On 20 June 2024, the Brazilian Superior Court ruled that ICMS-ST (Tax Substitution for the State Value-Added Tax), collected by the substitute taxpayer, should not be included in the PIS/COFINS (Social Integration Program and Contribution for the Financing of Social Security) tax base for substitute taxpayers.
Following this decision, substitute taxpayers may recover PIS/COFINS amounts improperly collected over the past five years, except for those who filed a lawsuit before 13 December 2023. In such cases, taxpayers can recover amounts from the five years preceding the lawsuit.
To improve tax inspection and prevent evasion in the circulation of goods in Brazil, the states created the ICMS (Tax on Circulation of Goods and Services) substitution system (ICMS-ST). This system anticipates the calculation and collection of ICMS at the beginning of the commercial chain, making the importer or manufacturer—referred to in Brazilian law as “substitute taxpayers“—responsible. ICMS-ST is calculated by applying the state tax rate (usually 18%) to a presumed tax base, which reflects the average consumer price of the goods.
To understand the Superior Court’s decision, it’s essential to clarify that other entities in the chain—such as wholesalers and retailers—do not collect ICMS since the substitute taxpayers already paid the state tax. These entities are known as “substituted taxpayers” in Brazilian law.
However, collecting ICMS at the beginning of the chain by the substitute taxpayer distorts the calculation of other Brazilian taxes. For example, PIS/COFINS, which are federal taxes on gross revenue or sales, are calculated on an inflated revenue base due to the ICMS collected by the substitute taxpayer on a presumed and increased tax base. This inflated base artificially boosts gross revenue across the commercial chain, even though the state tax does not represent actual revenue but merely passes through the company’s accounts before being transferred to the states.
The Superior Court’s decision to exclude ICMS-ST from the PIS/COFINS tax base significantly reduces the tax burden and aligns taxation with the financial reality of substituted companies. It corrects a distortion that unfairly taxed amounts not representing actual revenue.
Given this, substituted taxpayers must adjust their accounting and tax practices in line with the decision. Legal advice may be necessary to ensure the proper application of the exclusion and recover improperly paid amounts from previous years.
