In this newsletter you will find CARF favorable decisions published in 2020 regarding relevant and favorable issues for taxpayers:
1. Cancelling of tax assessments on stock options.
2. The concept of input for PIS/COFINS tax credits.
3. No social security contributions if there is no provision of services.
4. Recognition of factoring income on a cash basis.
5. Cancelling of penalties for obstruction of tax audits.
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1. STOCK OPTIONS ARE NOT TAXED WITHOUT EXERCISING THE OPTION
In stock option plans, employees of a certain company generally have the right to acquire shares of the company after fulfilling certain conditions, such as result goals and vesting conditions.
Stock option plans have been subject to tax assessments by the federal tax authorities, which charge the WHT (IRRF) on the date the employee acquires the right to acquire the shares, under the justification that there would be an indirect remuneration paid by the company, regardless of whether the beneficiary did or did not exercise their right to purchase.
The Superior Chamber of Tax Appeals, however, has canceled assessments of this nature. In ruling n. 9101-004,587, by unanimous vote, the Judges decided that the taxable event would only occur with the exercise of the purchase right, when there would be an effective gain, in the form of company shares. In this case, as the taxable event would have occurred at a different moment from that indicated in the tax assessment notice, the charge was fully canceled.
The same understanding has been adopted in other CARF Rulings, such as ruling n. 2301-007.000.
2. THE CONCEPT OF “INPUT” FOR PIS/COFINS TAX CREDITS IS BROAD
In recent rulings, CARF has stated that the concept of input for PIS and COFINS purposes is broader than the one used by the Federal Revenue in Normative Instruction n. 1911/19.
According to Normative Instruction n. 1911/19, packaging used in the transportation of finished products would not be inputs and, therefore, would not provide PIS/COFINS tax credits. CARF Panels, however, recognize the right to calculate credits on pallets and cardboard boxes used for this purpose, since those items are essential to the productive activity and guarantee the integrity of the transported goods. Good examples are rulings n. 3003-000.726 (unanimous vote), 3402-007.058 (majority of votes) and 3402-007.056 (majority of votes).
The CARF has also allowed credits for some expenses that are not directly related to the production process. A good example is the right to calculate credits on expenses with cleaning supplies, which were unanimously recognized in rulings n. 3401-007.154, 3401-007.155, 3401-007.157, for taxpayers in the agricultural industry.
The right to take tax credits overt the freight paid due to the purchase of inputs has also been recognized by different CARF Panels, such as rulings n. 3401-007.091, 3402-007.058, 3402-007.056, 3402-007.102, and 3003-000.784. According to the Counselors, the freight is a part of the price of the purchased input and, therefore, must also be a part of the amount of PIS/COFINS tax credits.
3. THERE ARE NO DUE SOCIAL SECURITY CONTRIBUTIONS WITHOUT THE EFFECTIVE PROVISION OF SERVICES
Is the transfer of the results from sales to cooperative members subject to social security contributions? According to CARF ruling n. 2401-007.219, unanimously, no.
Ruling n. 2401-007.219 deals with a mining cooperative that sold its cooperative members’ production on their behalf, with subsequent transfer of the amounts obtained, by deduction of an administration fee equivalent of 2% of the sales result. In that case, the CARF understood that this transfer did not trigger social security contributions.
In that ruling, the tax authorities sustained that the amount passed-on as a result of the activities of the cooperative members would constitute remuneration for services rendered to the cooperative, subject to social security contributions. However, the CARF considered that the cooperative did not have the means of production for the extraction of mineral resources, and that the cooperative members did not contribute to common production, but acted for their individual benefit, so that the cooperative only sold the products.
Therefore, the Judges decided that the cooperative members would not render services to the cooperative and, therefore, social security contributions could not be charged.
4. FACTORING REVENUES MUST BE RECOGNIZED ON A CASH BASIS
In ruling n. 9101-004,434, the Superior Chamber of Tax Appeals unanimously recognized the right to the recognition of factoring income on a cash basis.
The tax authorities stated that factoring activities would constitute a provision of services, so that its revenues should be recognized on the date of the commercial operation, according to the accrual basis. However, the judges highlighted that, although factoring activities may include the provision of services and the purchase of credit rights, the amounts involved concern the acquisition of credits with discount. Thus, the taxpayer would be entitled to the cash basis regime.
5. A FINE CAN ONLY BE IMPOSED FOR OBSTRUCTION OF AN AUDIT WITH PROOF OF FRAUD
In ruling n. 3003-000.739, the CARF analyzed a case in which a fine was imposed for obstruction of an audit. The tax authorities found that the taxpayer would have hidden an original invoice when importing goods from abroad based on an allegedly fraudulent invoice. The tax authorities also seized the goods and the taxpayer filed a writ of mandamus to discuss the confiscation penalty.
When analyzing the writ of mandamus, the Judiciary concluded that the taxpayer would have made a simple mistake in filling out the import declaration, without any intent to intentionally hide the original invoice. In view of this scenario, the CARF decided that the tax authorities would not have proven that there was fraud and intentional concealment of the document, with prejudice to the customs inspection, so the fine was deemed inapplicable.