The discussion on the (non) taxation of revenues arising from investment subsidies granted by Brazilian states to taxpayers has recently taken on new contours with the judgment  of Theme 1,182 by the Superior Court of Justice (STJ).

The understanding issued by the court through the decision published on June 12 was that the generic benefits of the Tax on the Circulation of Goods or Services (ICMS) – ICMS benefits in the forms of exemption, deferral, reduction of the calculation basis or reduction of rate, that is, benefits that are not presumed tax credits – should not compose the calculation basis of  the Corporate Income Tax (IRPJ) and the Social Contribution on Net Income (CSLL).

For this, three requirements should be met (the last two, as established by article 30 of Law 12,973/14):

  • Registration and deposit of the benefit in the Executive Secretariat of the National Council of Finance Policy (Confaz) – pursuant to article 10 of Complementary Law 160/17 (LC 160/17);
  • Constitution and maintenance of the amounts related to the enjoyed benefits in the incentive reserve account in the company’s ’net equity; and
  • Limitation in relation to the destination of the values, which cannot be distributed to the shareholders of the entity benefiting from the incentive .

The STJ confirmed the understanding that had already been adopted by both panels of the court, which was that the intention of the state in granting the tax benefit was no longer relevant since the edition of LC 160/17 – which inserted paragraphs 4 and 5 in article 30 of Law 12,973/14.

In other words, it would no longer be appropriate to question whether the state granted the benefit of ICMS with the objective of stimulating the implementation or expansion of economic enterprises (concept of subsidy for investment). This is so because the differentiation of the classification of benefits into investment subsidy (suitable for exclusion for purposes of calculating the IRPJ/CSLL) and costing subsidy (taxable by the IRPJ/CSLL) no longer mattered to define the possible non-taxability of these incentives granted by the states.

To benefit from the condition of non-taxability of generic benefits, therefore, it was enough to meet the three requirements mentioned above – and no other.

The STJ also ended up differentiating the benefits of presumed credits from generic benefits and established that only the former should receive the treatment provided for in EREsp 1,517,492/PR – which determined the non-taxation of presumed ICMS credits based exclusively on constitutional grounds, not analyzing any need to meet the requirements of the legislation. It was thus established that:

  • the presumed credits could not be subject to taxation for offense to the federative pact and to reciprocal immunity (that is, they represent non-taxable revenues by themselves); and
  • the other tax incentives could not be subject to taxation only when the requirements of article 30 of Law 12,973/14 and article 10 of LC 160/17, mentioned above, were met.

Taxpayers may have difficulties with the tax authorities

Although the understanding of the Superior Court seems very clear, taxpayers may still encounter resistance from the tax authorities in the application of the issued theses.

On June 12, shortly after the publication of the decision on Theme 1,182, the National Treasury Attorney General's Office (PGFN) released a public note informing, among other points, that the ICMS that was no longer paid due to the tax benefit cannot be incorporated into the company's profit. It must be registered in an incentive reserve account and subsequently reinvested in the expansion or implementation of an enterprise.

In our view, the PGFN's understanding of the need to reinvest the amounts in the expansion or implementation of an enterprise does not find support in the law or in the decision of Theme 1,182 issued by the STJ. However, it may represent an orientation on the matter that the Brazilian Federal Revenue Service (RFB) will adopt in future inspections.

We understand that the objective of the STJ in the judgment of Topic 1,182 was to ensure that the resources were not removed from the patrimonial sphere of the benefited legal entity, in reinforcement of the legal content expressed in paragraph 2 of article 30 of Law 12,973/14.

The paragraph is explicit in not allowing the exclusion of benefits from the calculation basis of IRPJ and CSLL if there is a different destination for the  benefits. It lists, in its paragraphs, examples of what should be considered as deviation – basically hypotheses of transfer of profits to the partners of the legal entity.

From no perspective did the legislator and the ministers of the STJ understand that the deviation of the destination would be characterized as the need for reinvestment in expansion or implementation of an enterprise, as the PGFN intends to make taxpayers believe. This is an attempt to reopen a long discussion, now pacified in the courts and definitively eliminated, on the mathematical proof of investment of resources in assets of the legal entity.

In addition, in recent inspection procedures, initiated after the publication of the decisions of Theme 1,182, the RFB sought to apply a second understanding on the decision of the STJ. This other position ends up restricting (or even making impossible) the application of the court's understanding to concrete cases.

In a specific precedent, the tax authorities sought to sustain that the STJ would have concluded that the exclusion of incentives from the calculation basis of IRPJ and CSLL would impose compliance with the requirements set forth in article 10 of LC 160/17 and in article 30 of Law 12,973/14. Among these requirements would be that there must be the occurrence of an effective tax benefit to the taxpayer resulting from the state rule that granted the ICMS benefit.

From this standpoint, the tax authorities considered that there would be no tax benefit for the seller of the merchandise that enjoyed generic benefits of ICMS. As an example, it was mentioned that there would be:

  • the mere deferral of the collection of the tax to a later stage of the production chain, due to the recovery effect of the non-cumulative regime (that is, the value of the tax that the seller ceases to debit in the operation benefitted with exemption or reduction of calculation basis or rate is equal to the value that the buyer ceases to credit); or
  • the tax benefit of the purchaser of the goods (final consumer), not of taxpayer of the tax.

In our view, therefore, the RFB's orientation is to seek to restrict the application of the decision of Theme1,182 of the STJ, initiating a discussion hitherto non-existent – and, mainly, not provided for in the law. In addition, the tax authorities seek to ignore the theses issued by the Superior Court on the possibility of excluding subsidized revenues in relation to generic ICMS benefits from the IRPJ/CSLL calculation bases, directly affronting the principle of legal certainty.

There are motions to clarify filed against the decision rendered in Theme 1.182 that are pending judgment. These motions seek to clarify, among other points, the inappropriateness of the requirement to apply the benefit in reinvestment in the expansion or implementation of the enterprise, so that it is clear that the RFB can only proceed with charging IRPJ and CSLL if, in an tax assessment procedure, it is verified that the taxpayer did not observe the legal requirements provided for in article 10 of LC 160/17 and in article 30 of Law 12,973/14.

The decision of the STJ in relation to this point may therefore remove the understanding issued by the PGFN in its public note – and, depending on the depth of the analysis, the understanding of the RFB mentioned above.

On August 7, the National Treasury filed challenges to the motions to clarify opposed by taxpayers and amicus curiae in the case and reinforced its understanding of the need for the gains obtained from the tax benefits of ICMS to be destined to the viability of the economic enterprise through the implementation of a new venture or expansion of an existing one.

According to the understanding of the tax authorities, the decision of the STJ only removed the need for prior proof that the state law had the intention to subsidize, maintaining the need for subsequent proof that the amounts related to the tax benefits of ICMS were invested in the economic enterprise (via implementation or expansion of these).

In addition, the PGFN confirmed in the records of the aforementioned challenges the position that has been adopted by the RFB in the inspections, as we mentioned above, having highlighted that "when the tax exemption occurs through exemption and reduction of ICMS, the taxpayers who are in the middle of the productive chain will not obtain any economic advantage, nor is there a waiver of revenue,  given that there will be a recovery in the subsequent stages [of the production chain]"

The tax authorities concluded that the tax benefits of ICMS granted in a generic, unconditional manner and that do not generate any gain are not subsidies and, therefore, would not be able to be excluded from the calculation basis of the IRPJ / CSLL upon proof of compliance with the requirements of article 30 of Law No. 12,973/2014.

We consider that both the position of the PGFN and the understanding of the RFB in the recent inspections of which we have heard are not supported by the judgment of Theme 1,182 or by the current legislation. Even so – and despite the fact that the decision of the STJ in Theme 1,182 was issued under the rite of repetitive appeals (systematic whose intention is, ironically, to confer isonomic treatment and legal certainty to its beneficiaries) – it is important that the taxpayer is alert to the possible resistance he will face as to the application of the thesis on the non-taxability of generic ICMS benefits.

If the different positions of the tax authorities on the restrictive interpretation of the application of the thesis issued in Theme 1,182 were not enough, there are discussions that were not addressed by the STJ in this repetitive appeal and that may directly impact the enjoyment of the tax credit originated from the exclusion of ICMS tax benefits from the calculation basis of IRPJ and CSLL.

The recognition and use of the aforementioned tax credit would be conditioned not only to the validation of the possibility of excluding subsidized revenues from the IRPJ/CSLL calculation bases, but also to the deductibility of the ICMS expenses recognized in the company's bookkeeping – with special attention to the accounting procedure determined by Technical Pronouncement 07 of the Accounting Pronouncements Committee (CPC).

According to this pronouncement, it should be recorded:

  • an expense related to the ICMS that would be fully due in the operation, if there was no tax benefit; and
  • the corresponding subsidized revenue.

Although they deal with different situations, we assess that the risk of the tax authorities considering the mentioned expenses non-deductible became greater with the publication of the Consultation Procedures  Cosit 15/20 and Cosit 12/22.

There are also controversies about the extent and measurement of the granted subsidies regarding ICMS presumed credits. It is discussed whether the recognized revenues could be fully excluded or whether the exclusion would be restricted to the portion that effectively exceeds the credits that could be recognized by the taxpayer from its acquisitions (in this case, granted credit minus recognized credit).

It can be seen, therefore, that despite the effort of taxpayers to pacify the issue, the non-taxability of revenues from investment subsidies is still a controversial matter and can generate clashes between taxpayers and the tax authorities.