Taxation on electricity: the parameters of the recent STF decision and its consequences for the sector
Carlos Augusto Tortoro Jr., Danilo Vicari Crastelo e Paola Andrade, partners and lawyer at Tortoro, Madureira & Ragazzi Advogados, respectively.
In times of pandemic and of great legal insecurity permeating the business environment in Brazil, the Federal Supreme Court by means of a virtual plenary session ended the judgment of Appeal No. 593.824/SC, establishing the following thesis in favor of the taxpayers: “the demand for electric power is not liable, by itself, for taxation via ICMS, because only the values referring to those operations, where there is an effective consumption of electricity by the consumer are included in the tax base for calculating that tax.”
At last, there is a glimpse of light for Brazilians who for years have been so drastically penalized by one of the most expensive electricity rates in the world, full of cross-subsidization and taxes of the most varied shades. The case, which reached the court 12 years ago had the general repercussion recognized in 2009 (theme 176) and last April was adjudicated on its merits by a majority vote, following the ministers, the case law already consolidated by the Superior Court of Justice, also in favor of the taxpayers.
In a decision full of interdisciplinary content involving sectorial and tax issues, the rapporteur Justice Edson Fachin showed the need for separation between the actual energy consumption and the amount made available by the distributor, commonly called “electrical power demand.”
In fact, the electric power, which is generated from potential differences between two points that establish a current between them, although not tangible, is effectively considered a commodity by operation of Supplementary Law No. 87 of September 13, 1996 (Kandir Law), and its sale is obviously subject to ICMS (Tax on Circulation of Goods and Services).
In the purchase and sale relations of this peculiar merchandise, two distinct environments are established by Law no. 10.848/2004 for its sale: The Regulated Contracting Environment (ACR) and the Free Contracting Environment (ACL).
According to article 1, §2, item I, of Decree no. 5,163/2004, the Regulated Contracting Environment is the “market segment in which the transactions of purchase and sale of electricity between selling agents and distribution agents take place, preceded by bidding, except for the cases provided for by law, in accordance with specific marketing rules and procedures.”
The majority of Brazilian consumers are in this regulated market and are served by distributors responsible for the physical supply of energy, remunerated precisely by this activity. The captive customer has no margin for individualized price negotiation, choice of sellers and supply period.
The demand for electric power is generally purchased by individuals who are included in Group A, according to ANEEL Resolution 414/2010, and who need high voltage to connect several machines and equipment, as an example. Put simply, it is important to highlight that for this group the binomial tariff is applied, i.e. the consumer pays for the electricity effectively consumed and for the use of the distribution system.
As this is a class of consumers that demand large amounts of energy, there is a need to sign a demand contract whereby the distributor undertakes to provide the maximum electricity needed and to maintain the system ready to support the demand for power. However, what has been purchased is not always effectively used, which ended up generating the controversy over which amount should be included in the ICMS tax base.
In the tax argument, the tax should be levied on the tariff charged to the consumer, i.e., the tax calculation base should encompass the total of the transaction: the purchased and consumed energy. However, it shall be proved, duly appointed by the Constitutional Court, that the consumption of electricity resulted from its effective use and not from the power availability.
According to the rapporteur minister, “the provision of electric energy incurs costs to the concessionaire, and therefore it must be paid in full. However, it does not correspond to the consumption of electrical power which is what was effectively used with the connection of equipment and machines and which may be higher or lower than what was made available.”
At this point, it is important to emphasize that the understanding was satisfactory for the sake of preserving the electric sector tariff policy without harming neither the distributors who continue to be legitimately remunerated for the provision of the availability of the system and of the energy demanded, nor the final consumer.
With the interdisciplinary premises well defined, the controversy was positively resolved for the taxpayers, since ICMS collection in this type of transaction is clear about the actual energy consumption corresponding to the tax base imposed by the state tax. Thus, respecting its incidence matrix rule, which brings unequivocal legal security to the energy market and consolidates a discussion held for over a decade.
By adopting a pro-consumer understanding, the Federal Supreme Court shows that there is still a hope for an effective evolution of the electricity sector in the country as far as tariff justice is concerned given that its tariff affordability has long since been forgotten in favor of the inefficiency of sectoral public policies. In short, the collegiate decision shows that the consumer of electricity cannot be seen as an inexhaustible source of financial resources, either to sustain the state machine or to subsidize economic sectors.