As widely reported, the Federal Supreme Court (STF) in a judgment concluded on February 8, 2023 ruled in summary that final court decisions favourable to the taxpayer determining the non-payment of a tax demanded on a continuous basis, i.e. with periodic payments, become ineffective should there be a change in the Supreme Court’s position.
The recent decision, involving the analysis of two extraordinary appeals, RE 955227 (Topic 885) and RE 949297 (Topic 881), has led to the need for companies to confirm the possible effects on their financial statements, not least because the CVM (Brazilian Securities and Exchange Commission), with rulings approved by the CFC (Federal Accounting Council), has set guidelines determining the registration of all tax issues that could be included in the judgment (Circular Letter/CVM/SNC/SEP/no. 01/23).
It is important to note that the decision of February 8, 2023 dealt with the Social Contribution on Net Profits (CSLL), the constitutionality of which was first discussed in the 1990s, with final and unappealable decisions recognizing the unconstitutionality of the law that instituted the CSLL, payment of which could therefore not be demanded (Law 7.689/88). In 2007, however, the STF in Action for Declaration of Unconstitutionality no. 15, declared that the charge was constitutional. The opinion now expressed by the Justices of the STF is that the CSLL has therefore been constitutional since 2007, and as a result, it has been payable since then and provision should have been made even by companies with a final and unappealable decision in their favour. However, considering that in Brazil there has never been a similar situation in which the doctrine of res judicata has been questioned, and considering that a financial provision is synonymous with the expectation of loss, no provision was made for the amounts payable by most of the companies that benefitted from the original favourable decision.
If the effects of the decision of February 8, 2023 are not modified to the effect that the new position of the STF applies only to the future and not to the past, which is still a possibility as the result of a new request for modification submitted in Embargos de Declaração (motion for clarification), the CSLL will in fact be due by taxpayers that benefitted from favourable decisions as from 2007. There is still a discussion as to whether CSLL could be demanded only in relation to the last five years not affected by the statute of limitations, or whether it could be demanded since 2007, which is not the position most widely accepted. There are also companies whose unpaid contributions have been the subject of tax assessment notices, which must also be considered.
Although the decision dealt specifically with CSLL, the principle applies to all final decisions that suspended the payment of continuous taxes and the results of which were reversed by the STF. We are aware that certain arguments have been the focus of attention by companies. We may list the following:
(i) Certain claims for exclusion of ICMS from PIS and COFINS tax base filed after March 2017 (Topic 69).
Considering that on May 13, 2021 the STF decided that the exclusion of ICMS from the PIS and COFINS tax base is valid as of March 15, 2017, according to the principle established in the judgment of Extraordinary Appeal no. 574.706, under the general repercussion system (Topic 69), except for lawsuits and judicial and administrative proceedings filed up to this date, companies that filed suit after March 15, 2017 are not authorized to take advantage of previous credits, according to the position adopted by the STF.
It should be noted that numerous companies filed lawsuits after March 15, 2017 and were granted final and unappealable decisions recognizing the right to the credit in the 5 (five) years prior to the filing of the lawsuits. The PGFN (Office of Attorney General of the National Treasury) even filed numerous rescission actions to adjust the decisions to the STF’s position. According to the STF ruling of February 8, 2023, however, regardless of the rescissions, the credits may only be used after March 15, 2017.
(ii) IPI on resale of imported products (Topic 906).
The Federal Supreme Court has confirmed the constitutionality of the IPI levy on the customs clearance of industrialized products and also on their removal from the importing establishment for sale in the domestic market. By majority vote, the Court dismissed Extraordinary Appeals nos. 979626 and 946648, judged together, in a judgment concluded on August 21, 2020. The general repercussion of RE 946648 was recognized (Theme 906).
The court, in accordance with the dissenting opinion of Justice Alexandre de Moraes, held that the levy of the tax at both stages does not represent double taxation and does not result in a violation of the principle of tax equality. The general repercussion argument was as follows: “The levy of the Tax on Manufactured Products (IPI) on customs clearance of manufactured goods and on their removal from the importing establishment for sale in the domestic market is constitutional.”
(iii) Social security contribution on 1/3 vacation bonus (Topic 985).
During the period from August 21 to August 28, 2020, in Virtual Plenary session, the STF settled its position on Topic 985, by majority vote, to the effect that “The levy of social security contribution on the amount paid as constitutional one-third vacation bonus is lawful”. In other words, the employer’s INSS contribution is levied on the 1/3 vacation bonus paid together with the employee’s vacation pay.
Since March 2014, the Superior Court of Justice (STJ) had already established Binding Decision 479 to the contrary (that the 1/3 vacation bonus is of an indemnity nature and does not give rise to the payment of INSS). This decision was followed by the Regional Courts of Appeal. In 2016, the STF itself denied general repercussion to Topic 908, which addressed the levy of INSS on the employee’s quota of the 1/3 vacation bonus, on the grounds that it was an infra-constitutional matter.
(iv) CSLL on exportation (Topic 8).
By six votes to five, the Federal Supreme Court (STF) decided on August 12, 2010 that the profit earned by exporting companies is subject to CSLL tax. The justices ruled that revenue is not profit. Therefore, the constitutional provision for immunity from the levy of contributions on revenue obtained from exports does not apply to CSLL. Justice Joaquim Barbosa cast the deciding vote.
By nine votes to two, the justices also ruled that the levy of contributions on the financial movement of these earnings is lawful. Only Justice Marco Aurélio and STF President Cezar Peluso voted against the charge of CPMF on revenue obtained from exports.
The argument that prevailed was that the taxpayer is not entitled to exclude from the CSLL and CPMF tax base the revenue arising from export transactions carried out since EC (Constitutional Amendment) 33/2001, because the tax base is the net profit, which is not to be confused with revenue. If the revenue derived from exports is exempt from contributions, this does not imply that the profit resulting from such revenue is also exempt, since revenue and profit are not the same.
(v) COFINS on the provision of legally regulated services (Topic 71).
Revocation of the exemption stipulated in art. 6, II, of Complementary Law 70/1991 by art. 56 of Law 9.430/1996 is lawful, since LC 70/1991 is only formally complementary, but ordinary in substance as regards the provisions concerning the social contribution it created. Thus, the exemption from payment by the civil companies listed in Decree-Law no. 2.397/87 (such as “medical clinic”, “law office”, “accounting firm” etc.) is no longer applicable, according to the ruling of the STF.
These and other cases, in which there are taxpayers benefitting from favourable decisions, given the change in orientation by the STF, even if these decisions have not been the subject of rescission actions by the PGFN, according to the STF’s ruling of February 8, 2023, may culminate in the demand for unpaid taxes based on the previous judicial decisions.
Our first recommendation is that each company should assess the past and current legal disputes it is involved in, in order to confirm initially if it is benefitting from them. If the assessment is positive, that is, if there is any benefit arising from a judicial decision, it should be confirmed whether there is any change of orientation in relation to this discussion. And, if so, what are the effects of this change in relation to the specific case.
It is certain that further discussions may be necessary in order to clarify to what extent the earlier final and unappealable decision will become ineffective due to the new position of the STF. It is important to note that until the STF changes its understanding on a certain matter, the favourable decision will continue to produce its regular effects. Furthermore, it must be borne in mind that the principles of non-retroactivity, as well as annual and 90-day anteriority must be observed, i.e. the new ruling of the STF can only come into force in the next fiscal year or, as in the case of contributions, after 90 (ninety) days.
It should also be mentioned that there is a possibility that the tax authorities will demand a penalty and interest for the late payment of taxes, although this may be questioned.
We take this opportunity to point out that we have the expertise and are available to assist any company that wishes to make the necessary assessment of the impact of the STF’s decision of February 8, 2023 on its accounting and financial statements.
Patrícia Giacomin Pádua
Partner in the Tax Area – Stüssi Neves Advogados – São Paulo