Diana Piatti Lobo and André Essinger

When talking about crediting PIS and Cofins on inputs, the normative and case law context is always the same: the legal references of articles 3, II, of laws 10,637/02 and 10,833/03 and the examination conduct by the Superior Court of Appeals (STJ) in REsp 1.221.170/PR.

The STJ decided REsp 1.221.170/PR in 2018, under the procedure for repetitive appeals system, and declared the illegality of normative instructions 247/02 and 404/2004, as it considered that the interpretative limits for the concept of input present in these normative provisions were undue.

The Court defined the concept of input for the purposes of crediting PIS and Cofins as provided for in Law 10,637/02 and Law 10,833/03 and established that it must be assessed according to criteria of "essentiality" and “materiality" for a given good or service in the development of the activity performed by the taxpayer.

Despite this, the issue is still subject to discussions in the administrative and judicial spheres, in view of the divergence between the tax authorities and taxpayers regarding the subsumption of the facts to the open concepts of "essentiality" and “materiality" and the possibility of applying these concepts in the context of commercial economic activities or in subsequent stages of the production process and/or provision of services.

When it comes specifically to publicity, advertising, and marketing expenses, there are two main interpretative currents:

• one defends the possibility of taking PIS and Cofins credits on expenses, as it considers these expenses to be intrinsically linked to the generation of revenue and, therefore, are essential and relevant to the business activity; and
• the other holds that these expenses, although relevant and certainly incurred to generate revenue, do not fall within the legal concept of inputs, which would require, in this line, a link to the production stage of goods and/or services.

When examining 21 decisions handed down by the Carf's ordinary courts on the matter,^[1] all of them after the concept of inputs was established by the STJ, a majority unfavorable to the taxpayer can be seen, with a prohibition on taking PIS and Cofins credits in relation to these expenses.

The general line maintained in these decisions is that, besides being necessary to prove the essentiality and materiality of the expense with its end activity, this expense must fit into the production and/or provision of service phase, which, in general, does not occur with advertising and marketing expenses.

To better understand the above arguments, we resort to the decision rendered through appellate decision 3302-012.005, handed down on October 26, 2021. In it, the 2nd Panel of the 3rd Chamber of the 3rd Section, by majority vote, upheld the disallowance of PIS and Cofins credits taken by a leading streaming company.

The main reason raised was that the expenses with advertising and marketing were not a structural element and inseparable from the performance of the service performed by the company (provision of films and other visual materials), so that its suppression would not compromise the performance of its core business.

The winning vote highlighted that advertising and marketing expenses "are only an option for the taxpayer to seek quick and bigger results, but this does not justify attaching such expenses as a sine qua non condition for the performance of its activities.

The dissenting vote, in turn, held that because it is a virtual company that uses streaming technology to attract customers to watch licensed movie products and distribute them to its consumers, marketing and advertising services would be essential to the company's activity, and therefore eligible for PIS and Cofins credits.

This opinion was based on the evidence submitted, based on documents and reports prepared by market experts, that the suppression of these advertising and marketing expenses would have such an impact on the company's revenue generation that the business activity would undoubtedly become unviable.

Also noteworthy is appellate decision 3302-012.007, issued on October 26, 2021, and unfavorable to the taxpayer. In it, the Carf board members, despite having recognized the importance of the expenses incurred with advertising and marketing for a company that manufactures soaps and detergents and sells cleaning, household maintenance, perfumery, and personal hygiene products, held that these costs are not essential for the purposes of carrying out its activity, and consequently, for the purposes of generating PIS and Cofins credits.

There are also, albeit in a minority, examples favorable to the taxpayer in the Carf's case law, as can be seen in appellate decision 3401.005-291 handed down on August 29, 2018. The decision recognized the right of a customer in the production and sale of cosmetics, hygiene, perfumery, and cosmetics in general to treat credits as inputs arising from expenses with advertising and marketing.

In the decision, in summary, the Carf's team found that it is possible to credit PIS and Cofins, since the company's corporate purpose involves activities such as economic feasibility studies, definition of the strategy to launch its products in the market, and validation of results, which are directly related to marketing and advertising activities.

Along the same lines, the 1st Ordinary Panel of the 2nd Chamber of the 3rd Section, through appellate decision 3201-005.668, issued on August 21, 2019, when analyzing a case involving a credit card company, recognized the company's right to assess PIS and Cofins credits on marketing expenses, as it considered these services essential and material to the performance of its business activity.

More specifically, when comparing the nature of the revenue ascertained and the inputs used, the Carf panel, by majority vote, concluded that the specific services provided by the company to its customers are exactly those linked to brand development and market performance. They would therefore be directly linked to services related to marketing and advertising, and are thus intrinsic to their provision of services.

Although it seems more appropriate to analyze in a deeper way the essentiality and materiality of marketing, advertising, and publicity expenses from the point of view of the impact on the generation of revenue and the achievement of the taxpayer's core business, it can be seen that the Carf examines the particularities of the concrete case only to ascertain whether the expenses have a pertinent, essential, and relevant relationship with the production process or with the provision of services, to enable the sale and delivery of the good or service to the end consumer.

Despite the importance of the discussion on the subject, especially in a scenario of increased competition among companies and, consequently, greater need for investment in marketing, advertising, and publicity, the majority position indicates a restrictive interpretation regarding the possibility of crediting these expenses.

The topic was subject to review only by the Carf's ordinary panels. The 3rd Panel of the Superior Chamber of Tax Appeals, the highest administrative level of appeal responsible for settling interpretative conflicts, has not yet ruled on the merits of the issue. This fact leads us to await the discussions and the possibility of a reversal in the case law that is currently the majority of the body.

^[1]3302-012.005, 3302-012.007, 3301-011.071, 3301-011.073, 3301-011.074, 3301-011.075, 3301-011.076, 3301-011.077, 3301-011.079, 3301-011.081, 3302-010.033, 3302-009.388, 3302-009.389, 3302-009.390, 3003-001.184, 3302-008.120, 3301-007.117, 3001-000.939, 3201-005.668, 3301-005.689, 3401-005.291