Brazilian legislation regarding Social Contributions on Revenues (PIS/COFINS) states that a legal entity subject to the non-cumulative taxation method may offset PIS/COFINS credits with its debits from such contributions.
These credits are mainly computed on expenses related to goods and services, used as input in the rendering of services and the production or manufacturing of goods or products intended for sale, with certain exceptions.
However, the definition of "inputs" has long been a subject of debate in Brazil, due to three diferente interpretations of the concept in different contexts:
■ For Brazilian taxpayers: The non-cumulative rule should be applied in a broad and unrestricted manner. In this sense, the concepts used in the Brazilian Income Tax legislation, according to which all the costs and expenses related to the service rendered or to the manufacturing process of the products are deductible, should also be applied to PIS/COFINS credits;
■ Brazilian Federal Revenue Service: The concept employed for tax credits used in the Excise Tax (IPI) legislation should also be applied to PIS/COFINS. Therefore, inputs are only:
— The raw materials, intermediary products, packaging materials and any other goods applied or consumed in the manufacturing of the product or rendering of services, as long as they are not included in the company's fixed assets; and
— The services provided by a legal entity domiciled in Brazil, applied or consumed in the manufacturing of the product or rendering of the service.
■ Superior Court of Tax Appeals (CSRF): The right to credits include those expenses incurred on goods and services that are directly related to the production of goods or rendering of services but not limited to the purchase of raw materials, intermediate products and packaging materials. This should be decided on a case-by-case basis.
The issue has reached the judicial courts and, in February 2018, the First Section of the Superior Court of Justice (STJ) rendered a decision under the system of multiple appeals dealing with the same matter of law ("Recurso Repetitivo") regarding the extension of the concept of inputs for PIS/COFINS credit purposes.
The decision will harmonize the STJ case law and also bind the lower judiciary levels and the administrative decisions.
The prevailing STJ understanding is that the type of input must be essential or relevant to the taxpayers´ economic activity and rely on three guidelines, namely:
■ The goods or services must have been acquired to be used in providing the service or in the production, or to enable them (with the "making" represented by the production process or service provision);
■ The production of the goods or provision of the service must depend on the acquisition of goods or services (which are essential in the production process, and not to the product or the service itself, which means that the removal of the inputs would make the production of goods or service rendering impossible); and
■ Direct contact of the goods or service provision with the product is not necessary (with the possibility of their indirect use in the "making," represented by the production process or service provision).
In our opinion, the result of this judgment, though more favorable than the restrictive interpretation held by the tax authorities, does not give legal certainty to taxpayers, as it is based on abstract and different concepts for each economic activity.
Therefore, it is necessary and highly recommended to evaluate each specific situation for purposes of defining the expenses incurred by the taxpayer as part of the concept of input for appropriating PIS/COFINS credits.
This article was first published by Wolters Kluwer – Global Tax Weekly, June, 2018.