Brazil: Exporting States limit the Usage of ICMS Tax Credits

A non-published study of the National Confederation of Industry (CNI) shows that the 10 biggest exporting states in Brazil limit the usage of ICMS tax credits of companies selling products abroad.

The states` governments define requirements for the usage of tax credits when it comes to:

  • Paying tax debts
  • Transferring the money to third parties

This practice could reduce the international competitiveness of the affected companies. States using these procedures are São Paulo, Minas Gerais, Rio de Janeiro, Paraná, Rio Grande do Sul, Mato Grosso, Pará, Espírito Santo, Bahia und Santa Catarina.

 

ICMS Tax on Exports

In Brazil, the export of goods is exempt from the ICMS tax. This rule has been established in the constitution and the Kandir law in order to make Brazilian companies more competetive in foreign trade. In practice, in order to grant the complete exemption from the tax, the ICMS tax (which is embedded in assets of the domestic production chain) is currently being calculated as tax credit for exporting companies.

These tax credits can be used either to pay tax debts or transfer money to third parties.

 

Debt Repayments

The CNI study also shows that the policies of the states names above prvents the usage of tax credits to pay off tax debts. Every third company that has ICMS tax credits cannot use them to pay off its tax debts.

“If the ICMS tax credits are not refunded, the price for exports in de facto increased through taxes. In order to balance this, the company has to internalize the additional costs which in turn decreases the competetiveness of Brazilian products abroad”, says Carlos Abijaodi, Direktor der CNI Industrial Development .

 

The study shows that limitations to the usage of ICMS tax credits mostly apply to the following situations:

  • Tax substitution (if the producing company has already paid the entire ICMS tax load instead of the entire sales chain)
  • In case of imports (if ICMS is applicable)
  • In case of different tax rates, e.g. when exporting goods to other federal states

 

Transfer of Tax Credits to Third Parties

Many of the named states apply restrictions to the transfer of tax credits to third parties. Such restrictions are:

  • Permit of the Ministry of Finance to grant transfer
  • Monthly limits on how much can be transferred
  • Prohibition of transfers if the company has lost the privilege, e.g. in case of installment payments or legal proceedings

 

“These are limitations that contradict the Kandir law, as the STJ has affirmed in its decisions on multiple occasions. Therefore, companies shouldn`t be limited by the states` restrictions”, the study says.

 

Other problems companies residing in the respective states face are complex and unclear rules for accumulated tax credits, the levying of high taxes and the taxation of transferred tax credits.

The goal of the regional governments behind those limitations is to force companies to pay their debt from their cashflow. Their non-compliance with the legal provisions is aimed at solving the states` tax revenue problems.

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