Brazilian agriculture is a global reference in productivity and contributes directly to the country's economic development. The sector was mainly responsible for the strong GDP growth in the first quarter of 2023, as released by the IBGE.

This scenario requires the State to establish measures to promote agribusiness through tax incentives, public policies, and facilitated financing structures, among other types of subsidies.

This is the case of ICMS Agreement 100/97, approved by the National Council for Finance Policy (Confaz). The agreement offers the following tax incentives for various agricultural inputs:

  • exemption from ICMS due on internal operations, as provided for in its third section; and
  • 60% reduction of the ICMS calculation basis due on interstate transactions, under the terms of the first section.

In order to enjoy the tax benefits mentioned, as provided for in subsection II of Section Five of ICMS Agreement 100/97, states may require taxpayers to comply with two requirements:

  • a substantive one, expressed in the deduction of the amount corresponding to the ICMS exemption from the price of the goods; and
  • one of an instrumental nature, materialized in a demonstration of the respective deduction in the tax invoice.

Regarding the instrumental requirement, the legislation of each state regulates the specific procedures for demonstration of the deduction in the tax invoice (such as indication in the "Additional Information" field of the amount exempted, etc.)

However, in recent years, state revenue services have assessed taxpayers on the grounds that there is no proof of passing on of the deduction in the price of the products, even in cases where the irregularity identified is related only to compliance with the instrumental requirement (i.e., demonstration of the deduction on the invoice).

A relevant question then arises as to how to prove that the tax benefit has been passed on in the chain. This is because both ICMS Agreement 100/97 and the state laws that absorbed it did not expressly establish a form or procedure for proving that there was an effective deduction of the ICMS exempted from the price of the goods sold.

In an objective reading of subsection II of section five of the agreement, it would be defensible to conclude that it would be sufficient to fulfill the instrumental duty of demonstrating the deduction on the invoice to prove the deduction of the ICMS exempted.

It should be noted, however, that it is not being stated that the only way to prove that the ICMS exempted was passed on to the purchaser would be through the instrumental duty to indicate the deduction on the invoice - not least because this obligation is not confused with the substantive duty of ICMS Agreement 100/97.

Even in cases where the instrumental duty of demonstrating the amount of the deduction on the tax invoice has been fulfilled, there is a new tendency for tax authorities to sometimes resort to other evidence to question the actual deduction of the exempted ICMS (regardless of compliance with the instrumental duty).

In these cases, in the tax authorities' view, there is a risk that the taxpayer had raised the original net price of the transaction to artificially deduct the exempted ICMS. The agency's claim is that the tax benefits of ICMS Agreement 100/97 were not been passed on, but rather internalized by the seller in its profit margin.

From an analysis of the precedents related to this topic, it appears that this scenario tends to occur in cases where the tax authorities identify different prices in domestic transactions (exempt from ICMS) and interstate transactions (subject to reduction in the calculation basis). Exempt sales would be more costly than those partially exempted by the reduction of the tax basis.

Given these indications, the tax authorities choose to assume - without any verification or even knowledge of the commercial and market variables of the transactions or even of the agricultural sector as a whole - that the taxpayer failed to comply with the substantive requirement of passing on the economic advantage of the ICMS tax benefit.

The tax authorities, therefore, reverse the burden of proof to require the taxpayer to demonstrate actual deduction of the amount corresponding to the tax exempted from the price of the goods, disregarding all other variables that influenced the pricing of the transactions compared (in particular, the existence of a potential stock exchange quotation - whose variation is inherent to the business).

This understanding could lead to new assessments related to the application of other tax incentives conditioned on demonstration of the transfer of the benefit in the chain - as an example, one could mention ICMS Agreement 87/02 as an example, which grants exemption from ICMS on transactions with drugs and medicines destined for bodies of the federal, state, and municipal direct public administration.

In our assessment, in respect of legality and tax typicality, the burden of proving non-existence of transfer of the ICMS deduction per ICMS Agreement 100/97 remains with the tax authorities, who intend to disregard that the taxpayer applied the tax benefit.

In the same sense, the scholarly writings of Professor Paulo de Barros Carvalho elucidates that "the law establishes the need for the administrative legal act to be duly substantiated, which means that the tax authorities have to offer conclusive proof that the event occurred in strict conformity with the generic provision for the normative scenario."[1]

As a consequence, "[i]f the taxpayer contests the grounds of the tax assessment issued by the tax authorities, the burden of showing the unfoundedness of this objection returns, again, to the tax authority, which will have to prove the legal inadmissibility of the objection, causing the requirement to remain."[2]

In concrete terms, we have identified a tendency for tax authorities to increase the evidentiary burden in tax assessments in such cases. It is required that the taxpayer be able to provide sufficient evidence to demonstrate not only the actual passing on of the tax deduction to purchasers, but also the rationality of the differences between the prices charged, in order to rule out a presumption of improper application of the ICMS benefit.

Therefore, in cases of allegation of non-compliance with actual transfer of the incentive in the chain, through reduction in the price of the goods, we recommend that taxpayers analyze their operations to be able to offer evidence and arguments that prove to the tax authorities the existence:

  • of different prices for different operations (including justification); and
  • of the transfer of the tax benefit to the respective purchaser of the products.


[1] CARVALHO, Paulo de Barros. The theory of evidence in administrative tax proceedings and the use of presumptions. Instituto Brasileiro de Estudos Tributários [“Brazilian Institute of Tax Studies”]– IBET.

[2] Ibid.