MP 1227 will not be the end of the world because we have the National Congress

In an article published in Gazeta do Povo, lawyer Eduardo Lourenço, partner at Maneira Advogados, and deputy Pedro Lupion, analyze MP 1227 and its implications for the regulation of the agricultural sector.

PEDRO LUPION07 JUNE 2024| 11min reading

Last Tuesday (04/06), in the early afternoon, all those who are concerned about the continuity of productive activities in Brazil were surprised by a totalitarian measure from the Federal Government. This is because, in an extra edition of the official gazette and already valid from that day onwards, Provisional Measure 1,227/24 was published, which has four items as its object: (I) establishes new conditions for the enjoyment of tax benefits; (II) delegates competence to the Federal District and Municipalities to judge ITR assessments when an agreement exists; (III) limits the compensation of taxes administered by the RFB; and (IV) revokes hypotheses of reimbursement and offset of presumed PIS/COFINS credits.

The last two items are so absurd that they end up causing the first ones, which are also full of controversies and unconstitutionalities, to be left aside in the news and political and legal analyses.

Given the importance and complete absurdity of the Provisional Measure, we will, in this space, establish a position on all items.

First, let us analyze the establishment of new conditions for the enjoyment of tax benefits. In summary, the MP recreatesthe declaration of enjoyment of tax benefits, which must be presented by taxpayers, under penalty of a fine of up to 1.5% of gross revenue. Once again, the State is passing on its oversight task to the taxpayer, creating more bureaucracy and costs. This declaration must be electronic, and the Federal Revenue Service will be responsible for defining the tax benefits to be informed, terms, deadlines and other conditions.

The legal text provides four conditions for the granting, recognition, qualification, co-qualification and enjoyment of an incentive, waiver or benefit of a tax nature that is the subject of the declaration, namely: (a) payment of federal taxes and contributions; lack of registration with Cadin; and no FGTS debts; (b) lack of sanctions resulting from acts of administrative improbity, interdiction penalties and acts harmful to national or foreign public administration; (c)adhesion to the Electronic Tax Domicile – DTE is required; and (d) registration regularity, in accordance with the regulations.

Regardless of the proof of the indicated requirements being carried out automatically by the RFB, without the taxpayer having to provide supporting documents, non-delivery or late delivery of the created benefit declaration will result in the imposition of a fine,calculated by applying a percentage (progressive from 0.5% to 1.5%) on gross revenue.

Nothing more wrong. In addition to creating new conditions and obligations, without detailing the effective and real scope (what benefits?), the rule also gives the Executive Branch freedom to regulate beyond what is reasonable. Note that taxpayers who have tax benefits must remain alert to the regulations and comply with the requirements at all times, living in total and constant legal uncertainty: a simple change in the regulations is enough for the Taxpayer to have to change all of their ancillary obligations and/or seek to meet new requirements and, in the end, still be subject to fines calculated on the value of their gross income, and not on the benefit.

How reasonable is this measure? Certainly none. Furthermore, we also did not identify the fulfillment of the constitutional requirements of relevance and urgency for issuing a Provisional Measure. That is, should this matter really be the subject of a Provisional Measure, which has been valid since its publication and has an abbreviated processing and discussion procedure? We understand that it is not and we must always emphasize that processes serve to have a rite in decision-making, with the maturation of the discussion being essential and not its haste.

These concerns and constitutional limitations also apply to the second theme of MP 1227, which brought the delegation of competence to the Federal District and the Municipalities for the judgment of ITR assessments when there is an agreement for the assessment and collection. Let's explain.

At this point, the Federal Executive Branch intends, when there is an agreement with the respective entity for inspection and collection of the ITR, to transfer the actions of instruction and judgment of administrative tax processes to the Federal District or the Municipality.

However, it seems to us that Constitutional Amendment nº 42/2003, which gave new wording to art. 153, para.

Furthermore, even if it is assumed that the procedural activity of judgment is included in inspection and collection actions, as a result of this very argumentation it will be necessary to accept the application of art. 146, III, b, CF, in the sense that it is up to the complementary tax law to establish general standards, especially regarding tax assessments. Therefore, if a matter must be dealt with by Complementary Law, it cannot be the subject of a Provisional Measure. And this requirement for a complementary standard is in line with another limitation when issuing a Provisional Measure: when dealing with civil proceedings.

Although we are clear that the MP does not deal with civil proceedings, a reading must be made of the real meaning of this constitutional impediment, which seems to be linked to the need to respect the broad debate, embedded in due legislative process, and the principle of non-surprise. In fact, let us remember that the STF, even before the inclusion of the limitation of a Provisional Measure dealing with matters of civil proceedings (EC 32/2001), had already taken a position regarding the impossibility of this type of legislation changing procedural rules (ADI 1910).

Specifically regarding the first two points, it is still worth mentioning a passage from Minister Celso de Mello's vote during the judgment of ADI 2736, in which the consequence of violating the indispensable Separation of Powers in the issuance of Provisional Measures such as the ones we are analyzing here is highlighted. Check it out:

“Possible difficulties of a political nature – except when constitutional reasons of urgency, necessity and material relevance are truly present – cannot justify the use of provisional measures, under penalty of the Executive, in addition to illegitimately appropriating the most relevant institutional function that belongs to the National Congress, becoming a hegemonic instance of power within the state community, thus affecting, with serious harm, the regime of public freedoms and serious consequences for the system of checks and balances, the balanced relationship that must necessarily exist between the Powers of the Republic.”

In fact, in this judgment the minister, still in 2010, highlighted that the exorbitant number of Provisional Measures “evidence that the compulsive exercise of the extraordinary competence to issue a provisional measure culminated in introducing into the Brazilian institutional process, true government Caesarism in legislative matters, causing serious distortions in the political model and generating serious dysfunctions compromising the integrity of the constitutional principle of the separation of powers (…)”.

Everything so far analyzed about Provisional Measure 1227 already shows its absurdity, especially due to the constant attempt to violate the Separation of Powers. But that's not all and there are more worrying points.

It's just that, in art. 5th, another hypothesis of “undeclared” compensation was stipulated, prohibiting the so-called “cross compensation” of the accumulated credit balance of PIS/COFINS credits (non-cumulative) for the payment of debts from other taxes administered by the Federal Revenue Service.

Until Monday, before the publication of the aforementioned rule, taxpayers who had their operations exempted by PIS/COFINS due to exports (art. 6, §1, II of Laws no. 10,637/02 and 10,833/03) or suspension/exemption and zero rate (art. 16 of Law No. 11,116/05), or even if they received presumed credits, they could use the credits to offset other taxes administered by the Federal Revenue of Brazil.

However, with the change, the credits can only be used to pay off their own PIS/COFINS debts. It turns out that the imposed limitation directly affects taxpayers and consumers, as, if there are not enough PIS/COFINS debts to drain, there will be a continuous accumulation of credit, without the real possibility of its use.

The unconstitutionalities are diverse. Initially, it violates the principle of non-cumulative use, as preventing effective use causes an accumulation of tax residue and, especially for exporters, it also violates the principle of destination according to which countries export products and not taxes. Furthermore, the measure ends up confiscating credits held by taxpayers, who have been prevented from offsetting them with estimated IRPJ/CSLL debts since 2018 and are now also prohibited from offsetting them against other taxes. Furthermore, when possible, it ends up imposing on taxpayers, as the only solution, the submission of a refund request which: (i) has no deadline for analysis; (ii) even if granted, there is no deadline for payment.

Furthermore, we must mention that there is an impediment to the institution of a Provisional Measure that intends to limit the use of financial assets, under the terms of art. 62, §1º, II, CF. What are the tax credits used to pay off tax debts if not the taxpayer's financial assets?

Finally, it should be noted that, as already mentioned, the new restriction came into force on the day of its publication (06/04/24), without observing the principle of precedence applicable to taxes. This is because, although the Provisional Measure did not directly increase the tax burden, the unforeseen and abrupt prohibition of compensation violates legal certainty under the bias of the no surprise principle, after all, taxpayers planned their activities considering the use of their credits considering the legislation in force for almost two decades. On this specific point, we recommend an article for reading.

It turns out that, in addition to these limitations on compensation, the MP went further and revoked some hypotheses for reimbursement and compensation for presumed PIS/COFINS credits. Following the (il)logic of prohibiting compensation discussed in the previous item, the MP, in the end, revokes some possibilities for offsetting presumed PIS/COFINS credits with debts from other taxes, as well as preventing reimbursement, namely: (i) production of pharmaceutical products (Law 10,147); (ii) industrialization of agricultural products, including cooperatives (Laws 10,925, 12,058, 12,350, 12,599, 12,794, 12,865); (iii) petrochemical industries (Law 11,196).

In other words, for taxpayers who enjoy presumed credit, the situation is even more serious, as reimbursement in cash will not be possible, expressly revoked by MP nº 1,227/24. In practice, the new restrictions extinguish the tax benefits of presumed credit previously granted, without respecting tax precedence. Furthermore, they also violate art. 178 of the CTN, which brings about the need to respect the benefits granted.

On this point of presumed credits, we must clarify that, although legally they are “benefits”, in practice this is not what they are about, notably in the agricultural production chain and its respective industry. Briefly explaining this issue, we must remember that the non-cumulative nature of taxes is always intended, either to avoid exporting taxes or to avoid burdening production chains. It turns out that some operations, especially in agriculture, involve individuals, in which it is not possible to calculate PIS/COFINS credits in the acquisition operation by a processing or exporting industry, which does not rule out the fact that the rural producer's inputs were burdened by the aforementioned contributions. This is precisely why we have presumptive credit, which works as an instrument to try to neutralize the tax burden in the production chain. It is not a benefit, but rather an economic adjustment of something that was actually paid in the previous chain.

Ending our position, we must think about what MP 1227 has to do with tax reform. And the answer is clear and unique: breach of trust.

Proponents of the new tax reform system claim that it will work because, among other points, the components of the productive link will be reimbursed for accumulated credits, with taxpayers simply having to trust in the system that will begin in 2026. It turns out that, as seen, the return and effective use of credits are already encountering obstacles today and solely due to the use, by the Federal Government, of an instrument to, breaking the legitimate trust of taxpayers, limit the use of their credits.

It seems that, while one part of the Government tries to convince the taxpayer that everything will work out in a year and a half when the transition begins, another part of the same Government brings us to reality by showing that it is no longer working and that it cannot be trusted.

In view of all the points, we can only conclude that this Provisional Measure must be returned by the National Congress and, if not, that it will, without a doubt, be completely suppressed.

***

The article was written together with Eduardo Lourenço, PhD and Master in Constitutional Law from UniCEUB and Master of Laws (LLM) in Tax Law from IBMEC. Partner at Maneira Advogados.

https://www.gazetadopovo.com.br/vozes/pedro-lupion/a-mp-1227-nao-sera-do-fim-do-mundo-por-que-temos-o-congresso-nacional/