The Legal Right to Use or to Transfer ICMS Tax Credits

Brazilian exporters are legally entitled to use or to transfer the State ICMS tax which is excluded from their exports to foreign countries. This right is granted by Complementary Law 87/96, known as Law Kandir.

The amounts corresponding to the ICMS tax exclusion may be assigned to other ICMS taxpayers and may also be used as currency for payment to suppliers.  

The purpose of the law is to relieve exports from local taxes and help Brazilian exporters to compete abroad.

However, Brazilian exporters may end up with more ICMS tax credits than they may use internally in offsetting their ICMS tax debts deriving from sales in the local Brazilian market.

As these credits are equivalent to cash, they would be entitled to assign and transfer their credit rights to other ICMS taxpayers. However, some State Governments raise obstacles to the use or to the assignment and transfer of such ICMS tax credits. One of such obstacles is the imposition of a time schedule for the use of the credits rather than accepting its immediate use.  

As Law Kandir is in a higher constitutional level as compared to an ordinary law, the State laws restricting the implementation of the tax credit use or transfer are not valid.

This is why Prado Garcia Advogados recommends its clients to seek the judicial remedies in order to overcome such illegal restrictions. Mere pleas to the State administration would be useless under such circumstances.

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COFINS tax and its exemption

By a vote of 6 to 4 of its eleven judges, the Supreme Court in Brasilia ruled to confirm a previous 2004 decision of a now retired member of the Court against the Federal Government. The Government had asked the Court to overule a Superior Court of Justice judgement which recognized a tax exemption that the Government sustains to have been revoked.

The tax exemption was granted by Complementary Law 70/91 involving the federal tax named COFINS for professional service companies.

This confirmation represents a defeat to the Government in its attempts to overule the Superior Court of Justice decisions on the matter, and it will represent an additional burden for the Government in its efforts to submit the issue to the Supreme Court from a constitutional angle.

The Government sustains that the tax exemption granted by Complementary Law 70/91 was revoked by the Ordinary Law 9.430/96, on the grounds that the former one was materially an ordinary law.

Prado Garcia Advogados – Lawyers and Consultants point our, however, that an option made by the Brazilian Congress to adopt a Complementary Law where an ordinary would suffice is a political decision protected by the checks and balances principles under the Brazilian Constitution, among other grounds.

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Court order reduces tax costs

A Federal Judge in the Federal Regional Court for the First Region (TRF- 1ª Região) in Brasilia issued an order by request of a company headquartered in the State of Minas Gerais, allowing it not to include a state tax (ICMS) on the tax basis of two federal taxes, namely COFINS and PIS. The merits of the case shall be addressed by the other members of the same group of federal judges in the Court.

As informed by the TRF-1 press section, the company (in the textile business) filed a suit requesting a preliminary decision in order to avoid paying COFINS and PIS taxes on the amounts of the State tax. The  trial judge denied the request, thereby motivating a recourse to the Federal Court, where its plea was then granted.

The Court judge, Maria do Carmo Cardoso, who granted the order, stated that the case demanded an urgent decision in view of the fact that the operational activities of the company would be impaired if it had to go on paying the federal taxes as they have been assessed. The order would, in addition, prevent the company from being submitted to the legal penalties.

A similar case is pending in the Supreme Court in Brasilia, on the grounds that the inclusion of the State tax (ICMS) on the tax basis of PIS and COFINS is a violation of Article 195, I of the Brazilian Constitution. These two federal taxes would have constitutional permission to charge solely the amount of the sales of merchandise and services invoiced by the taxpayer, but not a tax value which represents a State revenue.

The Court decision favors solely the party seeking for Court relief. Any other company interested in pursuing the same rights would have to file its own suit. Claiming tax credits for the past five years is also advisable and a legal right for any taxpayer submitted to illegal or unconstitutional tax levies.

The precedent is the “Agravo de Instrumento 2007.01.00.000928-4”

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