Brazil: Exclusion of ICMS from the PIS and COFINS tax base


published on 16 September 2021 | reading time approx. 3 minutes


The discussion known as the “thesis of the century” was judged by the Federal Supreme Court (STF) on 15 March, 2017, by Extraordinary Appeal No. 574.706/PR. The STF found that it is unconstitutional for the State VAT (ICMS) to be part of the PIS and COFINS calculation basis, however left some gaps to be answered, such as how the taxpayer should exclude State VAT (ICMS) from the PIS and COFINS calculation basis. On 13 May, 2021, the STF finalized the process and clarified the gaps in the 2017 decision.



The calculation basis of PIS and COFINS is formed by the company's revenues, however, ICMS is part of this value as it is a tax “within” the pricing. Although ICMS is “within” revenues, it is paid to the State, that is, it increases the PIS and COFINS tax basis but it is not revenue for the company. Thus, when applying the PIS and COFINS rate on ICMS revenues, it has a "tax over tax" effect.
Between March 2017 and May 2021, the Internal Revenue Service published COSIT Internal Consultation Solution No. 13 October 2018, which established instructions on how taxpayers should exclude ICMS from the contribution base. The RFB created a new system, taking advantage of the gap in the 2017 STF decision, defining that the portion to be excluded from PIS and COFINS should be the ICMS actually paid. This system was less advantageous for the taxpayer, that is, it was a way for the tax authorities to try to curb the taxpayers' credit recovery.

With the decision of the STF in 2021, it became clear that the taxpayer must deduct the ICMS value from the revenue in order to have the PIS and COFINS calculation basis. Thus, the amount to be excluded from the PIS and COFINS calculation basis is the ICMS highlighted in the Invoice. Example of the impact of the decision:

DescriptionBefore STF DecisionAfter STF Decision
RevenuesBRL 100.000,00BRL 100.000,00
State VAT (ICMS 18%)BRL 18.000,00BRL 18.000,00
PIS and COFINS tax basisBRL 100.000,00BRL 82.000,00
PIS and COFINS tax (9,65%)BRL 9.650,00BRL 7.913,00

For companies in the Actual Profit Method, the rate of PIS 1.65 per cent and COFINS of 7.6 per cent (total of 9.65 per cent) must be applied, and for companies of the Presumed Profit Method the rate of PIS 0.65 per cent and COFINS of 3 per cent (total of 3.65 per cent).
As a result of the judgment, the Attorney General's Office of the National Treasury approved Opinion SEI No. 7698/2021/ME establishing procedures to be observed, in order to guarantee the effectiveness of the STF's decision. Thus, following the ruling in May 2021, all taxpayers that have added ICMS to the PIS and COFINS calculation basis will be able to exclude and calculate contributions only on the amount of effective revenue, excluding State VAT (ICMS).
With these changes, many companies took legal action to demand a refund of their past credits. The STF decision defined the following time limits:
  • Companies with a  legal claim before 14 March, 2017: may refund credits for 5 years before the date of the claim;
  • Companies with a legal claim after 15 March, 2017: may refund credits after 15 March, 2017; and
  • Companies without legal claim: may refund credits after 15 March, 2017.

According to the STF, this thesis does not apply to companies subject to the Simplified Tax Calculation System (Simples Nacional).
The credit approval will depend on whether the taxpayer is litigating or not. If the credit authorization is at the administrative level, it will be necessary to rectify the ancillary obligations that are involved in the PIS and  COFINS calculation. More specifically:

  • EFD Contributions: An accessory obligation that contains the detailed calculation of PIS/COFIN. Its rectification is necessary to reduce the debt amount previously calculated as a result of the exclusion of ICMS from the PIS and COFINS calculation basis.
  • DCTF: Ancillary obligation that contains the declaration of the PIS and COFINS debt, as well as the form of extinction of the tax credit, that is, payment, offsetting, etc. The rectification of the DCTF, in this case, aims to reduce the amount of the PIS and COFINS debt and thereby enable the credit resulting from an overpayment, to the detriment of the effect of excluding the ICMS.
  • PERDCOMP: This ancillary obligation will not be rectified, but will be used to realize the credit arising from an overpayment, which may be using offset against any other federal tax (overdue or falling due) or using refund of the value in kind.

It is important to emphasize that this rectification procedure must be analyzed on a case-by-case basis, requiring a study before proceeding with any rectification.
Following the recent ICMS decisions on the PIS and COFINS basis, many service companies are filing lawsuits requesting the removal of the ISS tax from the contribution calculation basis. The increase is due to the expectation that the municipal ISS tax will be excluded from PIS and COFINS, applying a similar modulation as in the case of ICMS. If the logic is the same, companies that have not filed a lawsuits before the decision of the STF will not be entitled to a refund for the five years before the sentence.
Thus, if the STF applies the same interpretation of PIS and COFINS, service providers may exclude ISS from the PIS and COFINS calculation basis, since this tax cannot be configured as revenue.
The expectation is that decisions related to the ISS are faster than the ICMS, as the delay in the decision encourages the multiplication of "baby theses". 
Another point of discussion is the exclusion of PIS and COFINS from their own calculation basis, the so-called "inside calculation". The reason for the decision, in this case, would also be that these contributions are not revenue and, therefore, cannot be in the calculation basis itself.
It is extremely important that taxpayers monitor the upcoming judgments, as many changes are expected in the Brazilian tax scenario.



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