International Tax BrazilTAX

INTERNATIONAL CORPORATE TAX

November 2005

Federal Courts Hold for andAgainst Government inRecent Tax CasesIn Brazil, two separate courts recentlyhanded a victory and a defeat to theFederal government in two taxdisputes. In one case, the FederalSuperior Court of Justice (STJ) held,five to three, for the governmentconcerning the phase out and repealof a tax credit that applies to exportsof manufactured goods. In the othercase, the Federal Supreme Court(STF), by a vote of six to four, held forthe taxpayer in finding Law nr. 9.718(1998)—which expanded the tax basefor application of certain social taxeson gross receipts—wasunconstitutional.

IPI: Notional Credit on ExportsIn Brazil, a federal excise tax (Impostosobre Productos Industrializados—IPI)applies for manufactured goods. TheIPI credit on exports (also known as“IPI premium credit”) was added byDecree-law nr. 491 (1969) as anincentive to boost exports by allowingtaxpayers a tax credit equal to theamount of IPI tax levied throughoutthe production chain of manufacturedproducts intended for export.

Subsequently—due to concernsexpressed in the context of certaintrade negotiations—Decree-law nr.1.658 (1979) provided for a phase outof the IPI tax benefit, with final repealin 1983. Also, in 1979, Decree-law nr.1.724 was issued which grantedextraordinary powers to the Ministryof Finance to increase, decrease, orextinguish the IPI premium credit.After the constitutionality of Decree-law nr. 1.724 (1979) was challenged bynumerous taxpayers, the FederalSuperior Court of Justice found thatthis 1979 decree wasunconstitutional. That decisionopened the way for taxpayers todispute Decree-law nr. 1.658 (1979)that phased out the IPI tax benefit.

After a series of defeats concerningthis issue in the lower courts, theFederal Superior Court of Justicerecently held for the governmentconcerning the IPI phase out andrepeal.

This recent decision of FederalSuperior Court of Justice unifies andrectifies the court’s previousinterpretation concerning the IPI taxcredit. Note that the taxpayer/plaintiffin this case could exercise its right to

appeal the decision to the FederalSupreme Court, whose ruling wouldbe the ultimate holding in thedispute.

PIS and COFINS TaxesPIS (Programa de Integração Social)and COFINS (Contribuição para oFinanciamento da Seguridade Social)are federal taxes imposed on grossreceipts.

The first paragraph in article 3 of Lawnr. 9.718 (1998) expanded the taxbase of receipts subject to PIS andCOFINS taxes, by adding a newdefinition of gross revenues that wasnot dependent on the taxpayer’s typeof business or accountingclassification. Until enactment of thislaw in 1998, PIS and COFINS werelevied on gross sales receipts ofproducts and services, by simplyreferring to the taxpayer’s invoicesunder the rules of ComplementaryLaw nr. 70/91.

Taxpayers disputed theconstitutionality of Law nr. 9.718(1998) in light of the fact thatConstitutional Amendment nr. 20(1998)—the legal foundation for thelaw—was enacted only 18 days after

© 2005 KPMG Tax Advisors - Assessores Tributários Ltda., the Brazilian member firm of KPMGInternational, a Swiss cooperative. All rights reserved. Printed in BrazilThe information contained in International Tax Brazil is general in nature and based on authorities thatare subject to change. Applicability to specific situations is to be determined through consultation withour tax advisors.The KPMG logo and name are trademarks of KPMG International, a Swiss cooperative.

For more information, contactone of the followingprofessionals

São PauloMarienne Munhoz+55 (11) 3067 3182mmunhoz@kpmg.com.br

Luiz R. Dardes+55 (11) 3067 3188ldardes@kpmg.com.br

Madrid (Ibero-Americas Spanish LatAmDesk)Murilo Mello+ 34 637 09850murilorodrigues@kpmg.es

the publication of the law (theBrazilian Federal constitution barscertain types of new taxes fromtaking effect within less than 90 daysafter enactment). The FederalSupreme Court agreed and found the1998 law was unconstitutional.

While these decisions areenforceable only between therespective taxpayers and thegovernment, these court cases setthe tone for future decisionsconcerning the litigated issues.Therefore, similarly situated taxpayersmay rely on the Federal SupremeCourt’s decision as precedent todispute the issue in their cases. Someobservers note that the amount oflosses which the government couldface with respect to this issue couldreach R$ 30 billion (approximatelyUS$ 14 billion). Taxpayers who aresuccessful in their disputes orlitigation concerning the PIS andCOFINS issue may be able to claim atax credit that can be used to offsetother Federal taxes and contributions.

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