Treasury seeks to limit tax losses from ‘argument of the century’ in STJ trial

The Treasury is trying to limit losses through the so-called “argument of the century”, a decision that has had a strong fiscal impact by reducing the basis for calculating federal taxes, and whose ruling may define the case scheduled for hearing this Wednesday – the Superior Court of Justice (STJ) of fairness.

The ministry requested a review of the judicial decision in favor of the taxpayer while the Federal Supreme Court (STF) has ruled against the government in the case, but has not yet determined the time frame for the decision to take effect.

A Treasury official with knowledge of the matter explained that the department had tried in a number of ways to stay the processing of these proceedings both in the STF itself and in the federal district courts, but without success, and the issue has now been referred to the STJ.

“In order for the STF precedent to be applied in a uniform and consistent manner, the only procedural recourse available is the revocation action. There is some resistance from the STJ to these actions, but this case is so exceptional that we are confident of a favorable outcome,” said a source who requested anonymity.

In the so-called “thesis of the century”, the STF decided in 2017 that ICMS should not be part of the basis for calculating the federal Pis and Cofins taxes, when the government estimated losses of more than R$240 billion. However, it was not until 2021 that the court determined that this understanding was generally valid only in the context of the decision made in 2017.

The courts have ruled in favour of taxpayers in a series of cases due to the time lapse between decisions, which the Treasury argues should now be thrown out for non-compliance with the adjustments. Sources said 78% of legal proceedings on the matter were filed by companies after 2017.

According to the assessment of Bruno Teixeira, tax partner at TozziniFreire Advogados, STJ litigation presents a significant risk for taxpayers who filed litigation after the 2017 STF decision but before the adjustment.

“If the Treasury’s rescission action is successful, the taxpayer will have to return the entire amount to the Treasury, plus late payment fees and interest. In other words, the taxpayer won the judicial process, obtained a final and non-appealable decision, trusted the judiciary, and then took the rescission action to revoke this,” he said.

Companies affected by these decisions are entitled to recover taxes paid through tax compensation, which has shown strong growth in recent years and has attracted the attention of the Ministry of Finance on the grounds that the movement puts the government’s fiscal efforts at risk.

This year, the Treasury Department successfully approved a rule limiting the use of tax recoveries generated by court decisions, a move that also targeted the “Papers of the Century” case.

Justifying the measure, the ministry said that debts offset by companies over the past five years totaled 1 trillion reais, an increase of more than 14% in the 12 months ending August 2023 compared with the same period in 2022.

At the time, the Treasury also said that as of 2019, compensation from court decisions began to account for 38% of such spending, compared with 5% between 2005 and 2018.

Even with such restrictions, the government released a new MP in June that placed additional limits on Pis/Cofins compensation, saying that actions taken before that were “not enough to restore the unions’ revenues.” The initiative caused a strong reaction and was ultimately rejected by Congress.