Pedro Rezek Andery Altran
Lawyer at Marcos Martins Advogados
Complementary Law No. 7/1970¹ instituted the Social Integration Program (PIS), whose function is to promote the integration of employees into the life and development of companies.
The Social Security Financing Contribution (COFINS) was created by Complementary Law 70/1991², after CF/88 came into force, which in its article 195 made it possible to create a new contribution to raise funds for social security, social assistance and health. The basis for calculating these contributions is the company’s turnover.
Until 2003, these contributions followed the cumulative system, i.e. the calculation basis was gross operating revenue, without deductions for costs, expenses and charges. After the publication of Constitutional Amendment 42/03, which inserted paragraph 12 into article 195 of the Federal Constitution, there was authorization for the application of the non-cumulative system for PIS and COFINS for companies opting for real profit.
The aim of the non-cumulative system is to avoid the cascading effect of taxes, preventing the same tax from being levied more than once on an amount that has already served as the basis for its collection in a previous phase of the economic process.
The non-cumulative form can only be used by companies opting for real profit, allowing the taxpayer to credit what is an input.
In view of this possibility, Article 3 of Laws 10.637/2002³ and 10.833/2003⁴ ensured the application of this system to PIS and COFINS, respectively.
Article 3 – From the amount calculated in accordance with Article 2, the legal entity may deduct credits calculated in relation to:
II – goods and services used as inputs in the provision of services and in the production or manufacture of goods or products intended for sale, including fuels and lubricants, except in relation to the payment referred to in Article 2 of Law No. 10.485, of July 3, 2002, owed by the manufacturer or importer to the dealer for intermediation or delivery of vehicles classified in TIPI headings 87.03 and 87.04.
The legislator’s premise was to treat inputs conceptually and comprehensively, so it was up to the taxpayer and the federal tax authorities to define what inputs were.
Since then, taxpayers and the tax authorities have come to different understandings about the scope of what is an input for PIS and COFINS.
On the one hand, the tax authorities insisted on using the same criteria adopted for ICMS and IPI to conceptualize inputs, i.e. only those used in the production of goods would be an input, with one of its main characteristics being the loss of its properties in order to be transformed and/or become part of the final product. There is no doubt that the application of this legal regime restricts the taxpayer’s credits and increases tax collection.
On the other hand, the taxpayer and a large part of the doctrine understood that input for PIS and COFINS would be to adopt the criterion of essentiality, i.e. everything that is essential for the company’s end activity. In this case, the legal system used to calculate IRPJ applies.
As a result, the Administrative Council for Tax Appeals (CARF) took a stand on the issue and this court adopted the criterion of essentiality to conceptualize inputs for PIS and COFINS, ruling in favor of the taxpayer. Below is the judgment:
NON-CUMULATIVE PIS/COFINS. EXTENDED WARRANTY INSURANCE COMPANY. INSURANCE SALES SERVICE. GENERATION OF CREDIT. POSSIBILITY.
For the purposes of non-cumulative PIS and COFINS credit, any good or service essential to the company’s activity should be considered an input. In this case, outsourcing the service of prospecting and selling insurance is essential to the appellant’s business, which is why it is classified as an input and generates non-cumulative PIS and COFINS credit (Case No. 16327.000635/2009-19, Ruling No. 3401-002.213). (emphasis added)
This decision established the concept of input in the administrative sphere. Until then, there had been no decision by the Judiciary on the issue, which was reason enough for the tax authorities to continue defending their position.
After years of discussion, the Superior Court of Justice – STJ, in a judgment on April 24, 2018, with general repercussion, defined that for PIS and COFINS purposes, the concept of input should take into account the criterion of essentiality, as follows:
TAXATION. PIS AND COFINS. SOCIAL CONTRIBUTIONS. NON-CUMULATIVE. CREDITING. CONCEPT OF INPUTS. ADMINISTRATIVE DEFINITION BY SRF NORMATIVE INSTRUCTIONS 247/2002 AND 404/2004, WHICH REFLECTS A RESTRICTIVE PURPOSE AND DISTORTS ITS LEGAL SCOPE. DISABLED. DEFINITION OF THE CONCEPT OF INPUTS IN THE LIGHT OF THE CRITERIA OF ESSENTIALITY OR RELEVANCE. TAXPAYER’S SPECIAL APPEAL PARTIALLY HEARD AND, TO THAT EXTENT, PARTIALLY UPHELD, UNDER ART. 543-C OF CPC/1973 (ARTS. 1.036 ET SEQ. OF CPC/2015). (1) For the purposes of crediting PIS and COFINS contributions, the restrictive definition of input proposed in IN 247/2002 and IN 404/2004, both issued by the SRF, effectively disregards the command contained in article 3, II, of Law 10637/2002 and Law 10833/2003, which contain an exemplary list.
2. The concept of input must be assessed in the light of the criteria of essentiality or relevance, that is, considering the indispensability or importance of a given item – good or service – for the development of the economic activity carried out by the taxpayer.
3. Special appeal representative of the controversy partially known and, to this extent, partially granted, to determine the return of the case file to the instance of origin, in order to assess, in comparison with the company’s corporate purpose, the possibility of deducting credits related to costs and expenses with: water, fuels and lubricants, laboratory materials and examinations, cleaning materials and personal protective equipment-EPI.
4. Under the rite of art. 543-C of the CPC/1973 (arts. 1,036 et seq. of the CPC/2015), the following theses are established: (a) the crediting discipline provided for in SRF Normative Instructions Nos. 247/2002 and 404/2004 is illegal, as it compromises the effectiveness of the non-cumulative system of PIS and COFINS contributions, as defined in Laws 10. 637/2002 and 10.833/2003; and (b) the concept of input must be assessed in the light of the criteria of essentiality or relevance, that is, considering the indispensability or importance of the finished item – good or service – for the development of the economic activity carried out by the Taxpayer.
(REsp 1221170/PR, Rel. Minister NAPOLEÃO NUNES MAIA FILHO, FIRST SECTION, judged on 02/22/2018, DJe 04/24/2018)
Although this decision was more favorable to the taxpayer due to the extension adopted, it did not establish any objective criteria for defining inputs. It established its own system for calculating PIS and COFINS, namely the criterion of the essentiality of the input for the company’s activity.
With the adoption of the essentiality criterion, it is clear that the right to credit must be analyzed on a case-by-case basis. There is no exhaustive list of what is essential for each company, requiring a detailed analysis of each production process, or aspects inherent in the commercialization or provision of services.
In this way, it is clear that both the administrative sphere represented by CARF and the judicial sphere with a decision by the STJ have adopted a new system for calculating PIS and COFINS credits, which is the criterion of the product purchased or service taken being essential to the business activity.
¹BRASIL. Complementary Law No. 7/1970, of September 7, 1970. Institutes the Social Integration Program, and makes other provisions, Brasília, DF, Sep 1970
²BRASIL. Complementary Law No. 70/1991, of December 30, 1991. Institutes a contribution to finance Social Security, Brasília, DF, Dec 1991
³BRASIL. Law No. 10.637/2002, of December 30, 2002. Provides for the non-cumulative collection of the contribution to the Social Integration Program (PIS) and the Public Servant Equity Formation Program (PASEP), Brasília, DF, Dec 2002
⁴BRASIL. Law No. 10.833/2003, of December 29, 2003. Amends Federal Tax Legislation and makes other provisions, Brasília, DF, Dec 2003
