No Tax Credits for Merchants' Credit Card Fees, Brazil's Revenue Department Says

Originally published in the March 3 edition of World Tax Daily (Copyrights Tax Analysts)

Brazil’s Federal Revenue Department (FRD) has published a clarification denying tax credits for the Program for Social Integration contribution (P.I.S.) and Contribution for the Financing of Social Security (COFINS) on credit card fees paid by merchants to credit card companies.

Private Letter Ruling (PLR) 05/2009, issued by the FRD Superintendence for the Third Fiscal Region, ¹ is dated January 21 but was published in Brazil’s official gazette of February 2. It says that for purposes of calculating P.I.S. and COFINS credits, the taxpayer cannot consider fees paid to credit card companies as financial expenses because such fees do not arise from loans or financing granted to the taxpayer.

PLR 05/2009 is binding only on the filing taxpayer and does not immediately affect other taxpayers in similar situations, but it may serve as a precedent to tax agents. Although the complete facts and circumstances of the relevant case are unknown, it is clear that the taxpayer sought confirmation that credit card fees paid by merchants should generate P.I.S./COFINS while applicable. It is not clear which fees charged by credit card companies were included in the taxpayer’s ruling request.

The summary of PLR 05/2009 reads as follows:

• For purposes to calculate credits under non-cumulative COFINS [and P.I.S.], he “management fees” paid by the taxpayers to credit card companies cannot be considered as financial expenses, since they do not arise from loans or financing granted to the taxpayer pursuant to Articles 3, items V of Law Nos. 10,637/2002 and 10,833/2003 (in their original wording), as amended by Law No. 11,196, of 2005; as from the latter law only [COFINS and P.I.S.] tax credits arising from lease payments paid by legal entities, except those under the Simplified Tax Regime (SIMPLES), were eligible.

Under the original versions of laws 10,637/2002 and 10,833/2003, corporate taxpayers under the noncumulative P.I.S./COFINS regime could claim P.I.S./COFINS tax credits for financial expenses incurred in loans and financing taken from third parties. At the time, financial income was also taxed by P.I.S./COFINS. Law 10,684/2003 added lease payments as capable of generating P.I.S./COFINS credits. In 2004, Law 10,865/2004 and Decree 5,164/2004 reduced the P.I.S./COFINS rates on financial income to zero in most cases and thereby eliminated the possibility for taxpayers to claim P.I.S./COFINS credits on financial expenses. The exception was lease payments, for which Law 10,865/2004 continued to allow P.I.S./COFINS credits.

Merchants that accept credit card payments in their sales have historically considered fees paid to credit card companies as financial expenses for tax purposes. Therefore, during the period that financial expenses generated P.I.S./COFINS credits, it would make sense that those fees would generate P.I.S./COFINS credits that merchants could use to pay their P.I.S./COFINS monthly liabilities.

PLR 05/2009 narrows the interpretation of the P.I.S./COFINS statute — namely article 3, Item V of both Law 10,637/2002 (for P.I.S.) and Law 10,833/2003 (for COFINS) — stating that fees paid by merchants to credit card companies do not qualify as financial expense because they do not arise from loans or financing made to the taxpayer. This interpretation is harmful to taxpayers, particularly those with significant sales paid by credit cards such as supermarkets, department stores, online stores, and rental car companies.

The good news for taxpayers is that PLR 05/2009 should affect a limited period of time because of changes to applicable laws and assuming that taxpayers have treated credit card fees as financial expenses, as seems to have been the case with the taxpayer in PLR 05/2009. From a practical standpoint, it should apply to transactions carried out before August 1, 2004, because thereafter, only lease payments could legally generate P.I.S./COFINS credits (still assuming that taxpayers have treated credit card fees as financial expenses). Also, because the applicable statute of limitations for P.I.S./COFINS is five years from the taxable event, in theory, only tax credits taken from February 2004 through July 2004 could be subject to questioning and assessment by tax authorities.

If, however, merchants have treated credit card fees as something other than financial expenses and still claim P.I.S./COFINS credits over those fees, they should review their procedures to assess the potential tax contingencies that could arise from the position taken in PLR 05/2009.

FOOTNOTE

David Roberto R. Soares da Silva