You are currently viewing PIS/Cofins – Concept of input

PIS/Cofins – Concept of input

Summary author Paulo Vieira da Rocha

Brazilian Social Contributions PIS/Cofins have the same structure as a tax and their taxable base is the gross
revenue of companies. Some taxpayers are subjected to it in a non-cascade framework, making them sort of a VAT.
For these companies, legislation provided for a credit on some costs and expenses, including those ones concerning
“inputs”. However, that legislation did not define itself what the concept of “input” was for the sake of determining
which costs or expenses gave rise to a tax credit. In this case, the Brazilian Superior Court of Justice decided that
the legal concepts for PIS/Cofins is an intermediary concept, based on criteria of essentiality or relevance.
Anhambi Alimentos Ltda. was a company operating in the food industry. It claimed the right to offset tax credits
for expenses and costs of water, fuel and lubricant oil, vehicles, laboratory materials and tests, individual protection
equipment, cleaning materials, insurance, trips and transport costs, selling expenses, selling commissions, freight,
services fees for marketing and advertising and telephone.
Legal background and issue
According to the Brazilian tax authorities, none of the items described in the field facts fitted in the concept of
input within the scope it has in the IPI legislation, which had the same scope as within the PIS/Cofins legislation.
Therefore, the Brazilian tax authorities did not allow Anhambi Alimentos Ltda.’s offsetting of tax credits.
The Brazilian Constitution defines in very precise limits the non-cascading effect of two VAT systems, the federal
IPI and the Brazilian member states’ ICMS. However, there was no constitutional provision concerning the
social contributions, i.e. PIS and Cofins, which are charged on a revenue basis and were completely cumulative
until 2002. In this year Lei 10.637/02 created a non-cascading system for social contribution PIS and in the next
year Lei 10.833/03 created the same for the social contribution Cofins. Furthermore, in 2003, a constitutional
amendment (nr. 42/03) included a provision (paragraph 12 in Art. 195) stating that the National Congress would
define by federal Law which economic activities would be entitled to a non-cascade regime for these social
contributions. Therefore, the judges assumed as a premise that the non-cascading effect of such contributions was
not constitutionally defined and it was a legal issue to be set by the parliament.

Taking this into account, the core of the issue in the case at hand was the concept of “input” put in both legal acts
(Lei10.637/02 and Lei 10.833/03). Assuming that it was a very open concept, the Revenue Service defined its
limits by means of Normative Instructions 247/02 and 404/04, which repeated the very straight concept of IPI
(federal VAT) legislation under the assumption that it was interpreting the legal concept. Taxpayers on the other
hand argued that the scope of the legislator (Lei 10.637/02 and Lei 10.833/03) was to define a valued added base
for the social contributions and taking this aim into consideration the mentioned Normative Instructions were
illegal, since they violated the very aim of Law. So the Superior Court of Justice had to define the borders of the
legal concept of input and incidentally to decide whether the Normative Instructions were legal or not.
For the majority of its judges (five to three votes), the First Section of the Superior Court of Justice (the section
entitled to decide on Public Law cases) decided that the Normative Instructions were in fact illegal, since they
restricted the concept of input too much. The Superior Court of Justice decided that “the concept of input must be
defined by the criteria of essentiality or relevance. In other words, one should consider the indispensability or the
importance of a certain item – good or service – for the performance of an economic activity undertaken by the
The Superior Court of Justice decided that in the case at hand, the following items were, in principle, essential
or substantially important to the activities of Anhambi Alimentos: water, fuel, laboratorial tests and materials,
cleaning materials and individual protection equipment. It used the wording in principle, because the case was
sent back to the lower court in order to confirm in terms of evidence that the activities undertaken by the taxpayer
actually took place and, therefore, that such items were to be deemed inputs. This was so because the Superior
Court of Justice only decides on legal interpretation, without any consideration of proof or evidence.
Editor’s notes
This decision does not put an end to disputes between taxpayers and tax authorities concerning the concept of input
for the sake of social contribution credits. First of all, it says that the issue ends up being about evidence. When
the Superior Court of Justice rules, it only decides the correct interpretation of the law. Therefore, the decision in
the case at hand only defined what can be considered input for the sake of tax credits and referred the case back to
the lower court in order to assess the evidence in the file that confirms that the activities undertaken by Anhambi
Alimentos were really the alleged ones and so that items were to be deemed inputs.
The decision also asserts that although it defined itself the concept of input the borders of such a concept are still
casuistic and must be assessed on a case-by-case basis by a relational analysis between each economic activity and
its items of costs and expenses.
At the end there are two other important remarks to be made about this case. The first is that many judges
expressed in their votes the idea that an item can be an input even if it is not indispensable, but if it is very
important for the activity. This means that they adhered to the doctrine of the “subtraction test” proposed by Judge
Campbell Marques, which says that an item is essential in case its absence makes the activity impossible and it
is substantially relevant if its absence makes that the product or service has a substantial decrease on its quality.
The second remark is that even though the summary of the decision says that the criteria for defining an input
are “relevance” or “importance”, on their votes, many judges, including Judge Costa (who maybe wrote the most
influent vote for the decision) said that this last criterion – importance – must be of a high degree, what means
that the decrease in quality provoked by the absence of an item must be a substantial decrease. This predicate
substantial is one more ingredient of the uncertainty that will keep surrounding these disputes.

Decision published in