End of differentiated ICMS is better for companies and higher-income consumers

The prohibition by the STF (Supreme Federal Court) of differentiated charging of ICMS for energy and telecommunications should benefit more companies and residential consumers with higher income and consumption, according to specialists.

Last Monday (22), the Supreme Court formed a majority to prevent states from charging differentiated tax rates. The lawsuit had been filed by Lojas Americanas, against a 1996 law in Santa Catarina that established a 25% tax rate for these two areas, compared to the 17% charged for ICMS in general.

As it is a managed price, if the ICMS for the operation is lower, the price will also fall, he explains. But that would happen after the final and unappealable decision of the Supreme Court and if the repercussion affects taxpayers of all states.

In 2012, the case reached the Supreme Court and had its trial started earlier this year, until a request for a view (more time to analyze the matter) by Minister Dias Toffoli interrupted the proceedings.

The tax burden on the electricity bill changes from one state to another. In the case of São Paulo, the legislation provides for a 12% rate for residential consumption of up to 200 kWh per month and 25% for monthly consumption above 200 kWh.

With electricity for commercial, industrial, services and public power consumption, the rule is to charge a tariff of 18%.

In Rio, the effective ICMS rate is 20% for those who do not qualify for the social tariff and consume up to 300 kWh per month, 31% for those above 300 kWh and 32% for those above 450 kWh, according to a report by the ABDG (Brazilian Distributed Energy Association).

“As this rule is not uniform, some states apply increased rates for residential consumers in general, giving exemption only to low-income consumers who consume up to 90 kWh”, says Mariana Kubota, from Stocche Forbes Advogados.

“ICMS is an important source of revenue for the states. The lawsuits were filed by the companies consuming these services”, explains Breno Vasconcelos, a partner at the Mannrich e Vasconcelos escritório office.

“Since most of the states exempted the energy bills of small consumers from the incidence of ICMS, the Supreme Court’s decision will mainly benefit companies or homes with high consumption.”

The states calculate that the decision that affects the collection of ICMS should generate a collection loss of more than R$ 26.7 billion per year.

According to the president of Febrafite (Brazilian Federation of Tax Associations for State Taxes), Rodrigo Spada, what is most surprising about the decision is the delay and the impact it can have on states that already have serious fiscal problems.

“When taking the case of Rio Grande do Sul, for example, which is in a fiscal emergency situation, the estimated loss is more than R$ 3 billion, a significant amount equivalent to 9% of the collection.”

He assesses that there should be little indirect impact for the consumer, in the case of companies that have a reduction in ICMS on their accounts.

Companies even tend to pass on a tax increase almost automatically to product prices, but the reductions hardly translate into lower prices, he says.

Kubota assesses that, in states where the general ICMS rate is 17%, the legislation can be changed to increase it to 18% — this could occur mainly in the North, Northeast and Midwest regions.

“Considering that these operations with electricity and telecommunications services represent the main revenue of most states, it is possible that other tax incentives will be reduced or changed to counteract the reduction in revenue from energy and telecommunications.”

In the case of telecommunications services, which also include internet services, she adds that the principle of selectivity must be observed. “States should not tax these operations at rates ranging from 25% to 30%, but rather apply general rates of 17% and 18%.”