Haddad expects help from the Judiciary

The Minister of Finance, Fernando Haddad, is counting on the help of the Judiciary to obtain the tax gain of R$24 billion that he hopes to have this year with the limitation of tax compensations to which companies are entitled.

Large companies, harmed by the government’s decision to limit the reimbursement of credits, have turned to the courts to circumvent the limitation established by Provisional Measure 1202/2023, issued by the government at the end of last year.

The issue has divided judicial bodies and the perspective is challenging for companies, exposing the controversies of the gigantic Brazilian tax litigation. The government hopes to once again count on the goodwill of the Federal Supreme Court (STF), which will have the final say on the disputes.

Tax credits arise from court decisions against the Tax Authorities in which there is no further appeal. Much of the litigation is linked to Theme 69, the so-called “thesis of the century”, a decision by the STF that excluded ICMS, the main state tax, from the PIS and Cofins calculation base, at a federal level.

With this decision, companies gained the right to deduct, from the taxes they have to pay to the Federal Revenue Service, the amount that the Court recognized as having been unduly charged.

What MP 1202 did was limit this reduction. According to an ordinance published by the Treasury after the MP, credits above R$10 million will be compensated in stages, over a period that can vary from 12 to 60 months, depending on the amount involved.

The higher the company’s credit, the longer it will take for full compensation. This means that part of the credit to which the company is entitled – money that, in practice, belongs to it, as it refers to taxes that it should not have paid – is temporarily “blocked”.

On the one hand, such a blockage temporarily worsens that company’s finances. On the other hand, it improves – also temporarily – the primary result of the government’s accounts.

This staggering was the way found by the government of Luiz Inácio Lula da Silva (PT) to reduce the impact of tax compensations on public accounts, within Minister Haddad’s crusade to provide R$ 168 billion and meet the goal of zeroing the primary deficit in 2024, established by the fiscal framework.

Increase in tax compensation increased government deficit

The economic team bet its chips on the limit of tax credits after the release of the figures for the first year of the Lula government.

According to data from the Federal Revenue, the significant increase in compensation in 2023 reduced the Union’s revenue by R$242 billion, which is equivalent to 2.2% of the Gross Domestic Product (GDP). More than a third of the volume refers to credits from court decisions. R$82.7 billion were offset, the third largest amount in the entire historical series, which began in 2003.

According to the Treasury, the “thesis of the century” compensations alone cost the Union more than R$60 billion last year. They were one of the main causes, according to the economic team, for the primary deficit of R$ 230 billion recorded in 2023. The government’s estimate is that, in the last five years, credits above R$ 10 million have frustrated revenue collection in R$ $320.5 billion.

This year, due to the MP, the scenario is reversed. In February, according to the IRS, the use of tax credits fell 40% compared to the same period in 2023, which contributed to the government’s record revenue in the month, which totaled R$186.5 billion.

Actions against MP 1202 divide the Judiciary

Decisions on the limits established by MP 1202 have divided the Judiciary. Some judges have granted injunctions that allow full compensation of taxes. Other decisions may still be subject to appeal.

According to the newspaper’s findings The State of S. Pauloat least five decisions have already been published: two in favor (to the companies Pernambucanas and Seara), two against (in actions filed by Lojas Colombo and Valgroup), and one that partially meets the demand (from the multinational Nestlé).

In any case, the MP will still need to be approved by Congress by the end of April. Otherwise, it will lose its validity. This is one of the reasons that has led Minister Haddad to repeat that the fiscal target does not depend only on the government, but on the Legislature and Judiciary.

Two other points of MP 1202 (the end of the payroll tax exemption for 17 sectors and Perse, an incentive program for the tourism and events sector) were revoked in agreement between the government and Congress, and a third (the end of the tax exemption part of the municipalities) was overturned by a unilateral act by the President of the Senate, Rodrigo Pacheco.

The limitation on tax compensations, however, was not revised, despite controversy and criticism. Economic agents and businesspeople even classified the measure as a “default”.

Experts contest MP 1202, but see a chance for a pro-government decision in the STF

For tax experts heard by the People’s Gazettethe constitutionality of the MP can be questioned from several aspects.

João Eloi Olenike, president of the Brazilian Institute of Planning and Taxation (IBPT), says that credit compensation should be dealt with by ordinary or complementary law, after legislative discussion, and not by MP.

“An MP must meet the principles of relevance and urgency, in accordance with article 62 of the Constitution. It has an exceptional and temporary nature. In Brazil, it seems funny to me that the urgency and relevance is for the government to make money to honor its expenses”, he states.

The argument is reinforced by Luciano Burti, from CBLM Advogados, who highlights the justification presented by the government. The text refers to events that occurred years before the publication of the MP, including the trial by the STF of the “thesis of the century”, in 2021. “There was no urgency. There was enough time to present the bill, debate and publish the law ordinary regulating the matter”, says Burti.

For Leonardo Roesler, partner at RMS Advogados, the right to compensation, supported by the National Tax Code and the consolidated jurisprudence of the Superior Court of Justice (STJ), can be claimed by companies based on the principle of equality.

“The MP imposes a differentiation between taxpayers, depending on the amount involved. The distinction can be considered arbitrary, configuring unequal treatment”, he states.

When evaluating a Direct Unconstitutionality Action proposed by the Novo Party, the STF must decide, in a binding manner, the effects of the MP. The tendency, according to tax experts, is for the understanding that the government’s measure is constitutional to prevail.

“It is not unknown that, among the government’s defense arguments, there is always the allegation of a loss of public accounts, which seems sensitive to higher courts, at least, to modulate the effects of decisions favorable to taxpayers for a moment after the trial”, says Nereida Horta, from CBLM Advogados.

Although in 2001 the Judiciary decided in favor of taxpayers in the “thesis of the century”, more recently the higher courts have favored governments more in tax judgments, voting most of the time in favor of the theses defended by the Union, states and municipalities.

“Some examples were the decisions on the IPI on the resale of imported goods, the incidence of ICMS on the energy transmission tariff and the System S social security contribution”, highlights Horta.

This action by the higher courts is viewed with reservations and criticism by those who follow the discussions.

“The Judiciary’s participation in maintaining the government’s fiscal target should not translate into a stance of subservience to the Executive’s financial needs”, states Leonardo Roesler.

“On the contrary, the Judiciary must ensure the protection of taxpayers’ rights and compliance with tax rules, even if this may, in certain cases, contradict the government’s fiscal interests. The action can be interpreted as disrespect for the autonomy of the Judiciary and the authority of its decisions”, he continues.

For Nereida Horta, even with the constitutionality of the MP, the topic is subject to challenge. “The morality and good faith of the State can be questioned by postponing the refund of what is owed to the tax payer”, she states.

“The MP reinforces the general idea that the imbalance in public accounts must be borne by the taxpayer through an increase in taxation, reduction or postponement of the return of amounts owed to taxpayers, without the necessary counterpart in cutting public spending”, he adds.