1. Introduction
On April 24, 2024, the Federal Government presented Complementary Law Bill No. 68/2024 to the National Congress (the “Bill”), with the aim of partially regulating Constitutional Amendment No. 132/2023 (“tax reform”).
The Bill presented by the Government deals with the creation of the Tax on Goods and Services (“IBS”), the Contribution on Goods and Services (“CBS”) and the Selective Tax (“IS”). The bills related to the creation of the IBS Management Committee and its litigation procedure are still to be presented, as well as the bill that should deal with the definition of IS rates.
Brazilian mining was awaiting the Government’s proposal for the Selective Tax, which is now added to Complementary Bill No. 29/2024, already presented for this purpose by the Parliamentary Entrepreneurship Front.
This is because the tax reform expressed in the constitutional text the possibility of IS being levied on acts of extraction, which raised controversies regarding the correct demarcation of its incidence hypothesis and calculation basis, which will now have to be decided by Congress.
In the following lines, we will comment on the Government’s Selective Tax Bill, regarding mining.
2. The Government’s Bill for the Selective Tax on mineral goods
IS is a tax under the jurisdiction of the Union, to be established by complementary law and whose rates will be defined in ordinary law. Its management will be the responsibility of the Federal Revenue of Brazil and its litigation will be governed by Decree No. 70,235/1972, possibly together with the current CARF.
As for mineral goods, the Project only included iron ore and its concentrates (NCM 26.01) in the event of IS levy.
This mineral substance was listed alongside oil and gas (NCMs 2709.00.10, 2711.11.00 and 2711.21.00) as the only ones submitted to IS levy due to extraction acts.
There was no justification for this, as seen in the message sending the Bill to Congress:
“Taxation on extracted mineral goods
264. The Bill proposes the incidence of IS on the extraction of iron ore, oil and natural gas . The proposal foresees the incidence of IS on the first sale by the extractive company, even if the ore is intended for export. There is also a possibility of impact on the non-costly transfer of extracted or produced mineral goods.
265. In situations where companies use ore extracted in their own production chain, the triggering event was defined as the consumption of the mineral good, whose calculation basis will be defined by a reference price according to the methodology established in the Complementary Law. It is planned to reduce the rate to zero for natural gas intended for use as an input in an industrial process.”
It must be borne in mind that it is up to the National Congress to define the text that will be promulgated. This means that the Bill may undergo modifications during the legislative process, containing changes to the mineral substances included in the hypothesis of IS incidence.
2.1 Incidence hypothesis
The wording of the Bill determines that “goods classified in the NCM/SH codes listed in Annex XVIII are considered harmful to health or the environment, referring to: I – vehicles; II – vessels and aircraft; III – smoking products; IV – alcoholic beverages; V – sugary drinks; and VI – extracted mineral goods.”
In other words, the Bill, without any technical basis, regulatory impact analysis or written justification, claims to consider that the products listed in its Annex XVIII are harmful to health or the environment. Check the Annex:
In relation to the moments of incidence (temporal criterion), the Bill establishes: (1) the first commercialization of the good; (2) auction at public auction; (3) the non-costly transfer of extracted or produced mineral goods; (4) incorporation of the good into fixed assets; (5) the export of extracted or produced mineral goods; or (6) the consumption of the good by the extractive producer or manufacturer.
The choice of these moments of incidence in the Bill is criticizable, since the Constitution, amended by Amendment nº 132/2023, restricted the temporal criteria: the production, extraction, commercialization or import of goods harmful to health or the environment. Acquisition, transfer, incorporation into assets and consumption (industrial transformation) are not temporalities permitted by the constitutional text.
The consequence of this mistake, as will be further explored below, lies in the definition of the IS calculation basis. The temporal criterion is what establishes the moment of occurrence of the triggering event and, therefore, the possible basis for calculating the tax in relation to the triggering event that occurred.
The IS will theoretically be single-phase, levied once “on the good”, with any type of use of tax credits for previous operations or generation of credits for subsequent operations being prohibited. Monophase is theoretical because iron ore, which can suffer the levy of IS for example, is an input to produce steel, which is used in the manufacture of vehicles. This means that the sale of the vehicle, again subject to IS, will represent the second incidence in the same production chain. As there will be no right to IS credit, the tax, in practice, is potentially multi-phase and cumulative, as its monophase is restricted to the good itself, but not to its production chain.
The combination of its supposed monophase with the temporal criteria presented means that, for mining, the IS-generating event is established whichever occurs first: (1) the industrial transformation or consumption of the mineral good; (2) non-onerous transfer; (3) the first sale on the domestic market; or (4) export.
An ore trader , therefore, even if he is also a miner, should not pay IS on ore acquired from third parties and resold or blended into his own ore.
2.2 The incidence of IS on exports of mineral goods
As a general rule, IS will not apply to exports. However, this was expressly excepted in relation to mineral goods.
In other words, the tax will apply to exports of this type of product, as long as its NCM is listed in the Annex to the Bill, which, in this case, was seen to only cover iron ore and its concentrates.
This is one of the main discussions that the National Congress should address regarding the IS. The reasons why we understand that the Bill is wrong in establishing the IS charge on mineral exports will be presented below.
The Bill also defined that, in indirect exports (via exporting commercial companies), the exporting commercial company will be responsible for collecting the IS that is not paid by the supplier.
2.3 Calculation basis
The IS calculation basis varies depending on the temporal criterion of its incidence hypothesis:
Here we reiterate the problem presented when describing the temporal criteria: in the case of mining, the moment of incidence is extraction, by virtue of the Constitution, and not sale, transfer, or consumption.
Hence, the calculation bases defined in the Project are all extemporaneous to the taxable event by extraction , capturing quantities that do not exist at the time of its occurrence, in violation of the IS competence rule and the contributory capacity evidenced at the time of the occurrence of the generating cat.
In any case, it is necessary to clarify what the Project considers as sales value and reference value .
The sales value is the total charged for the transaction, including (1) increases resulting from adjustments to the transaction value; (2) interest, fines, additions and charges; (3) discounts granted on condition; (4) transportation charged as part of the value of the operation, whether the transportation is carried out by the supplier himself or on his behalf; (5) taxes and public prices, including tariffs, levied on the operation or borne by the supplier, except IBS/CBS, the IS itself and ICMS; and (6) other amounts charged or received as part of the transaction value, including insurance and fees.
Unconditional discounts are excluded from the IS calculation basis, understood as “the portion reducing the price of the operation that appears in the respective tax document and does not depend on a subsequent event”.
We recommend that mining companies pay attention to negative price adjustments, both in internal operations and in exports, which result from adjustments in quotation, quality and other factors verified after the goods leave. It is the nature of this market to price in two phases, the first being provisional and the second definitive, adjusted upwards or downwards. The wording of the Project leaves room for the RFB to interpret the impossibility of recovering any IS overpaid due to negative price adjustments.
Another point of attention concerns the incidence of IS on CFEM, on state and municipal TFRM, as well as on State Contributions on Primary and Semi-finished Products. This is an undesirable aspect of the Project and is likely to result in litigation.
The reference value, applicable as a basis for calculation in the consumption and non-costly transfer of mineral goods, will be defined in an act by the head of the Executive Branch, based on quotations, indices, or prices in force on the date of the triggering event, on stock exchanges, commodities and futures, in recognized and reliable research agencies or government agencies.
Complexity is expected at this point, especially as the methodology suggests a parameter price test similar to the old PECEX, which will naturally require a series of comparability adjustments.
The ideal is that, maintaining the taxable event for consumption, the production cost should be the calculation basis, as it is the only quantity evidenced by the miner who consumes or transfers the mineral asset, in respect of its contributory capacity.
Sales returns generate the right to deduct the respective IS in the calculation period in which the return occurred or in subsequent periods.
2.4 Sales to related parties
The Bill states that, in sales between related parties, the IS calculation basis will be (1) the reference value; and (2) in the absence of a reference value it must not be lower than the market value of the goods, understood as the value practiced in comparable transactions between unrelated parties.
It can be seen that, as the Bill determines the incidence of IS on internal operations and on exports of mineral goods, in both cases there will be a need to submit its calculation basis to a transfer pricing test that will be specific to this tax.
The concept of related parties adopted by the Project is, by normative reference, the same defined by transfer pricing legislation within the scope of income tax, that is, Law No. 14,596/2023.
According to art. 4 of this law, parties are related when at least one of them is subject to influence , exercised directly or indirectly by another party, which may lead to the establishment of terms and conditions in their transactions that differ from those that would be established between unrelated parties in comparable transactions.
In other words, the determining criterion is influence. Law No. 14,596/2023 presents a merely illustrative list of the concept, adopting, as regards associated companies, the concept of significant influence over another entity, as provided for in §§ 1, 4 and 5 of art. 243 of Law No. 6,404/1976.
2.5 Tax rates
The rates will be defined in ordinary law. In operations with extracted mineral goods, the maximum percentage of 1% (one percent) must be observed.
2.6 Taxpayer
In the case of mining, the taxpayer will be the extractive producer who carries out the extraction, in the first sale, consumption, non-onerous transaction or export of the good.
There are questionable tax liability rules provided for in the Project, in violation of arts. 124 and 128 of the CTN, as they are not linked to the triggering event: (1) the transporter, in relation to taxed products that he transports without tax documentation proving their origin; (2) the possessor or holder, in relation to taxed products that he possesses or maintains for the purposes of sale or industrialization, unaccompanied by tax documentation proving their origin; (3) the owner, possessor, transporter or any other holder of national products leaving the manufacturer with immunity for export, found in the Country in a different situation, with certain exceptions ¹
2.7 Tax assessment
The IS assessment period is monthly and can be reduced by regulation, and the legal entity must consolidate the operations carried out by all its establishments.
3. Government’s Bill Problems: calculation basis for extraction and exports
There are two main debates regarding the IS impact on extraction: the issue of exports and what would be the basis for calculating the tax in this hypothesis. We understand that, in both cases, the Government Project presented proposals for unconstitutional standards.
The current art. 153, VIII, §6 of the Constitution, inserted by the tax reform, determines that when charged at the time of extraction, the tax will have a maximum rate of 1% on the market value of the product and will apply regardless of the destination of the extracted good.
Therefore, the question that arises is to know (1) what is “in extraction, the market value of the product” and (2) what the authorization of incidence means regardless of the destination of the extracted good, since § 6th, item I, of art. 153 determines, as a rule, the non-levy of IS on exports.
Starting with item (1), when the social fact foreseen in the antecedent occurs (by fulfilling all the criteria – material, temporal and spatial), this factual event takes on legality, due to its subsumption to the norm and generates, by consequently, the formation of the tax legal relationship. At this point, the attributes of the normative consequence are fixed, notably the calculation base, rates, and passive and active subjects.
In other words, the temporal criterion has the function of determining the moment in which the tax calculation basis must be assessed, since at the time of incidence all the constituent elements of the tax obligation are established. No property extemporaneous with the occurrence of the triggering event may be attributed to its determination. For example, since the Income Tax temporal criterion is defined on December 31st of each year, the inclusion, in its calculation base, of income earned on January 1st of the following year cannot be admitted, as it is element extemporaneous to the occurrence of the triggering event.
In the case of IS, its incidence hypothesis is (1) the carrying out of activities with economic content that imply harm to health or the environment, activities provided for in ordinary law that will set the rates for each case – material criterion ; (2) measured when production, extraction, commercialization or import of goods and services – temporal criterion ; (3) throughout the national territory – spatial criterion.
When the act of extracting the substance is verified, all elements of the tax obligation are established.
Hence, the rule that determines the incidence of IS on the “market value of the product” (item VII of §6 of article 153), can only be interpreted as being the market value of the extracted product, at the time of extraction (temporal criterion).
Consequently, it is not permissible to consider in its calculation basis the market value of the final product, whether commercialized or industrialized, which is what the Government’s Bill intends.
In short, the Bill is unconstitutional in this part, because if the incidence occurs at the time of extraction, the only possible calculation basis for the IS is the value of the raw product (extracted) before any type of processing.
As for mineral exports, it was seen that §6, item I, of art. 153, included by EC nº 132/2023, establishes that the IS “will not affect exports or operations with electricity and telecommunications”. Its section VI, on the other hand, states that “on extraction, the tax will be charged regardless of the destination”.
Despite the intention expressed by the rapporteur in the Senate, it is not possible to interpret the expression “regardless of destination” as an exception to the general rule of non-levy of IS on exports.
Larenz² states that a rule is only unconstitutional when it cannot be interpreted in accordance with the Constitution. That is, after interpreting a given rule using traditional interpretative methods , with a reading that does not violate the Constitution being possible, this interpretation must be preferred over any other that could characterize unconstitutionality. Larenz³ continues by highlighting two aspects: the interpretation in accordance with the Constitution cannot go beyond the possible literal meaning and context of the law; and the methods of interpretation are not subject to any rigid hierarchy, but they are not arbitrarily fungible with each other, which is why the spectrum of choice between two equally well-founded interpretations is quite restricted. The literal sense it is only the starting point , extracting a limit for interpretation from general linguistic usage .
regardless of destination ” can be interpreted literally in two ways: (1) as intended by the rapporteur in the Senate, being authorization to charge IS on the export of extracted products; or (2) as per art. 152 of the Constitution, which only prohibits establishing tax differences between goods and services, of any nature, due to their origin or destination .
The first interpretation, even if consistent with the intention expressed by the rapporteur in the Senate, would be unconstitutional and in violation of international treaties signed by Brazil. Hence, if there is another possible interpretation, it should be preferred.
This is because the IS is nothing more than a tax levied on goods or services, which cannot be subject to taxation in exports, without violating the Constitution.
The constitutional rules for exempting indirect taxation on exports are based on the principle of tax neutrality (art. 146-A, 150, II and 170, IV). In terms of international trade, this set of rules configures the principle of the country of destination.
Immunities on exports are based on the constitutional value of equality, which gives rise to the need for fiscal neutrality in the international flow of goods and services.
Hence, the country of destination principle, by limiting the tax base of the exporting country to goods and services consumed in its territory, fulfills the constitutional value of maintaining the neutrality of the international flow of goods and services. This is what can be seen both from Brazilian constitutional rules and from the General Agreement on Tariffs and Trade – GATT, ratified by Legislative Decree No. 30/1994 and promulgated by Decree No. 1,355/1994, whose art. XVI enshrines the principle of taxation in the country of destination for taxes on consumption, just like the IS.
In the same sense, Brazil has signed other international commitments whose content is neutrality in the international flow of goods and services, avoiding discrimination against exporting taxpayers. Under the 1988 Constitution, Brazil signed the Marrakesh Agreement, constituting the World Trade Organization (WTO) , and the entire set of agreements that concluded the Uruguay Round, with emphasis on the GATT and the Agreement on Subsidies and Compensatory Measures (ASMC), which expressly provide for the principle of destiny.
This is precisely the reason why one should prefer the second interpretation admitted by textual literalness, whereby the rule only prohibits establishing a tax difference between goods and services, of any nature, due to their origin or destination, in accordance with art. 152 of the Constitution.
In practical terms, the normative content of this standard implies that the IS cannot have different rates or calculation bases depending on the origin or destination of products extracted in the national territory.
In order for it to be possible to interpret this rule as an exception to the general rule of non-levy of IS on exports, the text should be much clearer and more explicit regarding the collection of tax in these cases. It would be, for example, the hypothesis of normative writing in which it is stated: the rule of §6, item I, of art. 153 (non-incidence on exports) is inapplicable in the case of incidence on acts of extraction. As this was not the wording adopted by the Constitution, one must prefer the interpretation that, at the same time, rules out possible unconstitutionality and more intensely implements the anti-discrimination rule provided for in art. 152 of the Constitution, making its applicability to IS clear. Hence, if the extracted product is intended for export, it will be subject to IS immunity, in accordance with §6, item I, of art. 153.
4. The risk of transforming the IS into an additional CFEM, in fraud of the revenue distribution determined by art. 20, §1, of the Constitution
Finally, it should be noted that the Government Project, as presented, makes the IS levied on mineral assets merely an additional CFEM tax rate.
According to the Project, the IS focuses, predominantly, on sales, including exports, and consumption. These are precisely the events that generate CFEM, as defined by Law No. 13,540/2017, which amended Laws No. 7,990/1989 and 8,001/1990.
The calculation bases are also practically the same: the revenue from sales/exports or the reference value/current price for consumption.
Apparently, this is a mere additional CFEM tax rate which, under the pretext of discouraging the consumption of goods supposedly harmful to the environment, in fact, has a purely fundraising purpose.
In other words, if the IS can be levied on any mineral economic exploitation activity (even iron ore, as the Bill intends), there will be no significant differences between this tax and the royalty regarding levy, both being charged on mineral economic use, including exports, capturing mineral rents.
The big issue is that the distribution of IS is, naturally, different from that foreseen for CFEM. While the royalty is intensely decentralized, strengthening States and Municipalities, the IS is highly concentrating of revenue in the Union. Hence, treating the IS as a mere additional CFEM tax rate serves to fraudulently stop sharing revenue with States and Municipalities.
Constitutional Amendment No. 132/2023 determines that 50% of the IS remains with the Union and the other 50% is distributed as follows: 10% to the States and the Federal District, in proportion to the value of the respective exports of industrialized products, with the States will deliver 25% of this amount to the Municipalities, according to the same IBS distribution criteria; 21.5% to the States and Federal District Participation Fund; 22.5% to the Municipal Participation Fund; 3% for investment in financing programs for the productive sector in the North, Northeast and Central-West Regions, through their regional financial institutions, in accordance with regional development plans, with half of the resources allocated to the semi-arid region of the Northeast being guaranteed to the Region, in the manner established by law; 1% to the Municipal Participation Fund, which will be delivered in the first ten days of December of each year; 1% to the Municipal Participation Fund, which will be delivered in the first ten days of July of each year; 1% to the Municipal Participation Fund, which will be delivered in the first ten days of September of each year.
In other words, unlike CFEM’s revenue, in which only 10% goes to the Union, the IS, even when charged on mineral extraction, will allocate 50% of its revenue to the central entity.
This is a warning point for possible litigation , given the risk of misrepresentation of the extra-fiscal nature of the new tax, so that it can be used as a mere collection instrument on mining, functioning as a new mineral royalty , to the detriment of balanced cooperative fiscal federalism , since the federal distribution of mineral income captured by the Union with States and Municipalities where mineral mining takes place is the distributive design provided for in the original wording of the Constitution and which will not be observed in any eventual management of the IS for mining collection purposes.
It is noteworthy, due to its importance: the implementation and collection of IS by the Union cannot make this tax a new CFEM. If this were the intention, it would be enough for the National Congress to increase the mineral royalty rates , so that the increase in revenue would be distributed with States and Municipalities , in the following proportion:
- 60% for the Federal District and the Municipalities where production takes place;
- 15% for the Federal District and the States where production takes place;
- 7% to the mining sector regulatory entity;
- 1.8% for the Mineral Technology Center ( Cetem ), linked to the Ministry of Science, Technology, Innovations and Communications, created by Law No. 7,677, of October 21, 1988, to carry out research, studies and treatment projects , processing and industrialization of mineral goods;
- 1% for the FNDCT, intended for the scientific and technological development of the mineral sector;
- 0.2% to Ibama, for environmental protection activities in regions impacted by mining;
- 15% for the Federal District and the Municipalities, when production occurs in their territories, but this portion is higher than the 60% distributed to the Federal District and the Municipalities where production occurs, or when affected by mining activity and production does not occur in their territories, if their territories are:
▪ cut off by infrastructure used for the rail or pipeline transport of mineral substances;
▪ affected by port operations and loading and unloading of mineral substances;
▪ where the waste piles, tailings dams and mineral substance processing facilities are located, as well as other facilities provided for in the economic use plan;
▪ in the absence of the hypotheses provided for above, a decree from the President of the Republic will establish the distribution of the plots to the Municipalities bordering the Federal District or the Municipalities where production takes place; or the Federal District and the States where production takes place;
▪ Decree of the President of the Republic will establish the distribution percentage of 15% for the hypotheses of allocation of federative entities, with delegation allowed to ANM to define the form and criteria for calculating the portion.
In other words, if the IS functions as a collection instrument for the Union on mining, under the pretext of being an activity (like any other) that causes legal impacts on the environment, it would be legitimate to argue that this fiscal behavior of the IS would constitute fraud notably on its own behalf jurisdiction rule and art. 20, §1, of the Constitution, which deals with CFEM. In this case, there would be abuse or misuse of power regarding the creation of the IS, because its institution would clearly have the (misplaced) purpose of capturing mineral rents, like CFEM, and not of discouraging certain types of activities (and not all them), which are harmful to health and the environment.
This deviation of purpose, understood as fraudulent to the Constitution, could lead to the declaration of unconstitutionality of the IS levied on extraction, since the Union cannot institute this tax, normatively extra-fiscal, and then manage it as if it were a tax collection intended to capture mineral rents – as if CFEM were –, only to stop distributing to States and Municipalities the portion that would correspond to them if the same normative movement were made by increasing the mineral royalty rates.
As a defense to this point, it would be recommended that the institution of the IS be preceded by a type of Regulatory Impact Analysis, as seen in Law No. 13,874/2019. Although Decree No. 10,411/2020, which regulates the Regulatory Impact Analysis, does not deal with the case of imposing taxes for extra-fiscal purposes, nothing prevents the law that creates the IS (of a complementary nature) and the law that defines its rates (ordinary law) establish this need.
This is an evaluation procedure prior to the publication of normative acts, containing information and data on their likely effects, to verify the reasonableness of the impact and support decision-making. If the intended measure is unreasonable or disproportionate to its purposes (in the case of IS, preserving the environment and human health), the Regulatory Impact Analysis will delegitimize it.
We consider it highly recommended that the IS, both in its institution and in the definition of its rates, be submitted to Regulatory Impact Analysis. This administrative procedure may constitute a legal guarantee that the IS will not be used for merely collection purposes, as intended by the Government’s Project in relation to the incidence on mineral goods.
The tax team at William Freire Advogados Associados is available to answer any questions you may have on the matter.
¹ a) intended for use or consumption on board, on vessels or aircraft in international traffic, with payment in convertible currency;
b) intended for duty-free stores, in direct sales operations, under the terms and conditions established by art. 15 of Decree-Law No. 1,455, of April 7, 1976;
c) acquired by the exporting commercial company referred to in art. 81, for the specific purpose of export, and sent directly from the industrial establishment for export shipment or to customs facilities, at the expense and order of the acquirer; or
d) sent to customs facilities or other places where export customs clearance takes place.
² LARENZ, Karl. Methodology of the Science of Law . Lisbon: Calouste Gulbenkian Foundation, 1997, p. 479.
3LARENZ, Karl. Methodology of the Science of Law . Lisbon: Calouste Gulbenkian Foundation, 1997, p. 480-490.
