Transition to ICMS Accrual Credit in Tax Reform

After the House of Representatives approves the tax reform (PEC 45/2019), the text goes to the Federal Senate, where it will be analyzed again and voted on in two rounds.

Much is said of the broader changes that the Reformation encourages, such as (1) its effect on the Federal Charter; (ii) the creation of a double VAT; (iii) applicable rates; (iv) differentiated tax systems; (grandmother cash back etc.

However, aside from the discussion on the merits of this reform, the text of PEC 45/2019 brings up other points that deserve deeper reflection and which we hope will be a topic for debate in the Federal Senate. One of them is the issue that we intend to deal with in this area, which is the question of ICMS accumulating credit and its conversion into Goods and Services Tax (IBS), a tax that will be the responsibility of states and municipalities and will replace, among other taxes, ICMS.

In the body of the proposal, we have the inclusion of Art. 133 in the Temporary Constitutional Provisions Act (ADCT), which provides that accumulated ICMS balances, existing at the end of 2032, will be used by taxpayers, under the provisions of the Supplementary Act. Pursuant to the second clause of clause 3, there is a resolution that the ICMS credit accumulated by the States and the Federal District shall be reported to the Federal Board of IBS so that it may be offset against this tax in 240 monthly, equal and successive installments from 2033. In other words, the accumulated ICMS credit will be used, Related to generation operations that occurred up to the expiry of this tax, to offset IBS debts over a 20-year period.

In addition, § 6 of the same article. 133, of the ADCT, stating that the Supplementary Code, when dealing with this point, will provide the general rules regarding such “proven” 20-year use of accumulated ICMS credit, as well as indicating the manner in which holders may transfer such credits to third parties, Further, how can these credits be compensated to the taxpayer by the IBS Board of Directors, if they cannot be compensated within the aforementioned 20-year period.

It turns out that a point that advocates of reform so strongly make, and which was factored into the House Tax Reform Working Group’s report, is the importance of prompt payment of backlog credit for taxes that have a value-added tax (VAT) characteristic. So much so that, according to the wording of the report, “the new system should ensure the return of accumulated IBS balances in the shortest possible time, as in the international community, a maximum period of 60 days seems reasonable to us.” In the approved text of PEC 45/2019, it will be up to the Supplementary Law to set this deadline.

However, this reasoning regarding the importance of prompt repayment of accumulated credit is inconsistent with the text of PEC 45/2019 approved by the House, particularly regarding the transfer of accumulated credit from ICMS to IBS, as provisions of Proposed Art. 133, from ADCT.

Now, if the importance of prompt repayment of the accumulated credit for IBS is recognized, given its indisputable importance for the non-cumulative nature it is intended to promote with that new tax, how can the constitutional rule for the proposed transition be justified by PEC 45/2019, which anticipates that the ICMS credit The accrual can only be used in 240 monthly installments, which results in an incredible 20 years of use?

The second clause of § 6, Art. 133, of the ADCT, provides that complementary law may provide for the manner in which holders of accumulated ICMS credits may transfer them to third parties. Thus, we ask: when promoting this transfer, will the recipient of the credit be able to use it only in installments within 20 years?

Another issue: the third clause of § 6, Art. 133, of the ADCT, states that the Supplementary Act will deal with the manner in which the accumulated ICMS credit may be refunded to the taxpayer, if the credit cannot be offset against the IBS within that monthly installment of 240. In this context, we ask: Can the taxpayer Obtaining compensation for the accumulated ICMS balance only if he is unable to make up for it within 20 years?

As can be seen, this go-to rule for the use of accumulated ICMS credit runs counter to the notion that, in order not to fully accumulate, prompt recovery of accumulated credit is essential. Setting a 20-year period for this refund would, in fact, directly affect taxpayers who are currently accruing ICMS credits.

We know that under the current ICMS system, many companies collect credits from this tax and are having great difficulty getting it back. With this scenario in mind, and considering the unquestionably detrimental effect that would exist in maintaining accumulated credit by a taxpayer for an unacceptable 20 years until fully compensated against IBS, we pose one final question to the reader: Does this make sense? That, in moving from ICMS to IBS, the credits of that tax are not fully used to meet them against IBS, without any installments, nor are they subject to immediate repayment from 2033? We understand that the answer to this question is negative.

* Sergio Vilanova Vasconcelos is a lawyer at ButtiniMoraes