On the Extraordinary Appeal, the company Parati Petróleo, which operates in the trade of fuels and lubricants, filed an appeal against the decision of the Court of Appeals of Minas Gerais ("TJ/MG"), which rejected the company’s request for the recognition of credits related to the difference between the real market value of its products and the value assumed by the State Tax Authorities, for purposes of the tax substitution regime.

The tax substitution regime is provided for in Item 7 of Section 150 of the Federal Constitution (introduced by Constitutional Amendment 3/1993) and is characterized by the payment of the tax at the beginning of the production chain (that is, by the manufacturer) under a pre-established price, anticipating the moment of the sale, held at the end of the chain. The goal of the system is to simplify the collection procedures and inspection. The only provision in the Constitution for the reimbursement of the ICMS paid on the tax substitution regime is the situation in which the presumed taxable event does not occur.

The Reporting Judge Edson Fachin decided in favor of the taxpayer, understanding that the principle of practicality, which justifies the use of the tax substitution regime, cannot overlap the principles of equality, contributive capacity and the prohibition to confiscate. According to the Reporting Judge, mechanisms of simplification, such as the substitution regime, cannot infringe rights and guarantees of taxpayers. That is: "Taxation cannot transform a legal fiction in an absolute truth, as would occur if the presumed taxable event had a permanent aspect, thus, strange to the reality of the economic process."

The Judge also proposed to delimitate the effects of the decision, in case his position is followed by the majority of the Judges in Plenary Session, in order to minimize the impact of the Court's change of understanding (considering the understanding expressed in the judgment of ADI No. 1851). This proposal consists on applying the effects of such decision only to pending lawsuits and future cases, after the settlement of the understanding, in order to allow the realignment of the Tax Administrations.

After Judge Fachin read his vote, the judgment of the Extraordinary Appeal was suspended. The trial was resumed yesterday, and Judge Teori Zavascki gave rise to a different opinion, taking into consideration that the understanding held on ADI No. 1851 should be maintained. "Ideally, the calculation basis would correspond exactly to the value of the operation at the time it occurred and the tax would be collected at that moment, and that there would be no tax substitution," he said. However, he says, for both the functionality and efficiency of the system, the tax substitution regime was established with a constitutional status, which cannot be equivalent to the regular system.

Also, according to the Judge Teori Zavascki, the tax substitution regime provides economy, celerity and efficiency to taxation. Given these practical purposes, it does not make sense to compensate lack of payments or overpayments, returning to the mechanism of monthly assessment. With it, the goals of the tax substitution regime would be emptied.

The vote of Judge Teori Zavascki was followed by the Judges Dias Toffoli and Gilmar Mendes. The Reporting Judge was followed by the Judges Luis Roberto Barroso, Rosa Weber, Luiz Fux, Marco Aurelio and the President of the Supreme Court, Judge Carmen Lucia.

Finally, Judges decided to delimitate the effects of the decision only to events subsequent to the issuance of the decision, as well as to all cases already filed.