A narrow alley to the downstream taxation in Brazil
Autor: Evandro G. Estebanez | Publicado: 2013-01-16T21:23:00-02:00


A narrow alley to the downstream taxation in Brazil

by Evandro Gãneme Estebanez

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The Petroleum
industry in Brazil has faced a big tax case, recently brought to the Supreme
Court, by the National Confederation of Commerce that claims the non
constitutional declaration over the fiscal agreement that rules derivatives of
petroleum and ICMS (BR sales tax) and involves Refineries, Fuel Distributors,
Sugar Mills, Fuel Retailers and others. 




The
Sales Tax or ICMS (Circulation of Merchandise and Services Tax) in Brazil has a
quite complex nature, since it involves different legal structures and aspects
of exclusive competency of each one of the 26 States and the Federal District,
Tax Liability, tax base, tax payment, tax rate, credit and debit system, non-cumulative
schemes, tax payers and governmental interests, among others.&nbsp;&nbsp;&nbsp;&nbsp; 




Naturally,
the ICMS is a Brazilian state competency tax, whose taxable event occurs with
the movement of the merchandise. Generally the product of its payment can be
totally or partially destined to the State of Origin or Destination, where the tax
payer in law or in fact is located.




However,
the law foresees special treatment to the oil industry, according to the
Federal Constitution of the Republic, complementary law #87 of 1996 and CONFAZ
(National Council of Treasury Policy) the conventions agreed between the member
states that set out exclusively about the ICMS, where is set out the way tax
replacement occurs, fiscal benefits and their concession and revocation, with the
purpose of harmonizing the respective fiscal accounts between the states.




The
Federal Constitution of Brazil has exempted the collection of ICMS on Oil and
its derivatives for the states of destination, although there is a legal rule of
non application on the interstate operations. In this sense, it must be said
that Supreme Court has already manifested itself for the taxation of the
merchandise and the income must be reverted to the state of consumption. 




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According
to the Brazilian law, ICMS is calculated over its own tax base, because the value
assigned to goods circulated
already shows the
value of this tax. On the other hand, bearing in
mind the importance of the collection and non effective power of public
supervising of States, the legislation in some cases
adopts the figure of Tax Liability or Tax Substitute, in which a given tax
payer shall collect the amount due on the entire production chain, ranging from
product manufacturing to the end consumer.




As
an example of such complexity in the Downstream operation case for
manufacturing and sales of gasoline C, usually intended for sale at fuel
retailers, is now highlighted. By determination of the Inter-ministerial
Council of Sugar and Alcohol-CIMA, all Gasoline type C, sold by the liter at
the pump, should contain a 25% mixture of Anhydrous Ethyl Alcohol Fuel (EAAF),
forming a chain of production involving Refinery, Sugar Mills, Fuel Distributor
and Fuel Retailers. Thus, the refinery provides Gasoline type A to Fuel
Distributors, who in turn promote a mixture of 25% of EAAF provided by the Sugar Mill and resells Gasoline C to Gas Stations selling
fuel at retail. 




Accordingly,
in the whole production chain of gasoline C there are two suppliers of raw
materials represented by the Refinery and Sugar Mill, not to mention it is
completed by the manufacturer of Gasoline C (Fuel Distributor) and Retailers.




However,
the Refinery has to fulfill its legal obligation as a substitute tax payer,
anticipating to the coffers of the state their values ​​resulting from the
movement of the fuel in the chain up to the end consumer. For that to happen,
the amount of tax collection is calculated on the future operations of the
final product. That's when the first complexity arises because the Refinery is
the legal party responsible for payment of “ICMS tax substitution forward” of a
partial product affected to its production! i.e. the Refinery, which sells
gasoline type A to the Fuel Distributor is responsible for the tax levy of
Gasoline type C sold at pumps to the final consumer, while the sale of raw
material EAAF from the Sugar Plant to the Fuel Distributor has deferment or
suspension of tax payment on sale at the time of departure of gasoline type C
from the Fuel Distributor, mixed with EAAF, to the Fuel Retailer.




Thus,
in operations between the EAAF supplier (Sugar Mill) and Fuel Distributor, ICMS
tax is due by the Refinery, as a “substitute tax payer backwards”. In this
triangulation, it is plainly possible to admit that the Fuel Distributor does
not collect such tax, and of course if the tax is not collected, according to
the non-cumulative fiscal principle, this fact entails the not crediting of the
respective portion of the tax for compensation in the subsequent operations. In
this scenario, a new legal covenant made in &nbsp;ICMS agreement # 110/2007 in § 10 and 11 of
the twenty-first clause ordains that in
interstate operations, the chargeback be made of the respective credit, corresponding to the volume of EAAF. Now, if the Fuel Distributor has no ICMS tax credit
(asset) on the sales operation of the Sugar Mill, why should it pay tax in the
form of reversal in interstate operations? As can be seen, it is truly the creating of a new tax, injuring the
principles of legality, the non-cumulative fiscal principle and ability to pay.





As is well known, and modeled by the constitutional act of Brazil, the creation
of a new tax comes from LAW. In this regard, it remains clear that the ICMS Agreement
# 110/2007 with the changes described above, does not have the power or
legitimacy to create a true hypothesis of incidence of taxes, hence the
manifestation of the National Confederation of Commerce by the declaration of
unconstitutionality of the said ICMS agreement, with new wording that went on
to create a new tax and without constitutional provision and Law that
legitimates it for this end.




However,
we find that there is still no definitive positioning of the Supreme Court on
the matter. In analysis, it was not even allowed to suspend the effectiveness
of the legal standard under the mantle of the provisional remedy application
brought. However, even though the current tax rule is in effect, there is no
doubt that this fact remains to cause a strong financial impact sustained by
the Fuel Distributors with the expenditure of funds for the payment of this new
"tax" instituted in the form of "reversal" on gasoline C,
whose demand for consumption has been constantly growing in Brazil. Without
further digression, it is not the role of the country's Supreme Court to
intervene politically in social issues, with decisions not associated to its
eminently Constitutional Law, but to deal with the obscurities of the law and be
keeper of the Federal Constitution in a clear way, equidistant and enshrined
within the principles guided by itself.




The discussion
with respect to the declaration of unconstitutionality of the norm is far from
an end, the Reporter of the ADI (Unconstitutionality Declaration Lawsuit),
Minister Ellen Gracie, now retired, voted in favor of the declaration of
unconstitutionality, but the trial is still pending the votes of other
Ministers, which already add up to two votes against it, thus reiterating the
possibility of permanency of the unconstitutional "new tax". Again
the National Tax System is put to the test! Sneaked in a dark alley, on one
hand, by the insatiable hunger of state revenues, on the other, by the light of
justice and constitutional fiscal rules that insist on shining! &nbsp;




Evandro G. Estebanez, is a Brazilian Tax Lawyer,
expert in Oil &amp; Gas, Member of Brazilian Tax Law Society and Founder
Partner of Brastax – Consulting Company. e-mail: ege@brastax.com &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;