Danilo Vicari Crastelo, Daniel Sircilli Motta and Paola Andrade, respectively partners and attorney of Tortoro, Madureira & Ragazzi Advogados.

Entrepreneuring in Brazil comprises not only knowing market issues, but also dealing with the many existing tax and regulatory laws, as well as protecting against excessive taxes that, misinterpreting the business conducted, see a taxation gap even if it is in breach of the law. As proof, some cases, such as that recently tried at the Rio de Janeiro State Appellate Court, confirmed the cancellation of an ICMS tax fine worth millions imposed upon a company that manufactures industrial and medicinal gases.

The tax assessment promoted by the State of Rio de Janeiro raises a challenging question for Brazilian entrepreneurs: the imposition – or not – of the state tax on simple shipments of goods between premises of the same taxpayer and on the circulation of goods, machinery, utensils and supplies for loan for use.

In disagreement with the understanding of the Judiciary, state tax authorities assess taxpayers under conditions that do not correspond to the expected concept that the ICMS is due from a “commercial transaction related to the circulation of goods”, which presupposes a legal purchase and sale in which a person (seller) undertakes to transfer to another (buyer) the ownership of a tangible or intangible good for payment.

In case of shipment of goods to another premises of the same taxpayer, whether in the same federative unit or not, it can be seen that the requirements of the taxable event are absent: there is no merchandise, there is no price to be paid, much less is there change in ownership (the so-called legal circulation of goods) authorizing the tax assessment.

The same applies to loans for use; as they are loans for using goods readily reimbursed within the time agreed by the parties, they do not in itself have the ability to generate transfer of ownership, since there is no transaction amount, and, therefore, the ICMS assessment does not apply.

Therefore, the claim brought by the tax authority representing the State of Rio de Janeiro is rebuttable; the defense of which stated that “legislation is clear regarding the imposition of ICMS on transfers of goods between premises, even those of the same owner, whereas the invalidity of this rule could only be noted upon its declaration of unconstitutionality,” and thus, it further argued that “the Principle did not require that the transaction relating to the circulation of goods entail a transfer of ownership to characterize the ICMS taxable event”, above all, supporting its argument in item I of article 3 of State Law No. 2.657/96. According to the court decision, it was possible to clarify that first, “as is known, the ICMS taxable event is the circulation of goods, which only occurs when there is effective transfer of ownership”, and also to emphasize to the tax authorities that “Venerable Special Body of this Appellate Court in judging the Claim for Unconstitutionality No. 0001513-02.2013.8.19.0000 declared the unconstitutionality, by material defect, of Article 3, item I, final part (‘even if to another premises of the same owner’) of State Law No. 2.657/96 ”, corroborating legal certainty for the specific case.

It is worth mentioning that, to the detriment of the logic regarding the non-occurrence of the taxable event, the understanding of which is summarized in the Federal Supreme Court entries No. 573 (“the physical exit of machinery, utensils and tools by way of lease for use does not generate a taxable event”) and No. 166 of the Superior Court of Justice (“the mere movement of goods from one premise to another of the same taxpayer does not generate an ICMS taxable event”), the companies are still assessed in these cases, which creates an unacceptable legal uncertainty.

It is no news that many companies with branches in different states of Brazil face events like that described above; by believing they are supported by law and behaving in a correct manner, they still have to defend themselves against administrative and judicial suits.

On the other hand, states face the legal reasons for the absence of taxation and demand the tax be imposed, by claiming that “only goods intended for fixed assets have the benefit of non-imposition of the ICMS”, or that “only the circulation of goods in the same state should not be subject to taxes,” or, more recklessly, distort reality and often misrepresent the loans for use to consider them a purchase and sale transaction to tax them.

Given the precedents submitted in this text, taxpayers who have undergone assessments supported by these grounds can and should defend themselves, primarily due to required legal certainty, which is always impaired when there is disrespect of binding and protective understandings.