1. The ICMS is a state value added tax, whose primary directives are set forth by the Brazilian Federal Constitution, and is governed, at the national level, by Supplementary Law 87/96.
2. As Brazil is composed of twenty-six States and a Federal District, each one has its own ICMS legislation, which has to comply with the general guidelines of the mentioned Supplementary Law and the Federal Constitution.
3. The ICMS is a non-cumulative tax, thus the amount levied on the previous transaction may be booked as credit to be offset against the tax due in the following one. The general rate is 17% (can vary from 4% to 39%) and its triggering events comprise the following:
- import of goods;
- domestic circulation of goods;
- inter-municipal or interstate transport services; and
- communication services.
4. Our analysis will focus on the import of goods, specifically the temporary imports performed under Special Customs Regimes, by which the imported goods must be returned abroad.
5. Based on their operational relevance, amid the Special Regimes comprised in Brazilian Customs Law (Decree 6759/09), we highlight the (i) Temporary Admission Special Regime (Temporary Admission) and (ii) the Oil & Gas Customs Special Regime (REPETRO):
- Temporary Admission, governed by Federal Revenue Service (FRS) Normative Instruction 1361/13, grants (a) the full suspension of federal taxes in certain cases (e.g., import of goods for scientific and technical events, performance and endurance tests, sales promotion, among others) or (b) the proportional payment of the federal taxes (1% per month of the taxes due) if goods are imported for economical purpose, meaning they will be used in the manufacture of goods or used in the rendering of services. An interstate agreement (ICMS Agreement 58/99) grants an ICMS exemption or a taxable basis reduction when the federal taxes are partially charged, in order to charge the ICMS in the same proportion of the federal taxes.
- REPETRO, governed by FRS Normative Instruction 1415/13, among other benefits, grants the temporary import of goods and equipment related to Oil & Gas activities (which unitary value equals or surpasses USD 25,000.00) with full suspension of federal taxes. ICMS Agreement 130/07 establishes (a) ICMS exemption or its levy at an effective tax rate of 1.5% if goods are to be employed during Research Phase or (b) ICMS levy at an effective tax rate of 3% (not recoverable) or 7.5% (recoverable) if the use occurs during Production Phase.
6. In general, such Special Customs Regimes apply to agreements whereby the foreign party grants the use of the goods without transferring their ownership to the importer, such as operational lease, rental or loan agreements. To this effect, the transactions are required to be carried out without exchange coverage, as the ownership of the goods remains abroad. Therefore, the Special Customs Regimes do not apply in case of ownership transfer to a Brazilian entity, and will be concluded upon re-exportation to the foreign owner.
7. The general understanding adopted by the States' Tax Authorities is that the ICMS is triggered in any import of goods, whether or not its ownership is transferred. Therefore, the abovementioned Special Customs Regimes are exceptional cases that the legislation allows to reduce or suppress the ICMS.
8. The Brazilian Federal Supreme Court (STF) issued a ruling (Extraordinary Appeal 540.829) in September 2014 asserting that the triggering event of the ICMS levied upon imports will only occur if the goods' ownership is transferred to the Brazilian party. Even though such ruling regards the import of aeronautic equipment under a leasing agreement, its effect is "erga omnes" (general repercussion), meaning that said STF ruling constituted a leading case binding similar future/ongoing lower courts' decisions.
9. Said STF's ruling was based on matured local doctrine that always opposed the State's Tax Authorities interpretation, by stating that the ICMS is due on transactions where the transfer of ownership occurs, and thus the mere customs clearance of a good that is bound to return to its owner is not enough to trigger this tax.
10. This ruling has brought a new scenario for importers — including the Oil & Gas Industry — that carry out transactions under the Temporary Admission for economic purposes or under REPETRO (as the ownership transference does not occur in such transactions), as it is an important precedent to challenge the levy of the ICMS (that we deem unconstitutional). In this context, the decision between importing under the Temporary Admission for economic purpose or under REPETRO, in order to elect the more tax efficient option, has been superseded.
11. In conclusion, our understanding is that companies performing temporary imports with no transfer of ownership have good grounds to file a lawsuit and request a preliminary injunction to suspend the ICMS collection and claim the non-levy of ICMS upon such imports. Moreover, depending on a case-by-case analysis, companies that have collected ICMS upon temporary imports in the last five years (statute of limitations period) could recover such amounts.
This article was first published by International Tax Review in April 2015 on www.internationaltaxreview.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.