STF forms majority to validate R$ 27 billion agreement with states to replace ICMS losses – 06/02/2023 – Market

The STF (Federal Supreme Court) formed a majority this Friday (2) to endorse an agreement signed between the Union, the states and the Federal District to replace the losses imposed by the ICMS (Tax on Circulation of Goods and Services) cut. ) on fuels.

In the agreement, announced by Minister Fernando Haddad (Finance) in March, the Union undertakes to pay BRL 27 billion to the units of the federation to compensate for the tax reduction approved in 2022 under the Jair Bolsonaro (PL) government. At that time, the then president was seeking re-election against a backdrop of rising fuel prices, high inflation and political wear and tear.

Another partial agreement related to ICMS had already been approved by the Supreme Court in December last year. The negotiations were carried out by the team of Minister Gilmar Mendes, Dean of the Supreme Court.

Ministers Gilmar Mendes, who is the rapporteur for the action, Cármen Lúcia, Rosa Weber, Edson Fachin, Dias Toffoli and Alexandre de Moraes have already voted in favor of the agreement.

Haddad informed, when announcing the agreement, that around BRL 9 billion of this total had already been compensated through injunctions granted by the STF to debtor states of the Union within the scope of the working group created by the Court. The remainder will be deducted from the debt installments with the Union or paid by the Union (for states with small debts or even no debt) until 2026.

With the agreement, the Executive undertakes to submit, within thirty days after validation by the Supreme Court, a complementary bill to Congress that authorizes an amendment to the debt refinancing contracts entered into with the Union and creates the temporary transfer of funds.

“The terms of the agreement, as well as the complementary bill to be sent by the Union, must be understood by the Legislative Power as a possible political-legal consensus, in view of the debates and solutions found”, says Minister Gilmar Mendes when voting for validate the agreement.

The settlement, he says, was built “on the basis of avoiding allegations of interference by the judiciary.”

The payment of compensation by the Union to the states became one of the main impasses at the beginning of the Lula government. In December, the STF, which mediated the conflict after being called upon by governors, gave the Union and states a period of 120 days to reach an agreement.

Until reaching the final number, the negotiations required intense negotiation and flexibility on both sides. In a meeting that took place in January, the federal government argued that the “fair value” of the compensation would be between R$ 13 billion and R$ 16 billion, but went so far as to propose R$ 22.5 billion. The states, in turn, spoke of a replacement of up to R$ 45 billion and reduced the request to R$ 37 billion.

In March last year, Bolsonaro sanctioned a law that standardized the ICMS rate on gasoline, diesel and ethanol. State tax was levied at a fixed amount per liter (“ad rem”) instead of a percentage. The measure had a billionaire impact on the states’ cash flow.

Two months later, the president of the Chamber of Deputies, Arthur Lira (PP-AL), articulated the approval of a proposal that limited the ICMS tax on fuel, electricity, transport and telecommunications to 17%. These goods came to be considered essential.

The project was the subject of intense dispute between states, which warned of the loss of revenue, and the federal government, which used the high moment in revenue to claim that state coffers were full and there was room for tax cuts.

Despite the resistance of the governors, who pointed out problems in closing the accounts with the drop in revenue, the proposal was approved with relative ease in both Houses of the National Congress, being sanctioned in June by the then president.

The text also provided for compensation to states that had losses greater than 5% in tax collection, but the wording of the rule left room for different interpretations. The way in which this repair was calculated was the subject of disagreements.