STF rejects unilateral limitation of ICMS benefit relating to Free Trade Areas

Ruling addresses the limits on changes, by state legislation, to ICMS benefits granted under Confaz agreements

On September 24, the Federal Supreme Court (STF) concluded its ruling on Direct Actions of Unconstitutionality (ADIs) 7,822, 7,830, 7,844 and 7,848, which challenge the validity of São Paulo State rules imposing time limits on ICMS benefits applicable to certain transactions destined for Free Trade Areas. The actions were brought by the States of Rondônia, Acre, Amapá and Roraima, with Justice Cármen Lúcia as reporting judge.

By majority, the court held that a state may not unilaterally restrict ICMS benefits or exemptions granted under interstate agreements without observing the constitutional regime and the applicable supplementary legislation.

• The dispute

The actions challenge amendments made by São Paulo legislation that imposed time limits on ICMS benefits applicable to certain outbound shipments of domestic products intended for sale or industrial processing in Free Trade Areas.

ADI 7,822 concerns the limitation applicable to transactions destined for the Guajará-Mirim Free Trade Area, in Rondônia. The remaining actions involve benefits relating to the Free Trade Areas located in Acre, Amapá and Roraima.

The dispute turns in particular on the application of article 155, paragraph 2, XII, “g”, of the Federal Constitution and of Supplementary Law No. 24/1975, which govern the granting and revocation of ICMS incentives and benefits.

• The reasoning adopted

In its ruling, the court held that ICMS benefits governed by an agreement entered into within the National Council of Fiscal Policy (Confaz) cannot be unilaterally restricted by a participating state.

Justice Cármen Lúcia, the reporting judge, found the limitation imposed by São Paulo legislation unconstitutional and proposed a binding statement to the effect that the revocation, in whole or in part, of ICMS benefits or exemptions must observe constitutional principles and the rules set out in the applicable supplementary legislation.

• Transactions carried out in earlier periods

The decision may have consequences for the tax treatment of transactions carried out during the periods in which São Paulo legislation ceased to recognize the exemption.

Whether ICMS amounts paid in those periods may be refunded or offset will depend, however, on the specific circumstances of each transaction, on compliance with the substantive and formal requirements of the benefit and, in particular, on the temporal scope the STF attributes to its decision.

In this context, any discussion of modulation of the ruling’s effects may also bear on that possibility of refund or offset.

• Subsequent changes to São Paulo legislation

During the proceedings, the State of São Paulo reported that it had enacted a subsequent rule reinstating the benefit for a new period.

Despite the new rule, the reporting judge held that the change to the period of validity did not remove the grounds of the constitutional dispute, since the question of whether the state could unilaterally modify the benefit remained at issue.

• Points deserving attention

The decision is relevant to companies carrying out transactions destined for Free Trade Areas, particularly as regards:

• whether the relevant transactions qualify for the ICMS benefits;
• the tax treatment applied during the periods in which São Paulo legislation limited the exemption;
• compliance with the substantive and documentary requirements for claiming the benefit;
• the possible effects of the decision on earlier periods;
• and the treatment of future transactions, in light of state legislation and of the final scope of the ruling.

Once the full decision is published, it will be possible to assess its effects with greater precision, including as regards its temporal scope and any modulation.

Our tax team continues to follow the matter and is available to assist in assessing any measures to be taken in light of each company’s specific circumstances.