax basis under Brazil’s tax laws. The courts have rejected that argument, however, taking the position that canceled sales differ from unpaid sales income because in the former, the seller (taxpayer) receives back the merchandise originally sold to the customer. When a customer simply does not pay for a purchase, no return of merchandise occurs and the taxpayer is required to file a claim against the customer to collect the unpaid sales receipts.
If the STF decides in the taxpayer’s favor, the decision will become an important tool for many taxpayers to reduce their P.I.S./COFINS burden relating to unpaid sales income. Companies in the telecom, cable TV, energy, and water and waste treatment sectors, to name a few, are among those that will certainly benefit from a favorable decision in the case.
- FOOTNOTE
1 The Superior Court of Justice is Brazil’s highest court with jurisdiction over nonconstitutional issues.
- END OF FOOTNOTE
David Roberto R. Soares da Silva