An analysis of the documents underlying the debate and subsequent approval of Complementary Law No. 160/2017 (LC 160/17) reveals that the purpose of the law was to terminate the litigation associated with the ICMS “Tax War”.

From the state tax perspective, LC 160/17 grants "forgiveness" for benefits unconstitutionally granted by the states over the years and ensures transparency and equality among federal entities for future ICMS incentives. At the federal level, articles 9 and 10 of the law sought to close the debate on whether or not an ICMS tax incentive can be classified as an investment subsidy and, therefore, excluded from the IRPJ, CSLL, PIS, and Cofins calculation basis.

The opinion of the Senate Economic Affairs Committee, when discussing the bill that resulted in LC 160/17, was perhaps the most emphatic on the law's objective: "the classification of ICMS tax benefits as a subsidy for funding or investment has been controverted (...) The aim of SCD No. 5 of 2017 is to close the discussion on the matter by inserting provisions in article 30 of Law No. 12,973, of 2014, to provide that ICMS tax benefits, whether or not granted within the scope of the “Tax War”, will be considered an investment subsidy. With this, the burden of the IRPJ, CSLL, PIS/Pasep Contribution, and Cofins will be eliminated."

It is clear that the legislator's intention was to eliminate the legal uncertainty surrounding the qualification of a tax incentive as an investment subsidy or as a cost subsidy, given the countless discussions that had been going on for years in the administrative and judicial courts on the matter (often adopting criteria not provided for in the legislation to qualify ICMS tax benefits as a kind of subsidy or otherwise), determining that any and all ICMS tax benefits will receive treatment as an investment subsidy. To reinforce this legal qualification, the new paragraph 4 of article 30 of Law No. 12,973/14 further emphasizes that "other requirements or conditions not provided for in this article may not be required" for classifying ICMS tax benefits as investment subsidies.

It seemed like the discussion was finally over. Provided that the states meet the requirements for registration and filing of tax benefits under LC 160/17 and that taxpayers allocate the “subsidy revenue" to the tax incentive reserve, the amount of the ICMS benefit could also be excluded from the IRPJ, CSLL, PIS, and Cofins taxable basis.

This position was even confirmed by the Federal Revenue Service itself in the Consultation Proceeding No. 11/20, which, despite the clarity of LC 160/17, was well received by the legal community as a definitive indication of the end of this debate, with a view to achieving some level of legal certainty. The favorable understanding of the tax authority, however, was short-lived.

In the recent Consultation Proceeding No. 145/20, published in December, the Federal Revenue Service reignited the debate over the qualification of ICMS benefits as investment subsidies or costs. In it, the agency states that, in order to be excluded from the taxable basis of IRPJ, CSLL, PIS, and Cofins, the state incentive must necessarily be granted as a "stimulus to the implementation or expansion of economic enterprises.”

Following this view, the intention of LC 160/17 was only to depart from the requirements of synchrony and binding that had been required until then by the tax authority to identify an investment subsidy, which are requirements set forth in Normative Ruling No. 112/78 and in article 198, paragraph 7, of Normative Instruction No. 1,700/17.

The new position of the Federal Revenue Service once again "selects" a specific set of ICMS benefits that may receive the tax treatment of "investment subsidy," which excludes those that do not present a clear counterpart in an economic enterprise.

Regardless of any value judgment on the tax policy choice of the Legislative Branch in the promulgation of LC 160/17 (which, it is worth remembering, had the vetoes of the Executive Branch on this matter overturned), it seems evident that Consultation Proceeding No. 145/20 is disregarding the legal text and the objective for which the complementary law was conceived, making it completely ineffective, in addition to modifying the recent response by the agency itself in the opposite direction, accentuating the scenario of legal uncertainty that so harms the Brazilian tax environment.

Thus, the tax authority's most recent interpretation leads to the conclusion that LC 160/17 was enacted solely to remove the infralegal and, always, illegal requirements of the Federal Revenue Service (synchronization and binding), which could never have been required due to the lack of a legal basis in that regard. Of course, it is not necessary for the legislator to promulgate a rule with the force of complementary law in order to set aside a rule inserted into the tax system, illegally, via a normative instruction, which does not even have the force of law.

As is increasingly common in Brazil, it seems that the Federal Revenue Service does not agree with the tax policy chosen by the legislator and, without any legal support, will cling to this discussion, dragging litigation on for another decade, contradicting the text of the complementary law and the positions already established in the higher courts on the impossibility of levying of IRPJ, CSLL, PIS, and Cofins on ICMS tax benefits, as per Topic 843, decided under the general repercussion regime by the Federal Supreme Court, and the Motion to Resolve Divergence in Special Appeal No. 1.517.492, decided by the First Section of the Superior Court of Appeals.

It is seen that the Executive Branch, this time through the Federal Revenue Service, insists on acting in a dissonant manner from the Legislative Branch (which, as mentioned before, overthrew the veto of the Executive Branch itself when passing LC 160/2017) and the Judiciary, contributing to a scenario of complexity, cost, and legal uncertainty.

Situations such as these reinforce the need for a broader tax reform, but also serve as a warning against the risk that it will not achieve its full effects as long as the contentious mentality of the Federal Revenue Service persists, which adopts its individual interpretation in clear conflict with the spirit of the legislator.