Taxpayers face setbacks in the taxation of government grants
Taxpayers have suffered a setback in terms of corporate income tax on government grants in the form of tax incentives and reductions under ICMS (“Value Added Tax” – State Taxation of Goods).
The Brazilian tax authority, Receita Federal do Brasil (RFB), issued a public consultation in which it changed its own opinions on the matter and contradicted decisions of the judicial and administrative courts.
Is it possible for companies to take advantage of ICMS incentives (discounts, suspected tax credits that reduce ICMS due, exemptions, etc.) to treat this as an exclusion of government grants when calculating company income?
This is a longstanding discussion that essentially distinguishes government grants that are granted as an investment grant (not taxed by corporate income tax, namely IRPJ / CSLL) from those that are given as compensation for cost subsidies (taxed by IRPJ / CSLL) . .
In a nutshell, taxpayers argued that the ICMS tax incentives granted by local governments should not be subject to the IRPJ / CSLL as they would be granted as an investment grant, such as relief from the ICMS tax burden, but with a corresponding obligation on the company to invest the corresponding amount in expanding its activities in the region.
On the other hand, with a normative opinion from 1978, the RFB understood that a non-taxed investment grant can only be made if there is effective evidence that the amount corresponding to the ICMS reduction has been reinvested by the company Investments and that the amounts have not been distributed to shareholders, otherwise it is necessary to tax the grant.
The Board of Directors for Tax Complaints (CARF) has analyzed this issue several times and the judges took a case-by-case approach, but at the judicial level, most of the decisions favored the taxpayers.
In 2014 Law No. 12.973/2014 was enacted, with the noble but difficult aim of disciplining the differences in accounting (according to IFRS) and tax treatment on several points.
Article 30 of Law No. 12.973/2014 states that government subsidies granted as investment subsidies and therefore not subject to corporate income tax are those given (i) as an incentive for the expansion and development of a business; and (ii) which were held in the Company under special excess reserves, that is, with no distribution to shareholders.
In order to put an end to harmful tax competition between states, the House of Representatives issued Law No. 160/2017 in 2017, which amended part of Article 30 that stipulated that all government grants related to the ICMS should be granted to businesses are to treat income tax as an investment grant (not taxable), with no further requirements than those mentioned in Article 30.
As a result, the requirements used by the RFB in determining when ICMS tax incentives should be treated as an investment grant were no longer applicable. This includes the physical / effective proof of the investments made and the proof of the synchronicity between the receipt of the benefit and its destination as an investment.
Since 2017, several taxpayers have adapted their tax practices to the wording of Article 30 as amended by Law No. 160/2017 and have started to stop taxing their ICMS incentives through the IRPJ / CSLL. In most cases, CARF has also aligned itself with the new right-wing command, and the judiciary has retained the line that it has been following for some time.
The RFB issued a public consultation No. 11/2020 (SC 11/2020) as it was finally time for the RFB to publish its new understanding on the matter, and very well, which is the main understanding of Law No. 160 / 2017 confirmed without the need for any special consideration or other proof of the investment made in order to exclude the ICMS grants from corporate income tax. Thus, the most requested confirmation came from taxpayers, the seal of the tax authorities.
Surprisingly, on December 22, 2020, the RFB published another public consultation on the matter, SC 145/2020, in which it argued that taxpayers have yet to demonstrate that they have been given ICMS tax incentives as an incentive to expand and develop a Business that is a broad concept and difficult to prove. As a result, we anticipate that RFB will likely proceed on a case-by-case basis and put in place tax returns to look into this issue on a case-by-case basis.
Despite legal and administrative precedents, the clear wording of new legislation and contrary to its own view in SC 11/2020 caused chaos for taxpayers and potentially countless more years of litigation.
However, this is a minor roadblock and the Brazilian courts will maintain their interpretation on the matter. The Supreme Court has issued a ruling finding that ICMS tax incentives granted as presumed tax credits are not subject to PIS / COFINS taxation. This sheds light on how the court might view the corporate tax case.
Partner, Finocchio & Ustra
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