Originally published in the September 24 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com
Professional service providers suffered a major tax defeat on September 17, when Brazil’s Supreme Court (STF) ruled that they are subject to the 3 percent COFINS (Contribution for the Financing of Social Security). The ruling is more important than a similar decision from May 2006 because it is binding on all lower courts.
Professionals such as lawyers, physicians, architects, engineers, accountants, and auditors who have not paid COFINS in previous years will not only be subject to the tax on future income, but will be required to pay up to five years of unpaid COFINS, with interest and penalties, depending on the case. The five-year limit is the applicable statute of limitations for tax authorities to collect unpaid taxes.
The 8-2 ruling in favor of the government put an end to a COFINS controversy that has dogged professional service providers for years. The decision was delivered in extraordinary appeals nos. 377457 and 381964, filed by two law firms (Antônio Glênio F. Albuquerque & Advogados Associados S/C and Savoi e Cabral Advogados Associados S/C, respectively).
The decision is historic because the STF has declared the cases as subject to “general repercussion,” which under Constitutional Amendment 45/2004 and article 543-A of Brazil’s Code of Civil Procedure means that the constitutional issue at stake 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. As a consequence, all Brazilian lower courts must follow the STF’s position on the matter.
The COFINS exemption for professional service providers originally was granted by Complementary Law 70/91, which introduced the COFINS for corporate taxpayers. The law expressly excluded professional service providers from COFINS taxation because those companies were subject to a special regime in which they were treated as flow-through entities (meaning that tax was imposed on the partners, rather than on the legal entity).
In 1996, Law 9,430 eliminated that special regime, raising questions about whether the COFINS exemption would continue to apply to professional service providers. After years of disputes in the courts, the Superior Court of Justice in 2003 ruled unanimously that professional service providers were not subject to COFINS and that Law 9,430/96 could not have revoked the exemption granted by Complementary Law 70/91.
However, many regional appeals courts ignored that decision, ruling that the exemption had been revoked in 1996. For a few years, taxpayers prevailed before the Superior Court of Justice, which continued to uphold its 2003 decision.
On May 23, 2006, the first chamber of the STF ruled unanimously in favor of the government. It was the first defeat for COFINS taxpayers, who still hoped that the full STF would overrule the first chamber’s position. The September 17 ruling crashed taxpayers’ last hopes and put an end to a controversy that lasted more than a decade.
The decision may not affect all professional service providers in the same way, however. More conservative companies decided years ago either to pay COFINS (and eventually file for a refund if the STF ruled favorably) or to make court deposits to secure their lawsuits. For those, the decision is only bad news, with no major financial impact.
David Roberto R. Soares da Silva