The COVID-19 pandemic and recent trials about tax matters in the Federal Supreme Court (STF): coincidence or consequence?
June 9th, 2021, by Paola Andradre, Lawyer at advogada do Tortoro, Madureira & Ragazzi.
As a science that studies a certain system of rules created to regulate human behavior in society, Law has constantly been affected by various facts arising from economics, politics, climate and sociology. It was no different for the COVID-19 pandemic, which was confirmed to have spread in Brazil since mid-February 2020 and has ravaged the world for more than 400 days, mainly when it comes to legal and economic issues.
Taking into account that a preventive treatment has not yet been fully documented and several subjects still need to be unraveled by medical scientists, the COVID-19 has compelled us to rethink how we work, spend our free time, how we take care of our health care and, especially, how we manage our money in dark and uncertain times.
Industries that were experiencing strong growth have been devastated, first and foremost the tourism, leisure and restaurant ones (both those managed by large companies and by individuals, who invested their life-time savings in their businesses). Everyone has faced uncertainty on a daily basis about whether to continue running the company or not, and how to keep up with their taxes and cash flow in times of social isolation.
Considering all these doubts that have arisen regarding economic relationships established between contracting parties at all levels, including the most relevant one: the relationship between tax authorities and taxpayers, the Law, by means of the Judicial Branch, must take on the duty of settling conflicts of interest that have arisen from the pandemic.
Since it was evidenced by medical science that one of the ways to contain the virus spread is social isolation, we have seen the Executive Branch’s performance in struggling to save the economy (already in tatters) through the emergency aid, the Legislative Branch enacting laws that facilitate the purchase of supplies for the treatment of patients and, mainly, the Judicial Branch in an effort to settle disputes in a very active and atypical way.
In the tax area, however, not only the problems that have arisen nowadays have taken the Constitutional Court’s agenda, but also – and with great impact – important issues that had been shelved for years were resolved by the full court and contrary to the taxpayer, which surprised the entire legal community.
According to a survey released by the media¹, approximately forty-five (45) tax issues with general repercussion were resolved by the Federal Supreme Court (STF) during this pandemic period. Moreover, many of them were settled in virtual courts, which enables the parties involved to hold debates and present oral arguments.
Out of these trials, thirty-one (31) resulted in unfavorable decisions against the taxpayer. Some of these decisions are mentioned below, only as illustrative examples, which caused some discomfort, especially among those who struggle in the tax area.
The trial of the Subject-matter No. 985 (Extraordinary Appeal No. 1.072.485), an unpleasant surprise that came in 2020, established the thesis that “the levy of social contribution on vacation pay increased by one-third is legitimate”. This decision not only bewildered the jurists, but also the entire business community that already had favorable decisions about the exemption of taxation, based on the Federal Supreme Court’s understanding in a repetitive appeal and, therefore, binding on the lower courts. The Federal Supreme Court concluded that the amount was a compensatory payment, which is not comprised by the employee’s ordinary income. Both taxpayers and the legal security lost.
The Constitutional Court reached another unexpected decision issued in the Subject-matter No. 1048 (Extraordinary Appeal No. 1.187.264), which stated that “the inclusion of the State Goods and Services Tax (ICMS) in the Social Security Contribution on Gross Revenue’s tax base (CPRB) is constitutional”. The reason for this astonishment is that they applied an understanding diametrically opposed to the so-called “thesis of the century”, in which the State Goods and Services Tax (ICMS) should be excluded from contributions to the Social Integration Program (PIS) and the Social Security Financing Tax (COFINS), as it is not part of the taxpayer’s income, but rather passes through their cash. The question remains: what is the difference that would justify such a huge difference between these decisions? The statement that the payroll tax exemption would be beneficial is hardly convincing.
The Subject-matter No. 846 (Extraordinary Appeal No. 878.313) also brought an old discussion up during the pandemic, which established the thesis that “the social contribution provided for in Article 1 of the Complementary Law No. 110, from June 29, 2001, is constitutional, in view of the fact that the purpose which it was created for still remains”. Such imbroglio dealt with the social contribution of 10% on the Guarantee Fund for Length of Service (FGTS) penalties in case of dismissal without cause. Although it was extinguished by Law No. 13.932/2019, the Judiciary’s final decision on the adequacy of its collection after a statement issued by the fund manager itself (Caixa Econômica Federal) informing that the FGTS accounts affected by the deficient adjustment for inflation caused by the Summer (Verão) and Collor I Plans had already been recovered. After this controversial decision was confirmed, Justice Marco Aurélio, expressed his indignation in his appellate decision, stating that “no matter how noble the justification might seem, the State cannot circumvent the Federal Constitution with regard to taxation features”². Well, dissenting opinion.
Last but not least, the very recent judgment of the motion for clarification filed by the National Treasury in the Extraordinary Appeal No. 574,706 (Subject-matter No. 69), the so-called “thesis of the century”, which discussed whether the State Goods and Services Tax (ICMS) to be excluded from contributions to the Social Integration Program (PIS) and the Social Security Financing Tax (COFINS) would be the one actually paid (after matching of credits with debits, typical of non-cumulativeness) or the one indicated in the invoice (as the taxpayers intended). By 8 votes against 3,the justices decided to exclude the latter, the indicated one, as well as changed the effective dates, so that the declaration of unconstitutionality of this joinder would not date back, thus taking effect on the date the general repercussion thesis was approved (March 15, 2017), except for the actions filed before this timeframe.
Upcoming episodes still haunt and cause anxiety, given that everyone looks forward to the outcome of the Direct Action for the Declaration of Unconstitutionality (ADI) No. 5.090, which will decide on whether using the Referential Rate as a correction index for the FGTS accounts between 1999 and 2013 is constitutional or not. Assuming that it is deemed unconstitutional, thousands of workers who filed a lawsuit would be entitled to receive the deficiency payments using the most adequate inflation-adjusted index.
The abovementioned trial alone involves astronomical amounts of money: BRL 295.9 billion. It gives rise to increasing speculations as to how this amount was calculated and in which way its disclosure will cause a stir about the upcoming Federal Supreme Court’s decision. It is known that, in Extraordinary Appeal No. 574.706, the economic argument was heavily weighted by the Justices.
In this context, would the change of effective dates be the “golden mean”, so that no one “loses out”? It is wise to remember, however, that after it takes effect, the taxpayers will be left with the consolation prize, which is: “they won the lawsuit, but did not get the award”.
Now, considering the problems caused by an invisible, silent and ferocious microorganism that comprise all levels, values and aspects, the daily challenge of those who work with the Law is to ensure strict compliance with the existing rules in their defense, knowing that they will face an often-biased Judiciary Branch that will act as custodian of public revenues.
Surely, Professor Humberto Ávila’s words draw a reasonable conclusion about everything that has happened with the abovementioned trials, as well as the specter of changing the effective dates that has haunted the best-case scenario, in which the taxpayer is victorious: “the confirmation that unconstitutionality pays off, fundamental rights do not limit the power of the State and investments in Brazil are not worth it”³.