The debate over Brazilian state tax ICMS credits on intermediate products — essential inputs in manufacturing that are not commercialized — gained prominence with the Brazilian Supreme Federal Court (STF) ruling in RE 1.199.364.
The decision directly impacts the industrial sector, especially in states with regulatory restrictions on credit utilization.
We’ve outlined five essential points for the industrial sector to consider regarding the use of these credits:
1. STF Overturned Credit Restrictions: The STF declared Article 20, §1, of the São Paulo State ICMS Regulation (RICMS/SP) unconstitutional, as it denied ICMS credits on inputs used in intermediate products. The ruling reinforces the application of the non-cumulativity principle even to essential production items that are not part of the final product, allowing tax offsets throughout all stages of the production chain.
2. Consolidation of the Non-Cumulativity Principle: The decision prevents double taxation, ensuring the right to credit even when the input is not directly sold but incorporated into another good. This promotes greater tax neutrality and economic efficiency, correcting distortions that unjustly burdened the productive sector, especially regarding intermediate goods that do not circulate independently.
3. Attention to State Tax Regimes: Although the decision is based on São Paulo legislation, the STF’s ruling should apply to all states with similar rules. However, it’s important to stay alert, as each state may implement this interpretation differently in practice.
4. Financial Impact and Tax Planning: Industries that faced challenges in recovering these credits now have the opportunity to reassess their tax processes. This review may lead to refund or offset claims, providing a significant cash flow benefit.
The Discussion Is Not Over Yet: Despite the progress, practical issues remain — especially regarding time limits for claiming credits and possible tax authority resistance. Therefore, staying updated on legal developments and case law is essential.
The STF’s decision represents progress in enabling the recovery of previously inaccessible credits, but its application must be approached with caution, as it may vary depending on each company’s specific situation. The outlook is promising but demands vigilance given the usual resistance from tax authorities.
