Government will have to count on STF to save MP from Refund

The risk of the government being defeated in Congress with the provisional measure that ends the tax relief on companies’ payroll, cuts benefits for the events sector and limits tax compensation for medium and large companies should mean that, once again, the Federal Supreme Court (STF) be called by the Executive to help with the collection.

This is the projection of tax experts and Congressional technicians consulted by People’s Gazette to try to find out what should be left, after all, of MP 1,202/2023. It was published by President Luiz Inácio Lula da Silva (PT) at the end of December, on the same day that Congress had approved the extension of the tax exemption until 2027, overturning a presidential veto on a law approved to that effect.

Created by the Minister of Finance, Fernando Haddad, the MP attempts to boost revenue by R$32 billion, in an attempt to keep the promise of closing the public account deficit this year. With the reinstatement, the government hopes to obtain R$6 billion; with the retention of tax credits, another R$20 billion in 2024; and with the end of the Emergency Events Sector Resumption Program (Perse), an additional R$6 billion.

The MP is already in force, but it has revolted Congress leaders, especially from the center and right, who have maintained exemptions for several sectors for ten years – currently, there are 17: clothing; footwear; construction; call centers; media; infrastructure; leather; vehicles; machines; meat; textile; information Technology; communication technology; integrated circuits; subways; road passenger transport; and road freight transport.

Today, companies in these sectors pay, as social security contributions, 1% to 4.5% of gross revenue, instead of 20% of each employee’s payroll; the argument is that they employ a lot of people and need this to maintain jobs. Haddad’s MP proposes a gradual increase: from April onwards, 42 sectors would start paying 10% or 15% on the minimum wage and 20% on the remainder of what each employee earns. The rate on the minimum wage will increase year by year until reaching 17.5% or 18.8% (depending on the sector) in 2027.

Perse, in turn, zeroed federal tax rates on event companies and allowed them to settle debts with the tax authorities “according to their ability to pay”. The program was established in 2021 to prevent the sector from collapsing during the pandemic and would be valid until 2026; with the MP, charges return in April 2024 (CSLL, PIS and Cofins) and 2025 (IRPJ).

Tax compensation is an instrument that allows companies that obtained in court the right not to pay a tax to deduct, in the future payment of other taxes, the amounts that they were obliged to collect before the court decision. Haddad’s MP places a monthly limit on the compensation of companies with credits exceeding R$10 million. They will no longer be able to deduct the full amount in the same year and there will be a monthly limit on the discount.

Return of MPs: Will the STF define rules?

The first obstacle to be faced by the government is a possible return of the MP by Congress. Adopted only five times since 1988, it is a heterodox measure, not provided for in the Constitution or in the rules of Congress, the Senate or the Chamber. Hence the interest already announced by Haddad in activating the STF if this is done by the president of the Senate, Rodrigo Pacheco (PSD-MG), head of the Legislative Branch.

Under the existing rule, as soon as a provisional measure is published, the Chamber and Senate have 120 days to approve it, with or without changes, or reject it, including failing to vote on it, causing it to “lapse”. Before being analyzed by the plenary of both houses, a mixed commission of deputies and senators analyzes the content, gives its opinion on its constitutionality and incorporates changes proposed by parliamentarians. During this period, the MP is in force, with its rules being applied like any law, but only after approval does it become a definitive rule, together with the rules inserted into it by deputies and senators.

As there is no rule that allows or disciplines the return – what situations would allow it and what effects this would have on the time in which the MP remained in force – the STF’s response to the question is unknown. In the absence of rules, Legislative technicians believe that, if the issue is taken to the Court, ministers will end up legislating on the matter – prohibiting or establishing conditions –, which would create a new point of tension between the Legislative and the Judiciary, this time created by Executive provocation.

On the rare occasions when MPs were returned – in 1989, 2008, 2015, 2020 and 2021 – the presidents of the Senate at the time presented very simple justifications: they argued that the changes were “unacceptable”, brought legal uncertainty, lacked urgency, and challenged prerogatives of legislators, contained provisions apparently contrary to the Constitution. Interestingly, one of the provisional measures returned by Congress dealt with the same issue as now. In 2015, then-president Dilma Rousseff issued MP 669/2015, which reduced the tax exemption, already in force, for 56 sectors of the economy.

This history was recorded by current Senate lawyer Roberta Simões, in articles published in 2020 and 2021, after returns from former president Jair Bolsonaro’s MPs. Professor of Constitutional Law, she defends the possibility of return, but considers that it is necessary to regulate the act, foreseeing that it is applicable in cases of “manifest” unconstitutionality, “in view of the possibility of an unconstitutional provisional measure having immediate concrete and unwanted effects ”, as he wrote on the portal Jota, in 2020.

If the Reimbursement MP is returned, and if Haddad challenges the act in the STF, it will be the first time that the Court’s ministers will look into the issue. The result is unknown. To date, only one positive signal for the possibility of return has appeared.

In 2021, Rosa Weber suspended Bolsonaro’s MP 1,068/2021, which limited censorship on social media, shortly after its return by Rodrigo Pacheco. In the decision, the minister, now retired, recognized the possibility, through a “negative judgment of admissibility” of a provisional measure, “immediately extinguishing the legislative procedure resulting from its issuance”.

This part of the decision was never analyzed by the other ministers and Rosa Weber has already left the Court. A discussion about the possibility of return, therefore, would start from scratch in the STF.

What if the MP goes through?

If the Reimbursement MP is processed in Congress, by decision of Pacheco or the STF, the government’s difficulty in approving it remains in its three points. In this scenario, the Court must be called by Planalto to reverse the defeats.

The most delicate point is the re-encumbrance, due to the fact that the Legislature has just extended the benefit in payroll taxation in 17 sectors. In this case, the government could try to win a victory in the STF to end the exemption due to a 2019 pension reform rule, which prohibited the replacement of the salary base with revenue in the incidence of pension contributions. A provision made the reservation that the exemption along these lines, which already existed, could still be extended. But the guidance given since then is that at some point all employers in the country would once again collect 20% of the value of each salary in favor of the INSS.

“The government missed a stage. If I had gone to the STF to discuss the constitutionality of extending the exemption, it would have been easier to resolve it than this way, issuing an MP the day after Congress’s decision to maintain the benefit”, comments tax consultant Maria Carolina Gontijo, remembering that the Legislature approved the extension without providing a source of funding for the benefit.

As for the MP’s other points, she sees room for the government to achieve victories, even if partial. Despite considering the limits on tax compensation to be “absurd”, since companies should have the right to deduct from their taxes everything they paid in excess, she predicts that the government will win in Congress, under the argument that the measure affects especially “the richest”. If these companies challenge the STF, they also tend to lose.

“The taxpayer is forced to pay something undue, has this been recognized by the courts and will he have to wait even longer to get it back? Direct restitution is not a possibility, because court orders take years. The solution is compensation, which is done to the extent that there are taxes to be paid. In some cases this takes years. Now it will be decades”, explains tax lawyer Maria Carolina Torres Sampaio.

“When a company charges something unduly, it has to refund it as soon as this is recognized. And you have to give it back twice as much, in consumer relations. The government, the entity that charges the most amounts unduly, returns it whenever and however it wants. This violates numerous constitutional precepts. Good faith, proportionality, ability to pay, and so on,” he states.

The assessment among tax experts is that the easiest victory for the government in Congress would be the end of Perse, an event incentive program launched during the pandemic. From a legal point of view, the only obstacle is that the National Tax Code prevents the revocation of a benefit established with a fixed term, in the case of Perse, until 2026. Thus, if Congress overturns the measure, the sector could appeal to the STF to keep it. At this point, the Executive would also have to count on the good will of the Court to end the program.

“One argument for this is that the sector is benefiting without compensation. The STF is very pro-government and could accept this thesis to interrupt the program”, says Maria Carolina Gontijo.