Brazil: Is It The End Of The Tax War In Brazil?

Aiming to combat the Tax War among the Brazilian States, the Federal Senate approved a Resolution establishing that the tax on interstate operations with imported assets and goods will be charged at a rate of 4% in all States, in replacement for the current applicable rates (i.e. 12% and 7%).

Such Resolution seeks ending an war which involves the ICMS (Tax on Circulation of Goods and Services Provision), a kind of VAT collected by the States and levied on imports of goods and assets, internal operations related to circulation of goods, interstate and intercity transport services and communication services.

The Tax War mentioned above relates to tax benefits granted individually by the States. Although Brazil is a Federation, only a national supplementary law can regulate how ICMS exemptions, incentives and benefits should be granted and revoked by States.

Because of this, according to the Supplementary Law 24/75 tax or financial incentives related to ICMS will be granted or revoked under Agreements entered into between, and ratified by, the States and the Federal District. Thus, an ICMS benefit granted by a State without an agreement signed with the other States is considered unconstitutional.

The Supreme Court has already analyzed such issue over the past years, and its interpretations had been consistent, i.e., an agreement between States is required for ICMS benefits to be granted, otherwise the benefit will be unconstitutional.

Nevertheless, through the years the States have granted ICMS benefits without executing such agreements with the other States, and this is the so-called tax war.

The Federal Senate therefore approved such Resolution to combat that tax war, but not to combat it in general, but only the part of it that involves imported assets and goods, which is properly called "war of ports". According to such Resolution a single rate of 4% will be charged on interstate operations with assets and goods, which after have been imported, have not undergone a local manufacturing process, or after having undergone a manufacturing process, became products or assets with an Imported Content over forty percent (40%).

It is worthwhile pointing out that such rule does not reach operations with i) goods that have no similar product in Brazil (included in the list to be enacted by the Council of the Members of the Foreign Trade Chamber (CAMEX), ii) products that undergo basic production processes, such as those produced in the Manaus Free Zone, and iii) natural gas.

The regulation of the Resolution is crucial, because some issues have arisen. For example, how the Import Content will be calculated. Thus, given that the Resolution will be enforced from January 1, 2013, some rules to govern its application should be approved in the next months. The National Council for Treasury Policy - CONFAZ may enact rules to define the criteria and procedures.

In view of the foregoing, the Resolution may solve or minimize problems concerning the tax war involving imported products, but not the tax war in general.

However, an additional point that must be considered in the discussion over the tax war, and that may eventually put an end on the tax war in Brazil, is that on April 24, 2012, Justice Gilmar Mendes (from STF) submitted a proposal for Precedent No. 69. Such a proposal aims at discussing the effects of a declaration of unconstitutionality regarding previous operations carried out by the taxpayers.

This proposal prompted broad discussion among the taxpayers, and the States are exploring the possibility of entering into an agreement within the sphere of CONFAZ to resolve the issue.

In view of all this, the best solution would be an in-depth constitutional reform to prevent issues like this. However, those may be the initiatives that are viable at this time, and they reveal that the Federal Government (which is exerting pressure for a solution) is willing to solve one of the various structural problems of Brazil. Let's wait.

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