The multi-rate constitutional rules for the taxation of consumption in Brazil are an instrument to mitigate the regressive tendency of these taxes and, therefore, an instrument for the realization of the principle of the ability to pay.
Multiple rate rules apply to ICMS (state-level VAT-like tax) and IPI (federal VAT-like tax). Multiple rates for the IPI are mandatory, while for the ICMS they are at the discretion of the legislator. In the case of the ICMS, if the legislator opts for a multiple rate taxation, the essentiality of the goods is the only possible criterion for the definition of the rates.
In Brazil, the Federal Constitution prescribes that the ICMS may be selective, depending on the essential character of the goods and services. Thus, in order to attenuate the tendency to regressivity, it is logical and rational that the most essential products have lower rates than the superfluous products.
However, some Member States have adopted rates above the general domestic rate (typically 18%) to tax electric power and telecommunications services (which are clearly essential goods and services), in defiance of the constitutional rule of selectivity. Additionally, in some states, such as Amazonas, electric power tariffs are the same as those applied to luxury cars, yachts and other recreational boats or aircraft, weapons and ammunition, and even jewelry.
If the purpose of selectivity is to reduce the regressivity of consumption taxes, it makes sense that essential products have rates, at least, equal to other non-essential products, but never higher. As a result of this scenario, taxpayers have filed lawsuits challenging the difference in rates, especially regarding this issue.
On June 11, 2021, the Supreme Court of Brazil (STF) resumed (the trial was interrupted in 2020) to rule on the extraordinary appeal (RE) No. 714,139 which deals with the increase in the ICMS levied on electrical energy and telecommunications services in the State of Santa Catarina, in total disagreement with the constitutional principles that govern ICMS. The trial resumed on November 12, 2021, and so far it has three votes for the taxpayer and two dissenting votes.
The rapporteur of RE n Â° 714 139, Minister Marco AurÃ©lio Mello, understood that the selectivity applied to the ICMS levied on electric power and telecommunications services violates constitutional principles, by setting higher prices for goods. and essential services than general products. Ministers Dias Toffoli and Carmen LuciaAntunes Rocha voted in favor.
Conversely, ministers Gilmar Mendes and Alexandre de Moraes voted for a dissenting opinion. On November 12, 2021, Minister Gilmar Mendes, following the vote of Alexandre de Moraes, understood that only the tariff for telecommunications services is unconstitutional, because in the specific case of Santa Catarina, there is a reduced tariff for energy electric for some groups, such as home use and agricultural production with low power consumption. Thus, the dissenting vote understood that, for the other groups, the higher rate is constitutional since it encourages the rational use of electric energy.
However, the dissenting vote does not solve the problem, because in other states, such as Amazonas, ParÃ¡, and ParanÃ¡, there is no reduced rate for certain groups. In fact, in the state of Amazonas, electrical energy consumed for domestic use and rural production is taxed at a rate of 25% and telephone communication services at a rate of 30%, the two lowest rates. higher of that state’s legislation.
Furthermore, it should be noted that the essentiality to which the constitutional text refers is a criterion of the burden-sharing function of tax rules (fiscal or fiscal function). In this way, essentiality must comply with constitutional fiscal principles, such as the ability to pay, which in consumption taxation is objectively evaluable by the products or services consumed (or their essentiality, to be more precise).
In other words, essentiality is not a criterion for leading economic agents to encourage them to certain behaviors or not, but rather a criterion for evaluating the capacity to pay in the consumption of income. As mentioned above, this is a burden sharing instrument (or Lastenausteilungen, as it is deeply and often discussed in German literature). For this reason, electric power tariffs should not be higher than the general tariff as a justification to discourage excess consumption of electric power, for example.
In this sense, the increased ICMS tariffs levied on electricity and telecommunications services violate the principle of capacity to pay and the specific rule which prescribes that in the event that the ICMS has several tariffs, they must be fixed according to the essential character of the goods and services not, because they could, otherwise, overload an essential good consumed by the less privileged classes. This rule only prescribes this criterion, not another, such as those based on behavioral policy. The reason is quite simple.
To allow legislators in member states to choose between fiscal criteria (ability to pay) or economic-behavioral criteria, the constitution could simply do what it has done for most other taxes: say nothing. If the constitutional text prescribes a criterion (essence), it should not be interpreted in a way which implies an effect which would exist even in the silence of the Constitutional Assembly.
Thus, although the vote still has three votes against the higher tariffs and two dissenting votes, the Supreme Court is expected to recognize the manifest incompatibility between the general tariff and the tariff applied to electric power services and telecommunications. Indeed, these rates are in total disagreement with the Federal Constitution and overload the less favored class, increasing the regression of the ICMS.
Paulo Victor Vieira da Rocha
Partner, VRBF Advogados
Professor, Instituto Brasileiro de Direito TributÃ¡rio, State University of Amazonas, University of SÃ£o Paulo (temporary)
Marina da Silva Fernandes
Partner, VRBF Avocats
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