Provisional Measure 627 (later converted into Law 12.973/2014) added a new §5 to article 12 of Decree 1.598/77, which deals with corporate income taxes and contributions. According to article 12§5, "taxes and contributions attaching to gross revenue are included in gross revenue ...".

In practical terms, the new rule under article 12§5 means that taxes on gross revenue, such as the social contributions PIS (Programa de Integração Social, or contribution to the Social Integration Program) and COFINS (Contribuição para o Financiamento da Seguridade Social, or Social Security Financing Contribution), and social security contributions calculated on the basis of gross revenue (CPRB – Contribuição Previdenciária sobre a Receita Bruta), apply to the contributions themselves.

Under this "tax on tax" method, the amount of tax is included in the taxable value, increasing the overall tax burden.

The difficulty is that the "tax on tax" method is expressly provided for in the Federal Constitution only for the state value-added tax, ICMS (Imposto sobre Circulação de Mercadorias e Serviços, or Tax on the Circulation of Merchandise and Services). In the case of ICMS, the tax attaches to the value of the transaction by which the merchandise or service "circulates" – often the sale price – and the Constitution expressly states that the amount of ICMS is to be added to the taxable value prior to calculating the tax payable. This situation is completely different from social contributions, which attach to revenue or income from sales, which is a general concept defined in the private law.

Far from being revenue, PIS, COFINS and CPRB represent tax expenses: they are disbursements that decrease the taxpayer's net worth, directed specifically to financing the social security system, as provided for in article 195 of the Federal Constitution.

Revenue is income generated by a company's business activities, and increases the company's net worth. The concept of revenue expresses, in and of itself, the company's capacity to pay tax on the wealth generated by its business. Classic examples of revenue are amounts received on the sale of merchandise or the provision of services.

In the end, the new "tax on tax" rule for calculating contributions based on gross revenue not only lacks support in Brazil's Constitution, it abuses the basic concept of revenue. Even from an economic point of view the rule is difficult to justify because it seeks to tax neither income nor assets, and therefore violates the basic tax principle of capacity to pay and, in the end, the fundamental right to property.

As we know, legislatures come under political pressure to broaden the concept of revenue, but their powers are not unlimited. It will fall to the courts to determine whether this dubious attempt to increase federal tax revenues complies with constitutional and legal limits.

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