STF Supreme Court Acknowledgement of general repercussion. Confiscatory Tax Fine Limits of the tax fine assessed for tax evasion, fraud or collusion

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1 Dear Readers: The purpose of this Tax Bulletin has as its objective to keep our clients and other interested parties duly up-to-date on the main subjects being discussed and decided by the Judiciary, Legislative, and Executive. In this th Issue, we are addressing 15 different matters in Case Law, Legislation and Answers to Consultations. To access each of the texts individually, click: Jurisprudence STF Supreme Court Acknowledgement of general repercussion Confiscatory Tax Fine Limits of the tax fine assessed for tax evasion, fraud or collusion Political Sanction Constitutionality of restrictions imposed by the State to the free exercise of economic or professional activity, when used as means for indirect collection of taxes STJ Repetition Appeal PIS and COFINS Cumulative Regime Levied on Interests on Equity (IOE) STJ Repetition Appeal IPI levied on the trading of imported products New manufacturing process no required STJ Repetition Appeal COFINS Exemption of income from monthly fees of nonprofit organizations STJ Social Contribution tellers short pay to have tax levied on STJ Inclusion of ICMS on the calculation basis of Substitution Contribution implemented by arts. 7 and 8 of Law /2011 Legislation and Query Solutions Law /2015 CSLL Increase of the Rate for Financial and Similar Institutions Normative Opinion COSIT 2/2015 PER/DCOMP Joint Ordinance 1.427/2015 Information Provided in the Context of Mutual International Assistance in Tax and Customs Matters Ordinance PGFN 667/2015 Rural Debits Extension of the term for adhesion to the benefits provided by Law /08 Normative Instruction RFB 1.585/2015 Income Tax Financial and Exchange Markets

2 Answer to Consultation COSIT 188/2015 Assumed ICMS Credits are considered tax benefits and not subvention for investment Answer to Consultation 7.044/2015 Assumed Profit Vested Rights Acquired from Third Parties Answer to Consultation 9.014/2015 IPI Manaus Free Trading Zone Exemption Souza, Schneider, Pugliese e Sztokfisz Advogados law firm is available to its clients should they have any questions on the decisions commented on in this newsletter. Enjoy your reading.

3 Jurisprudence Supreme Court STF Acknowledged General Repercussion Confiscatory Tax Fine Limits of the tax fine with imposition substantiated by tax evasion, fraud or collusion On 10/29/2015, the Supreme Federal Court (STF) has acknowledged the existence of General Repercussion character in the discussion regarding the reasonability of tax fine qualified based on tax evasion, fraud or collusion, at the rate of 150% (one hundred and fifty percent) on the total or the difference of the unpaid tax or contribution, not reported or misrepresented (currently Paragraph 1, combined with Section I of the header of article 44 of Federal Law 9.430/1996), considering the constitutional prohibition to the confiscatory nature of tax assessments. Said matter will be debated in Appeal to the Supreme Court (RE) /PR, and Reported by Supreme Court Justice Luiz Fux. Political Sanction Unconstitutionality of restrictions imposed by the State to the free exercise of economic or professional activity, when used as means for indirect collection of taxes On 10/15/2015, the Supreme Federal Court (STF) has acknowledged the existence of General Repercussion concerning the discussion regarding the imposing of restrictions by the State to the freee xercise of economic or professional activities when the taxpayer is in debt with the Tax Authority. In casu, the Tax Administration of Betim (MG), dismissed the application as Rural Producer on account of the existence of two ongoing tax proceedings. The Plenum of the Supreme Court has reaffirmed the Court s precedent regarding the impossibility of imposing saidrestrictions, for the purpose of consolidating the already existing understanding at the Court relating to that discussion. The constitutional issue raised was analyzed in Interlocutory Appeal (ARE) /RS, Reported by the Honorable Justice Edson Fachin. STJ Repetition Appeal PIS and COFINS Cumulative Regime Levied on Interests on Equity (IOE) On 10/14/2015, the First Panel of the Superior Court of Justice (STJ), in the records of Appeal / RS, has decided on the systematics of repetition appeals (art. 543-C of the Civil Procedure Code - CPC), understanding that contributions to PIS and COFINS under the non-cumulative regime, shall be levied on interests on equity, referred to as IOE. By majority, the Justices of the First Section have followed the vote of Justice Mauro Campbell Marques, in the sense that interests on equity are not encompassed as moneys under the possible exclusion provided by Laws /2003 and /2003, which implemented the non-cumulative regime for PIS and COFINS. By majority of votes, the benefit is only allowed with grounds on Law 9.718/1998, at the time of the cumulative regime of these contributions. The dissenting votes were of Justices Napoleão Nunes Maia Filho and Benedito Gonçalves, as well as the Reporting Justice Regina Helena Costa. For them, the IOE have the nature of financial revenue or distributable profit and, therefore, they could not be levied PIS and COFINS, as these amounts are not treated as income, the calculation basis for the aforementioned contributions. 03

4 STJ Repetition Appeal IPI levied on the trading of imported products A new manufacturing process is not required On 10/14/2015, the First Panel of the Superior Court of Justice (STJ), in the Records of Motion to Settle Dissention in Appeal /SC, under the systematic of repetition appeals (art. 543-C of the Civil Procedure Code - CPC), has decided that IPI must be levied in the mere trading of important products, regardless of having undergone a manufacturing process after entering the country. The reporting Justice of the case, Justice Napoleão Nunes Maia Filho, along with the vote of Justices Benedito Gonçalves and Regina Helena Costa, understood that the double taxation of the IPI (clearing through customs and the shipping out of the product from the importing establishment) would be a violation to the General Agreement on Trading Charges (GATT), which provides for equal treatment for national and imported products, especially after nationalization. However, the winning vote was cast by Justice Mauro Campbell Marques, in the sense that the national Tax Code and other governing rules allow the IPI to be levied upon shipping out of products from foreign origin from the importer s establishment, as they would allegedly subsist the two absolutely distinct IPI taxation events: one relating to clearing through customs; and the other, the shipping out of the product from the importing establishment, deemed equivalent to industrial facilities for this purpose. Notwithstanding the stance defended in the Repetition Appeal, the matter can still be analyzed by the Supreme Court (STF), provided that many Appeals to the Supreme Court have been filed by the National Treasury in the Dissention Appeal Proceedings tried in 2014, where was recognized the impossibility of levying the tax on the mere sale of imported products, without a new manufacturing process to have taken place 1. STJ Repetition Appeal COFINS Exemption of income resulting from fees of nonprofit organizations On 09/23/2015, the First Panel of the Superior Court of Justice (STJ), in trial of Appeal /RS, under the procedural rules of repetition appeals (art. 543-C of the Civil Procedure Code - CPC), has overruled the appeal of the National Treasury, so as to establish the understanding that income from fees paid by students of nonprofit teaching institutions, for resulting from activities of the entity itself, enjoy the tax exemption set forth in Article 14, X, of Executive Order /01. According to the stance of the Reporting Justice of the Appeal, Mauro Campbell Marques, the primary purpose of a teaching institution is providing educational services, for which reason, it cannot be understood that income earned in this capacity (students fees) are not resulting from the activities of the entity itself, as required for the exemption provided for in the Executive Order. In light of the stance of the First Panel of the Superior Court of Justice, was thereby consolidated the understanding that Article 47 of Normative Instruction 247/02 of the Internal Revenue Services, challenged in said appeal, is frontally offensive to Article 14, Section X, of Executive Order /01, as it illegally excludes the consideration for educational services, which are the monthly fees received from students 1 EREsp n /PR, /SC, /SC, /SC and /RS. 04

5 from the concept of income relating to the entities own activities. Concerning the systematics of art. 543-C of the Civil Procedure Code (Repetition Appeals), as well as Resolution STJ 08/2008, said understanding is to be followed (binding precedent) by the States Courts of Appeals. STJ Social Contribution tellers short pay to have tax levied on On 10/01/2015, the Second Panel of the Superior Court of Justice (STJ), in trial of Appeal /RS, has understood that the amount paid by the employer as short paid monthly to teller operators who may have deductions in their compensation when there is a difference between the cash in the teller and the amount that was supposed to be has the nature of salary and, therefore, is subject to being levied social security contribution on. According to the Reporting Justice Humberto Martins, this is an amount paid month by month, due to mere liberality of the employer (resulting from a collective bargaining agreement and not of a provision of law), even if there are no differences in the teller s final count. In light of that, the Panel has pointed out, in trial of Appeal /RS, the non-compensational nature of bonuses given on the mere liberality of the employer. Based on the aforementioned ruling, the Reporting Justice has concluded that the so-called short pay is clearly salary and part of compensation, for which reasons his vote was that social security contribution should be levied on it. The matter concerning the validity of inclusion of the short pay on the social contribution is not undisputed in the Court. For this very reason, the matter can still be settled by the First Section, which encompasses the Panels of Law of the Court. STJ Inclusion of ICMS in the Calculation Basis of Substitutive Contribution implemented by Articles 7 and 8 of Law /2011 On 09/08/2015, the Second Panel of the Superior Court of Justice (STJ), when trying Appeal / SC, has partially granted the Appeal filed by the National Treasury and, in the portion granted, ordered the inclusion of ICMS in the calculation basis of the Substitutive Contribution implemented by Articles 7 and 8 of Law /2011. In summary, the Second Panel of the Superior Court of Justice has followed the vote of the Reporting Justice, Mauro Campbell Marques, who argued that the ICMS owed by the Company in its capacity of taxpayer is part of its gross income, according to Article 12 and Paragraph 1 of Law-Decree 1.598/1977 and of art. 280 of RIR/1999 and, therefore, must be levied the substitutive contribution provided for in Articles 7 and 8 of Law /2011. He pointed out, moreover, that said substitutive social security contribution legislation has adopted the broad concept of gross income, aligned to as adopted by the non-cumulative systematics of PIS and COFINS (Laws /2002 and /2003), a situation that would suppress application of the precedent established by the Supreme Court (STF) in Appeal /MG, since the aforementioned trial 05

6 has provided for the cumulative systematic of PIS and COFINS. For the purposes of corroborating his arguments, the Justice mentioned the precedent of Controversy Representative Appeal /SP, where the First Panel of the STJ has taken a stance for including the ISSQN in the broader concept of gross income, calculation basis for PIS and COFINS. According to the Reporting Justice, the only events that would require the exclusion of the ICMS from the calculation basis of the Substitutive Contribution would be relating to cases of ICMS Tax Replacement (ICMS-ST), and other deductions provided by law, since in these situations the company is not the taxpayer, the taxpayer is the next one in the chain, the replaced party. He pointed out, furthermore, that, in this case, there is an express norm in the sense that these amounts are mere entries in the company s bookkeeping, which only becomes responsible for the tax (tax responsible for replacing the taxpaying subject) which, at the end, will be paid to the Tax Authority. Despite of the understanding issued by the Second Panel of the STJ, it is important to point out that the precedents of the Court on this matter is not yet settled, considering the absence of facing the theory by the First Panel and the First Section of the Court. Finally, the constitutional nature of the matter in discussion is noteworthy, and the issue is certain to still be considered on a definitive basis by the Supreme Court (STF). COSIT Consultation solution no. 190/2015-IRRF- conversion of Indebtedness into Capital On 8/13/2015, the query Solution No. 190 was published, by the General Coordination of Taxation Revenue ( COSIT ), which deals with the withholding income tax ( IRRF ) in the conversion of interests into share capital. According to COSIT, the conversion of interests resulting from Loan agreements, entered into between the company and its shareholders, in the share capital of the liable company, must be considered as payment for bringing up the obligation of interests payment. This way, the said operation would be subject to the collection of IRRF, whose withholding and collection is upon the company receiving the investment, as the corporate borrower. COSIT Consultation solution no. 205/2015-IRRF - financial resources loan with Payment in installments On 8/14/2015, the Consultation Solution No. 205 from COSIT was published, which clarified that, for financial resources obtained through loan agreements that set forth its payments to be made in installments, the IRRF charged on its interests should be withheld and calculated on the amount received each month. Considering the provisions of law No. 8.9 from January 20, 1995 (law no. 8.9/ 1995 ) and Normative Instruction 1.022, April 5, 2010 ( IN no /2010 ), COSIT clarified that these financial incomes are subject to IRRF collection for the payment of each of the installments, according to the starting date thereof. In this way, the tax rate will be determined at the time of the payment of each installment, taking into account the time which has elapsed between the drawdown date and the corresponding interests payment date. 06

7 Legislation and Answer to Consultations Law # /2015 CSLL Increase of Rate for Financial and Similar Institutions On 10/06/2015, was passed Law # ( Law # /2015 ), result of the conversion of Executive Order 675, of May 21, 2015 ( MP 675/2015 ), which, among other provisions, sets forth the increase of the Social Contribution on Net Profit ( CSLL ), applicable to financial institutions and certain types of similar entities. According to Law # /2015, the CSLL rate applicable to financial and similar entities will be of 20% in the period between 09/01/2015 and 12/31/2018, passing to 15% as of 01/01/2019. On the other hand, credit cooperatives will be subject to the rate of 17% between 10/01/2015 and 12/31/2015, which will pass to 15% as of 01/01/2019. It is important to point out that the CSLL applicable to corporate entities in general remains fixed at 9%. Normative Opinion COSIT # 2/2015 PER/DCOMP On 09/01//2015, was published Normative Opinion # 2, of the General Coordination of Taxation ( COSIT ), settling the understanding and procedures in the scope of the Internal Revenue Service of Brazil (RFB) concerning applications for restitution, reimbursement and returns of offsetting through PER/DCOMP for tax credits unduly or mistakenly reported in Federal Tax Credits and Debits Returns (DCTF). According to COSIT, there is no impediment for the taxpayer to seek amendment of the DCTF after filed the PER/DCOMP which uses as credit payments entirely appropriated in the original DCTF, even after denial of the restitution application or non-certification of offsetting. However, in this case, the DCTF amendment will not necessarily be sufficient for allowing the intended credit, and the Tax or the Judging Authority, when examining the specific case, may request proof of the credit informed in the PER/DCOMP through other elements of evidence. Moreover, according to COSIT, in the event of the right to the taxpayer s credit being subject to dispute in an administrative proceeding and the matter involving a mistake actually resolved through the amendment of the DCTF, the proceeding must be referred to the Internal Revenue Service Agency ( DRF ) of origin for a review of the decision, for the possibility of ending the proceeding at such occasion. If there is a matter of law to be ruled on or if the review being only partial, the proceeding must return to the Trial Division of the Internal Revenue Service ( DRJ ) for it to decide on the matter. Joint Ordinance # 1.427/2015 Information Provided in the Context of Mutual International Assistance in Matters of Tax and Customs On 10/06/2015, was enacted Joint Ordinance PGFN/RFB 1.427/2015 ( Joint Ordinance 1.427/2015 ) which provides for the strategic cooperation between the Internal Revenue Service of Brazil ( RFB ) and the National Treasury s Attorney Office ( PGFN ), in the exchange of information obtained under tax and customs treaties entered into by Brazil. Broadly speaking, Joint Ordinance 1.427/2015 provides that the PGFN may request the RFB all and 07

8 any data obtained through cooperation with Tax and Customs Administrations that may contribute to recovery or securing tax credits from debtors investigated in Brazil. Among other information expressly listed in said Ordinance, are included transactions of taxpayers under investigation, inspection or collection; financial transactions of individuals or corporate entities with corporate or economic links or common interests; and debtors or taxpayers who own assets abroad. Ordinance PGFN # 667/15 Rural Debts Extension of the Period for Adhesion to the Benefits set forth by Law # /08 On 09/21/2015, was published Ordinance # 667/15, by the National Treasury s Attorney Office ( PGFN ), which extended until 12/30/2015 the period for adhesion to the benefits of Law # /08, which created the program for payment and renegotiation of debts from rural credit operations. In this program, the discount in the cash settlement can be up to 70% of the debt and, in renegotiation, the debt can be paid in an up to 10-years installment plan. Normative Instruction RFB # 1.585/15 Income Tax Financial and Exchange Markets On 09/02/2015, was published the Normative Instruction of the Internal Revenue Service of Brazil # 1.585, of August 31, 2015, consolidating and updating the rules of income tax levied on income and earnings in the financial and exchange markets, in investments with investment funds on short and long term, as well as investments in bonds or securities in fixed or variable income, by investor, individual or corporate entity residing or domiciled in the country and abroad. Answer to Consultation COSIT # 188/15 Assumed ICMS credits are considered tax benefits and not subvention for investment On 09/14/2015, was published Answer to Consultation COSIT # 188, regarding the tax treatment to assumed ICMS credits granted by the states and their equivalence to subventions for investment, for purposes of exclusion from corporate entities operational profit. Addressing the question made by a taxpayer who receives state tax incentives, COSIT issues the understanding that assumed ICMS credits has distinct aspects from the subvention for investments. The Answer to Consultation refers to Normative Opinion CST # 112/78, which lists the requirements for the unequivocal characterization of subvention. Among those requirements is the full linking of the resources to a pre-approved project. Therefore, in COSIT s understanding, the fact that the resources are made available directly and freely to the company cannot be characterized as subvention. Therefore, in the understanding of the Tax Authority, once the assumed ICMS credits are mere tax benefits and not subvention for investments, they must be part of the corporate entity s operational profit and, consequently, part of the calculation basis for Corporate Income Tax, Social Contribution on Net Profit, Social Integration Program and the Contribution for Financing of Social Security. 08

9 Answer to Consultation # 7.044/2015 Assumed Profit Assignment of Vested Rights to Third Parties On 10/19/2015 was published Answer to Consultation # 7.044, by the Superintendence Office of the Internal Revenue Service of Brazil of the 7th Tax Region, which determines the calculation basis for Income Tax for Corporate Entities ( IRPJ ), in the system of assumed profit for those whose corporate purpose is the transaction of third parties vested rights. According to the Superintendence, the amounts obtained by these corporate entities in operations of assignment of vested rights from third parties fit the concept of gross income for the purposes of calculation of Corporate Income Tax, and the calculation basis, in this case, must be determined according to the application of the assumed rate of 32% (thirty two percent) on the amount of the income obtained, as per Article 15, Paragraph 1, Section III, item c of Law # 9.249/95. This understanding reinforces the understanding of the General Taxation Coordination ( COSIT ) expressed in Answer to Consultation # 223/14. Answer to Consultation # 9.014/2015 IPI Manaus Free Trading Zone - Exemption On 10/15/2015, was published Answer to Consultation # 9.014, of the Superintendence of the Internal Revenue Service of the 9th Tax Region, which provides for exemption of the Tax on Manufactured Products ( IPI ), applicable to national products shipped to the Manaus Free Trading Zone for internal consumption therein, use or manufacturing or, moreover, for being shipped to the Western Amazonian. According to the understanding of the Superintendence, the exemption applies to foreign, national products and those resold to addressees on that region, when imported from countries in relation to which Brazil grants equal treatment for imported products. And the case, for instance, of importation from countries that are Signatory to the General Agreement on Charges and Trading ( GATT ), for which there is a provision on equal treatment concerning national products. 09

10 Team responsible for preparing the Tax Bulletin: Igor Nascimento de Souza Henrique Philip Schneider Eduardo Pugliese Pincelli Cassio Sztokfisz Fernanda Donnabella Camano de Souza Diogo de Andrade Figueiredo Flavio Eduardo Carvalho Vitor Martins Flores Rafael Fukuji Watanabe Rodrigo Tosto Lascala Laura Benini Candido Marina Lee Pedro Lucas Alves Brito Thomas Ampessan Lemos da Silva Maria Carolina Maldonado Kraljevic Gabriela Barroso Gonzaga Ferreira Porto Ana Cristina de Paulo Assunção Vanessa Carrilo do Nascimento Sergio Grama Lima Pedro Paulo Bresciani Renata Ferraioli Pedro Guilherme Ferreira Bini Roberta Marques de Moraes Tatiana Ergang Barros Alberto Frederico Teixeira Soares Carbonar 10