The Brazilian Supreme Court has set a precedent recognizing that electric power and telecommunications services cannot be subject to a heavier tax burden than the general rule, as Brazilian States usually do.
They are essential, irreplaceable. The precedent is very important and has a broadening effect, impacting virtually every single business. The ruling effects and the possibility of recovering undue taxes already paid are not defined yet.
Summing up, the Brazilian Constitution sets that ICMS (VAT-like tax levied by States) can be levied at different rates depending on the goods and services, but it must follow the “essentiality” criteria. It is a very simple and straightforward criteria: tax must be in accordance with the essentiality of each product, which generally means that essential products will attract lower tax rates
Therefore, the VAT levied on electric power operations and telecommunications services cannot have rates higher than the general rule, considering the essential nature of these goods and services. In this specific case, the rate levied by the State was 25% for electricity and telecommunications, while the general rate was 17%, but there are States that levy rates up to 30%.
The impact of VAT is enormous in Brazil. For example, the 30% rate represents an actual rate of 42.85%, while the 17% rate represents an effective rate of 20.48% on the price of the service or good. This means that the tax burden is doubled, even though these are essential goods and services, which is unconstitutional.
Plus, it is important to foresee the possibility of using the same legal reasoning to reduce the tax burden of other goods and services considered essential. For example, the oil and gas industry is heavily impacted by VAT and, if it is considered essential, it could not be subject to higher rates than the general rule.
