Federal taxation of ICMS tax incentives after April 26 – 05/02/2023 – What tax is this

In the last days of April, the market attentively followed the judgment in the STJ (Superior Court of Justice) of special appeals 1,945,110 and 1,987,158. At stake was the controversy regarding the taxation, by IRPJ and CSLL, of subsidy revenues granted by the states through the ICMS legislation.

Since 2017, the Court has firmly understood that these subsidies —when granted in the form of presumed credit— are exempt from taxation. The main reason for this is the “federative pact” or, to put it the same, the balance of political and institutional relations between the units of the federation.

Government subsidies are financial incentives granted for the benefit of the development of a certain sector or enterprise, in this case not through a direct transfer of resources, but through tax exemption. Therefore, if the Union could record these tax benefits, it would be taking part of the state investment in the favored sector and interfering in the public policies of another federative entity.

Very good. The special appeals judged on April 26 urged the STJ to decide whether the pacified jurisprudence around presumed credit would also be extended to other forms of tax incentives, such as those granted through exemptions and reductions in calculation bases or rates . Yes, the government can suppress taxation on a given sector, making use of a series of normative instruments. Presumptive credit is just one of them.

Contrary to the expectations of many, the First Section of the Court validated the taxation. Unanimously, it allowed the federal tax authorities to tax structured incentives, for example, in the form of exemptions, reductions in the calculation base or rate, as if incomprehensibly saying that, in these cases, the diversion of state revenue to the Union coffers would be harmless to the federative pact.

The main technical argument supporting the decision, however, is unsustainable. The PGFN (Attorney General of the National Treasury) managed to convince the ministers of the STJ that there would be a structural difference between the presumed credits, on the one hand, and the other tax benefits, on the other.

Presumed credits would be “positive” type incentives, in the sense that, upon receiving them, the company would obtain genuine revenue capable of positively impacting its result. It would be ontologically possible, therefore, to eliminate the effects produced by the incentive on profit for the period through an exclusion operation carried out directly in the tax bookkeeping (in Lalur). The other benefit modalities would all be “negative”, insofar as the incentive company would implement them by simply recording a lower ICMS debt.

The reasoning is fallacious because the way of accounting for government subsidies is always the same, regardless of how they are structured from a formal point of view. Accounting regulations in force in Brazil and internationally privilege the economic essence over the legal form. This means that if two distinct legal structures express the same economic phenomenon, the entity must portray them in the same way.

Precisely for this reason, accounting standards require that grants always be shown in the same way, regardless of the legal envelope that covers them. In order to be identifiable, tax incentives need to be recorded in separate accounts. You cannot simply record the tax debt already net of the incentive. The beneficiary entity records the “gross” tax obligation, as if it did not enjoy the subsidy and, separately, in a separate income account, credits the incentive. This procedure, it should be emphasized, is valid both for presumed credits and for the aid modalities that the tax authorities dubbed “negative”.

According to what was decided by the STJ this week, the exclusion of these other types of benefit from the IRPJ and CSLL calculation base is, yes, possible, but presupposes compliance with certain legal requirements. At this point, an inconsistency in the argument is obvious. If compliance with the conditions established by law authorizes the deduction of the incentive from the tax base, then the exclusion is not structurally incompatible with the nature of these benefits. The “negative” benefit label is not justified. All types of incentives – and not just presumed credit – would conceptually be subject to subtraction from the calculation base of federal taxes.

The primary requirement for excluding these other forms of subsidy (exemption, reduction of the calculation base, etc.) would be the provisions of Article 30 of Law No. 12,973/14. To this end, it is up to the company to allocate the incentive revenues in a specific account of its shareholders’ equity, detaching them from the result earned in the respective year. More than that, the amounts recorded there have limited use: they can only be used to absorb losses or to increase the share capital (and, likewise, provided that the increased capital is not later refunded to shareholders). Disobeying these limits, the incentive is immediately taxed.

In one respect, however, the taxpayers won the trial. The Court reaffirmed what it had previously said about the requirement for investment counterparts. Since the enactment of Complementary Law No. 160, exclusion is not restricted to state benefits granted in exchange for making investments. As well as the former, ICMS incentives granted without this requirement —granted only to fund the sponsored business activity— are also susceptible to exclusion from the IRPJ and CSLL calculation base.

Finally, a comment on the return of the Federal Supreme Court to the scene. Anticipating the defeat at the STJ, Abag (Brazilian Association of Agribusiness) asked Minister André Mendonça, rapporteur of extraordinary appeal 835.818, for an injunction to suspend the judgment of the 26th or its effects. He argued that the subject matter —the levy of PIS and COFINS on presumed ICMS credits— is closely related to what would be decided by the STJ, recommending that the Supreme Court rule first.

Debatable. Also in 2017, the STF refused to judge the incidence of IRPJ and CSLL on ICMS tax incentives, on the premise that the issue would not have general repercussions. If you weren’t going to pronounce on it, does it make sense to prevent the STJ from doing so? The fact is that the unlikely preliminary injunction requested by Abag ended up being granted. If it comes to be endorsed by the Plenary —something again unlikely— the STF will definitely enter the scene. And then, the agribusiness strategy of bringing it to the debate is potentially explosive.

Suspended at the request of Minister Dias Toffoli, the judgment of extraordinary appeal 835,818 has the score of 6 x 4 in favor of taxpayers. So far, the vote of Minister Marco Aurélio has prevailed, for whom the requirement of PIS and COFINS on presumed ICMS credits is unconstitutional. If the Supreme Court sees a close correlation between this matter and that judged by the STJ, it may impose one and the same solution to both.

Next, scenes from the next chapter…