United States

Brazil: ICMS must be Excluded from PIS/COFINS Tax Base

Apr 03, 2017
From KPMG TaxWatch

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On March 15, 2017, the Brazilian high court (the “STF”) ruled that the amount of ICMS (i.e., the state-level value added tax) imposed on a product or service should not be included in the tax base of PIS/COFINS (i.e., the federal social contribution taxes that operate like indirect taxes). Brazil has a complex indirect tax system with several federal, state, and municipal indirect taxes that can apply to the same transaction. In general, prices of goods in Brazil are tax inclusive, meaning that the tax amount due is embedded in the product price (i.e., tax base) itself. For PIS/COFINS, the tax base included the ICMS charged. Brazilian taxpayers have been litigating the ICMS inclusion since 2007, arguing that PIS and COFINS are designed to tax a company’s revenues earned in the normal course of business (e.g., sale of goods, provision of services), which would not include the ICMS that is collected on behalf of the state governments. The STF agreed with the taxpayers and stated that its decision sets precedent. Brazil does not follow the common law system, meaning the STF must first clarify certain elements of its decision before it can be fully applied. The STF’s decision will likely allow businesses with operations in Brazil to (1) reduce their PIS/COFINS payments going forward, by excluding the ICMS portion from the tax base; and (2) improve their cash flow by offsetting federal tax liabilities with PIS/COFINS credits if they are able to claim back the amounts overpaid in the past five years in the form of tax credits. For more information, please contact Frank Sangster or Paula Smith.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.