Excluding ICMS-ST from the PIS/COFINS Tax Base

This page is a translation of the original Portuguese text, provided for convenience. It deals with Brazilian law. If there is any discrepancy, the Portuguese version prevails. Read the original in Portuguese

Excluding ICMS-ST (the portion of Brazil’s state value-added tax on goods and services collected under tax substitution) from the PIS and COFINS (federal social contributions on revenue) tax base is a separate tax argument from excluding regular ICMS. It rests on its own grounds, has its own consequences, and is still disputed in the courts.

The Difference Between Regular ICMS and ICMS Collected Through Tax Substitution

To understand the argument for excluding ICMS-ST from the PIS/COFINS base, you first need to distinguish the two ways ICMS is paid. Under the regular system, the taxpayer calculates ICMS on each transaction, applying the tax to the sale price and deducting credits for purchases. Under tax substitution (ICMS-ST), the tax for the entire production chain is paid in advance by a single taxpayer (the substitute), who charges the substituted taxpayer the amount of ICMS calculated on the presumed final sale price to the consumer.

ICMS-ST is charged by applying an Added Value Margin (Margem de Valor Agregado, or MVA) to the substitute’s selling price. This projects the price the product will have in the later stages until it reaches the final consumer. The substituted taxpayer, on receiving goods for which ICMS-ST has already been paid, does not itemize ICMS on its own subsequent sales. Even so, the ICMS-ST amount is part of the cost of acquiring the goods and, as a result, can affect the tax base of other taxes, such as PIS and COFINS.

The exclusion of regular ICMS from the PIS/COFINS base was decided by the STF (Brazil’s Supreme Federal Court) in RE 574.706 (Topic 69) in 2017. The court held that ICMS itemized on the invoice is not part of the company’s revenue and therefore must be excluded from the tax base of these contributions. The ICMS-ST question, however, involves peculiarities that make the debate more complex and lead to different legal consequences.

The Grounds for Excluding ICMS-ST

Taxpayers who argue for excluding ICMS-ST from the PIS/COFINS base contend that the ratio decidendi (the court’s reasoning) in the STF’s Topic 69 decision applies equally to ICMS-ST. Their central argument is that ICMS, however it is paid, is not the taxpayer’s revenue. It is money that passes through the company’s cash account and must go to the state treasury. If regular ICMS is not part of revenue, they say, neither should ICMS-ST be.

From an accounting standpoint, the substituted taxpayer records ICMS-ST as part of the cost of acquiring the goods. When that taxpayer calculates PIS and COFINS under the non-cumulative regime, the tax base is total gross revenue, which includes the sale price of products whose cost incorporates ICMS-ST. In this way, ICMS-ST ends up indirectly affecting the base of the contributions, because the substituted taxpayer’s sale price reflects the tax cost borne at acquisition.

Under the regular system, the taxpayer calculates ICMS on each transaction, applying the tax to the sale price and deducting credits for purchases.

The Receita Federal (Brazil’s Federal Revenue Service), for its part, maintains that ICMS-ST is fundamentally different from regular ICMS. Under tax substitution, the substituted taxpayer does not itemize ICMS on its sales invoices, which, in the agency’s view, would make it impossible to identify the amount to be excluded from the tax base. The agency also argues that ICMS-ST was already paid at an earlier stage and is a cost of the product, permanently built into its price.

The Position of the Courts and CARF

The STJ (Brazil’s Superior Court of Justice) addressed the question in Repetitive Appeals Topic 1.125, ruling in 2023 on Special Appeals Nos. 1.896.678/RS and 1.958.265/SP. The STJ’s First Section decided that ICMS-ST amounts are not part of the PIS and COFINS tax base owed by the substituted taxpayer, applying the same logic as the STF precedent in Topic 69.

The STJ based its decision on the premise that ICMS, regardless of how it is collected (regular or through tax substitution), does not become part of the taxpayer’s assets. It is merely a cash inflow earmarked for the state treasuries. The decision binds all federal courts and judges in the country, but the National Treasury may challenge the interpretation before the STF through an extraordinary appeal, alleging a constitutional issue.

At the administrative level, CARF (Brazil’s Administrative Council of Tax Appeals) has issued conflicting decisions on the subject. Some panels follow the STJ’s reasoning and allow the exclusion, while others keep the Receita Federal’s position against it. Understanding how ICMS tax substitution works is essential to weighing the risks and opportunities of this argument for each taxpayer.

Practical Considerations for the Substituted Taxpayer

A substituted taxpayer who wants to exclude ICMS-ST from the PIS/COFINS base must take practical steps to quantify the amount to be excluded. Because ICMS-ST is not itemized on the substituted taxpayer’s sales invoice, you need to find the amount of the tax by reviewing the purchase invoices, where the ICMS-ST withheld by the substitute is reported.

The retroactive calculation of credits can cover the last five years, under the limitation period in Article 168 of the National Tax Code. The taxpayer must gather all purchase invoices that include ICMS-ST, calculate the proportional amount to be excluded from the PIS/COFINS base in each assessment period, and correct the ancillary reporting obligations (EFD-Contribuições) to reflect the exclusion.

Amounts overpaid can be recovered through administrative offsetting (qualifying the credit with the Receita Federal) or through a lawsuit for recovery of overpaid taxes. The administrative route is faster and cheaper, but it requires the taxpayer to hold a final and unappealable court decision or to fall within the situations in which the right is recognized administratively. The recovery of overpaid taxes (repetição de indébito tributário) is the proper procedural tool for seeking a court-ordered refund of these amounts.

Frequently Asked Questions

What is the difference between the argument for ICMS in the PIS/COFINS base and the argument for ICMS-ST?

The regular ICMS argument (STF Topic 69) concerns excluding the ICMS that the taxpayer itself itemizes on its sales invoices. The ICMS-ST argument concerns excluding ICMS paid in advance through tax substitution. The substituted taxpayer does not itemize that ICMS on its sales, but it is part of the taxpayer’s acquisition cost. Although the legal basis is similar, the way the exclusion is carried out is different.

Can the substituted taxpayer exclude ICMS-ST administratively?

After the STJ’s decision in Topic 1.125, substituted taxpayers have a solid legal basis for seeking the exclusion. The safest route is to obtain a court decision, but some taxpayers have obtained administrative recognition from the Receita Federal, especially when they show that the STJ precedent applies directly to their case. Correcting the EFD-Contribuições and qualifying the credit are the necessary administrative steps.

How do you calculate the amount of ICMS-ST to be excluded from the PIS/COFINS base?

The calculation requires reviewing the purchase invoices for goods subject to tax substitution and identifying the ICMS-ST withheld by the substitute in each transaction. That amount must be excluded proportionally from the sales revenue of the corresponding period. In practice, you divide the total ICMS-ST paid on purchases by the total sales of the goods acquired under ST, which gives an average percentage of ICMS-ST over revenue to be excluded.

As informações deste artigo são de caráter informativo e não substituem consulta jurídica individualizada. Cada caso possui particularidades que exigem análise específica.