Financial institutions ("FIs") await the Brazilian Supreme Court's decision on whether Social Integration Tax (PIS) and Social Contribution Tax (known by the Portuguese acronyms "PIS" and "COFINS", respectively, and to which we will refer to as "PIS/COFINS") is assessable on their core business of financial intermediation¹ during the period 1999-2014.

A law enacted in 2014 filled the gap and since 2015 there is no question that FIs are subject to PIS/COFINS on income derived from financial intermediation. Faced with this new reality, FIs are concerned in maximizing PIS/COFINS deductions, including expenses incurred in providing financial intermediation.

FIs are exposed to default risk losses in all their credit extensions and must create provisions for credit losses ("PCLs"). PCLs are regulated by the National Monetary Council in its Resolution 2682 no. 2682/99.

The Central Bank of Brazil lays down financial accounting standards and procedures in a compendium called Accounting Plan for Institutions of the National Financial System ("COSIF"). The keynote here is that the COSIF classifies PCLs as "financial intermediation expenses".

From a tax perspective, apart from legal ground, Brazilian Normative Ruling no. 1285/12 includes a specific provision toward tax deductibility of financial intermediation expenses from PIS/COFINS owed by FIs (art. 8-I).

Notwithstanding, the tax authorities hold that PCLs are not expenses but, rather, mere accounting provisions and, as such, cannot be excluded from the PIS/COFINS tax base.

In our view, there are strong arguments for contending that FIs are entitled to claim a deduction from PIS/COFINS because PCLs do qualify as financial intermediation expenses.

This was acknowledged in August 2017 by the federal trial judge of the 5th circuit court of São Paulo who ruled that "the PCL implies genuine allocation of capital to safeguard against frustrated negotiations and does not constitute a mere projection or accounting fiction."

The judge added that "it is a well-established fact that BACEN² considers the PCLD³ as an expense related to the activity of financial intermediation, whereas the Federal Revenue Service understands that for tax purposes one could not consider the item as an actual expense, and hence it cannot be deducted", and went on to conclude that "(...) for the purposes of undertaking the obligation, the PCLD is an expense, but for purposes of deduction it is not, and this is to say that the taxpayer is not only placed in a state of doubt and perplexity, but equally in that of victim of unfairness, insofar as different meanings are given to the same phenomenon always to her detriment and to generate additional duties to the State".

This decision, which was obtained by our litigation team, enables the FIs of the group we represent to deduct PCLs from the PIS/COFINS tax base and, furthermore, recover overpaid amounts throughout the 5-year period prior to the filing of the lawsuit.


1 The core activity of a FI is the "intermediation or investment of funds of their own or of third-parties" (excerpted from art. 17 of Law no. 4595/64).
2 "BACEN" is the Central Bank of Brazil.
3 "PCLD" stands for provisão para créditos de liquidação duvidosa, referred to in this paper as PCL.

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