Tax reform still does not guarantee fewer disputes in court; understand

Despite the promise to simplify and reduce the cost of companies with legal disputes against the Treasury, the tax reform approved in the Chamber of Deputies does not bring, at least for now, the guarantee that there will be less litigation. This is what four important tax experts consulted by the People’s Gazette.

There are several reasons given. In the first place, crucial rules, regarding the value of rates and details of tax incentives, have not yet been presented, and should only be approved in a complementary law, in the future. This prevents a certainty that there will be a reduction in litigation.

Another reason involves the possibility of that same complementary law, whose content has not even been drafted, being questioned as to its congruence with the Constitution and the PEC of the reform itself. There are still concerns and doubts about the capacity and reasonableness of the Revenue to collect correctly and fairly, accustomed as it is to the current model.

“As we don’t have all the projects that deal with tax reform, we only have a substitute that was presented now, a PEC full of complexities, we don’t have the complementary law, we don’t have the other necessary ordinary laws, Senate resolutions, etc. This tax reform is transparent. But due to the complexity of PEC 45, one can imagine, if one speculates that tax litigation, which is already high today, will remain at the same level”, says André Felix Ricotta de Oliveira, doctor and master in Tax Law from PUC- SP and member of the Tax and Constitutional Law Commission of the OAB-SP.

The main change in the current stage of the reform, focused on consumption, is the unification of federal PIS and Cofins taxes and the Tax on Industrialized Products (IPI) in the Contribution on Goods and Services (CBS); and the merger of the state Tax on Circulation of Goods and Merchandise (ICMS) and the municipal Tax on Services (ISS) into the Tax on Goods and Services (IBS).

In summary: for the Union, companies and consumers will pay CBS, which finances SUS, Social Security and unemployment insurance, among other social benefits; for states and municipalities, they will pay the IBS, whose revenue may be freely applied by governors and mayors.

The biggest difference is that CBS and IBS are Value Added Tax (VAT). This is a model in which at each stage of the production of goods or performance of a service, the company deducts the taxes paid in previous stages by suppliers.

Currently, for PIS/Cofins, ICMS and IPI there are different rates for each input, good or service used in the product. To make matters worse, there are a multitude of different regimes, in each state, that prevent the company from deducting the tax already paid by its suppliers, depending on the item. Another complication is that most of the ICMS is at the source, which leads states to compete for the installation of companies in their territories, including tax incentives, to collect more.

In the reform, the ICMS will be due to the state in which the good or service will be consumed, and period. The federal rate, from CBS, must be unique for each product and the IBS will be defined by each state or municipality, in the case of services, where consumption will take place.

Why Business People and Economists Like Simplification

Because of the simplification, both for the taxpayer and for the Tax Authorities, the reform has been praised by most economists and businessmen, mainly those linked to the industry, for facilitating payments and providing more clarity on what must be paid.

A recent study by Insper estimated that IVA will end 95% of legal disputes around the five taxes it will replace. Researchers Vanessa Rahal Canado, Breno Vasconcelos and Thais Romero Veiga Shingai analyzed information provided in 2021 by 751 publicly traded companies and found 526 lawsuits, in which they dispute the charge of R$ 120.7 billion.

In PIS/Confins, discussions on the use and reimbursement of credits, materiality, compensation and tax incentives, mainly, would be eliminated or reduced. In ICMS, the disputes around themes such as use of credits, Difal (difference between the internal rate and the interstate rate), transfer of goods and conflict of competence, about the state court able to judge the case, would end. In the IPI, discussions about incentives, tax classification, elimination of collection, among others, would be emptied.

The study, however, says that all these legal fights would practically end because the taxes themselves would be extinct. The current processes would continue to exist, but would end as the cases were adjudicated. This does not mean that new types of dispute would not arise with CBS, IBS, the Selective Tax (which would also replace the IPI), in addition to novelties such as cashback (possibility for low-income people to receive back what they paid).

“Currently, our system has five taxes on consumption: state ICMS; the ISS of the municipalities; IPI, PIS and Cofins, under the competence of the Union. The idea is to unify these taxes and, by reducing the number of taxes, also reduce a universe of situations in which there may be conflicts between the tax authorities and taxpayers. However, the fact is that the PEC, as it is currently written, is just an outline of what IBS and CBS will become. Most of the fundamental themes of the structure of these taxes will remain to be defined by a complementary law that we do not even have a draft of at the moment”, says Thulio Carvalho, tax specialist and master by PUC/SP, from the Dias de Souza Advogados Associados office.

He gives examples of taxable events (what type of transaction will be effectively taxed), taxable persons (who pays), different treatments (fuels, health, education, financial services) and items that deserve to be discouraged (such as tobacco and pesticides).

Guilherme Di Ferreira, lawyer at Lara Martins Advogados and deputy director of the Tax Law Commission of OAB-GO, also emphasizes the relevance of the complementary law. “Selective tax will have to be regulated by complementary law. Tax incentives too, as well as cashback. What creates a lot of litigation in the judiciary and also in the administrative sphere are the laws. If the supplementary law is not against the Constitution, if it is not contrary to the text of the constitutional amendment, if it is not in contradiction with any other situation, it may indeed have a reduction in litigation”, he says.

Dual system and tax classification will be a source of dispute

Maria Carolina Torres Sampaio, partner and head of the tax area at GVM Advogados, is certain that there will be more litigation, at least in the next 10 years, a period of transition from the application of the current to the new taxes, in which the two systems will coexist in parallel. Even in relation to CBS, IBS and the Selective Tax, she sees potential disputes.

The tax classification of goods is a classic example that tends to continue. To escape higher rates, defined by type of product, manufacturers try, in any case, to reclassify it to fit a lower rate. Notable cases were the reclassification of the Sonho de Valsa bonbon as a waffle biscuit and not chocolate; McDonalds’ maneuver to tax the cone as dessert and not ice cream; Crocs’ discussions with the inspectors about their footwear: waterproof shoes or rubberized sandals?

“We will have different tax rates. The fight will be transferred from the IPI to the excise tax. Furthermore, the excise tax will apply to goods and services that are harmful to health or the environment. We are going to have discussions related to these characteristics”, says the lawyer.

Battles over credit will continue

Another issue refers to the possibility of taking advantage of PIS/Cofins and ICMS credits, that is, the possibility of the company collecting less based on what was paid by its suppliers. Today, it is something very complicated: it depends on the input, the product, the state.

The ICMS charged by the states allows you to take advantage of credit paid in earlier stages, but in several situations the credit is prohibited, but each state has specific rules. PIS/Cofins should have a broader non-cumulative nature, but the Revenue has always understood that credits should be restricted to the acquisition of inputs that are completely consumed in the production process. Even with the Judiciary broadening this understanding, for goods and services essential to the production process, the classification is vague and generates discussions. Municipalities charge ISS based on billing, sales revenue, and not on value added to the service.

“The new tax is fully non-cumulative, as it is alleged. But the mentality of our inspection is completely opposite to that, that is, to generate the cascading effect to collect more. And IVA is not 100% of what is behind that will generate credit, as there are some conditions. Much less than in relation to PIS/Cofins and ICMS, it is true. But there are situations in which there will be no possibility of taking advantage of the credit. This fight will continue”, says Sampaio. “And if the company does not have the possibility to take advantage of its credits in the new system, will it be able to take full advantage of the taxes that are paid in the current system?”

Another examples

By the PEC of the tax reform, the basic food basket will have a rate of 0. For the lawyer, there will be a fight in court to include more food and hygiene items in the products that compose it.

The new IPVA will be calculated based on carbon emissions. It provides for litigation to try to prove that a vehicle does not pollute as much as the Revenue establishes.

IBS will be charged at the place where the service is provided. A company that offers internet services throughout the country tends to try to avoid charging municipalities that approve higher rates.

In cahsback, there may be a race to Justice to join the groups entitled to the benefit.

For Maria Carolina Sampaio, as certain as the permanence of disputes, in new discussions, is the increase in the burden on the service sector. “Doctor, lawyer, architect, engineer, manicurist, mechanic. All this will go up”, summarizes the lawyer.