Provisional Measure No. 1,227, enacted by the president of Brazil and published on June 4 2024, has introduced significant amendments to the federal tax legislation, two of which deserve particular attention as, apparently, these are just the first movements of the current political and economic clash concerning fiscal adjustments. The changes are:
New parameters for the availment of tax benefits; and
Substantial limitations on the offsetting of tax credits related to social contributions on turnover (PIS/COFINS).
However, the latter has already been rejected by the National Congress (the legislative branch), thus suspending its effectiveness retroactively.
The first amendment entails the mandatory provision of information, by means of an electronic declaration, to the Federal Revenue Service reporting the tax incentives, exemptions, benefits, or constitutional immunities of a tax nature enjoyed by the entity. The specific benefits, terms, and conditions are detailed by Normative Instruction No. 2198/2024 and can be, in future, complemented by other infra-legal acts, such as ordinances and consultation solutions. Non-compliance or late filing of the return will result in fines ranging from 0.5% to 1.5% of the gross revenue for the period in question.
It is premature to engage in in-depth discussions on this matter, but the inclusion of immunities in the text is somewhat perplexing, as they do not constitute tax benefits. Moreover, imposing administrative fines on turnover seems to be a penalty completely disconnected to the obligation for which the penalty has been justified to enforce compliance.
PIS and COFINS offset limitations
Regarding the limitations on the offsetting of PIS and COFINS credits, a new hypothesis of non-declared offsetting has been added into Article 74, paragraph 3, of Law No. 9430/98. This effectively restricts the possibility of offsetting the accumulated creditor balance with other taxes collected by the Brazilian Federal Revenue Service for entities subject to the non-cascading regime of PIS and COFINS.
In practical terms, taxpayers engaged in transactions sheltered by constitutional immunity (export), suspension, exemption, or zero rate, or those benefiting from assumed credits, will only be permitted to offset accumulated PIS and COFINS credits against debits of the same contributions. Offsetting with other taxes will be prohibited. Although the possibility of reimbursement remains intact, this new framework will have a significant impact on companies’ cash flow.
From a legal standpoint, favourable and unfavourable arguments can be articulated regarding non-compensation of PIS and COFINS credits.
Pros and cons of the PIS and COFINS offset limitations
On one hand, the primary issue is a potential violation of the non-cascading principle valid for these contributions, since taxpayers who recurrently accumulate credits will be unable to utilise them adequately, resulting in credit rights with no practical utility. Additionally, there may be a breach of the 90-day anteriority rule, which prohibits the collection of taxes instituted or increased within 90 days of the publication of the law, and a breach of the non-retroactivity rule, which forbids the application of tax laws to events occurring prior to their enactment.
Furthermore, a possible non-compliance with the principle of destination, which seeks to safeguard fiscal neutrality and the competitiveness of Brazilian products in the international market, as well as tax harmonisation in foreign trade, may be identified. In practical terms, for exempt export operations, although such operations should not incur tax charges, there may be an inability to utilise credits, indirectly burdening the supply chain and resulting in taxation at the origin, thus implying an export of taxes.
On the other hand, in support of the provisional measure, it is important to recall that the law may define conditions for the right to offsetting. For instance, the Brazilian Superior Court of Justice, in analysing the prohibition of offsetting taxes paid in advance based on an estimates regime for corporate tax settled by Law Act No. 13.670/18, decided that it is within the legislative branch’s competence to define the scenarios in which taxes offsetting is allowed, amending that any constitutional issues concerning this case were to be decided by the Supreme Federal Court (AgInt no Recurso Especial No. 192915B/PR, October 19 2021).
Similarly, regarding the power of legislators to limit the assignment of input credits for PIS and COFINS contributions on turnover, the Brazilian Supreme Federal Court has shown a trend to favour public treasury reasons. When deciding about the constitutional validity of certain modifications to law acts No. 10.637/02 and No. 10.833/03, it was held that the concept of input for credit purposes could be restrictive, and that the legislator has legislative discretion to regulate the non-cascading regime, provided that other constitutional principles are upheld (Theme 756, RE 841979, November 28 2022).
The legislative process
In light of this scenario, it was no surprise that the National Congress has taken the initiative to suspend, with retroactive effect, the sections of Provisional Measure No. 1,227 pertaining to PIS and COFINS contributions. More specifically, the president of the Senate and Congress, Rodrigo Pacheco, challenged this portion of the text, which will be returned to the executive branch, while the remainder of the text remains in effect and will be analysed by the Chamber of Deputies and the Federal Senate.
One of the primary arguments used, among other political and legal ones, was the disregard for the 90-day anteriority rule. Thus, if the executive branch still intends to impose the aforementioned limitations on the offsetting of PIS/COFINS contributions, it will be necessary to issue a new provisional measure specifically addressing this matter, as the current provisional measure will continue to deal solely with the other subjects.
Final considerations
Provisional Measure No. 1,227 had been issued by the federal government as a way to offset revenue losses caused by the continued payroll tax exemption for 17 economic sectors and small municipalities, approved by Congress. The government's estimate was that continuing the payroll tax exemption policy would cost BRL 26.3 billion in the 2024 fiscal year.
In other words, the current economic and political situation remains highly unstable, which also creates legal uncertainties, as there is still a high likelihood that these issues will become the subject of judicial disputes, with significant points to be considered and debated by the taxpayers and the public treasury.
