How a clear vision of the innovation process can generate more credit and make companies more competitive.
*By Aristotle Moreira Filho
The consumption tax reform is nearing its final stages of implementation, and within a few years some taxes that we know today will no longer appear on the tax calendars of Brazilian companies.
This does not mean that the current taxes, to be eliminated with the tax reform, will cease to occupy taxpayers immediately. Until the expiration of the limitation and prescription periods for collection and recovery of any unduly collected amounts, the current indirect taxes will continue to appear on the radar and in the spreadsheets of both tax authorities and taxpayers.
This is precisely the case with PIS and Cofins, social contributions whose enforcement is not exactly characterized by legal certainty. Especially in its non-cumulative form, PIS/Cofins has accumulated a high level of litigation in recent decades, with no prospect of resolution in the short term. The concept of inputs for calculating non-cumulative PIS/Cofins credits represents significant challenges for tax authorities and taxpayers, regarding each type of expense incurred and its relationship to the company's activity.
The Brazilian Federal Revenue Service's restrictive interpretation of credit criteria, in turn, requires taxpayers to conduct a detailed examination of each expense incurred, with a view to potential legal challenges. In this context, the crediting of expenses arising from research and development (R&D) activities still represents a relatively unexplored frontier for taxpayers and, therefore, a source of opportunities for reducing tax costs, especially, but not only, for those taxpayers operating in technology-intensive segments, such as the software sector. We will comment on this topic below.
The expenses incurred by taxpayers in R&D activities, in their various forms, occur within the context of carrying out a business function that is distinct from the productive function typically subject to both direct and indirect taxes. The innovative function of the company projects its own tax effects and therefore its fiscal impacts must be analyzed specifically.
This premise is fundamental to the analysis of indirect taxes prior to the tax reform, which, to a large extent, have their incidence and credit rights segmented and restricted to certain dimensions of business activity.
The contributions to PIS and Cofins are levied on the earning of gross revenue, regardless of its denomination or accounting classification. This broad scope of incidence applies, for consistency, both to the tax obligation, which arises from any legal transaction that generates a positive change in net worth for the taxpayer, and to the non-cumulative credit, which arises from all costs and expenses incurred by the legal entity and necessary to obtain the gross revenue taxed by PIS and Cofins.
This broad scope of the right to PIS and Cofins tax credits has been largely endorsed by our case law. leading case Regarding the topic, corresponding to REsp No. 1,221,170-PR. In it, the Superior Court of Justice defined that all expenses that have as their object utilities considered essential or relevant to the business generate PIS/Cofins credit; these being understood, respectively, as those that are indispensable to the performance of the company's core activity or that, while not indispensable, are necessary, by legal imposition or by peculiarities of the activity segment, to the business activity and the execution of the production process. Therefore, these are considered inputs that generate PIS/Cofins credit.“all those goods and services relevant to, or enabling, the production process and the provision of services, which may be directly or indirectly employed therein and whose subtraction makes the provision of the service or production impossible, that is, whose subtraction hinders the company's activity, or implies a substantial loss of quality in the resulting product or service.” (REsp 1.221.170-PR, Rapporteur Justice Napoleão Nunes Maia Filho, Second Panel, decided on 02/22/2012).
Although it can be argued that investment in R&D is essential for maintaining the competitiveness of companies in today's technology-dominated world, the Brazilian Federal Revenue Service's understanding of the essentiality or relevance of R&D spending is quite restrictive.
This is made clear in Normative Opinion Cosit/RFB No. 5/2018, in which the agency presents its interpretation and application of the essentiality and relevance criteria, defined by the STJ (Superior Court of Justice), to various types of expenditures. It states that “The expenses incurred by a legal entity for research cannot be considered inputs for the purposes of tax credits under contribution legislation because they are not related to the production of goods or the provision of services.”Comparing the aforementioned opinion with RFB Normative Instruction No. 2,121/2022, it can be inferred that, from the perspective of the Brazilian tax authorities, only projects at the highest level of technological maturity (TRL-9) generate credit: only the expenses of the legal entity for the development of an intangible asset that effectively results in (i) an input used in the production or manufacturing process of goods intended for sale or the provision of services or (ii) a product intended for sale or a service provided to third parties can be considered inputs for the purposes of calculating PIS/Cofins credits.
In short, PIS/Cofins tax credits are restricted to expenses related to successful and implemented projects involving new inputs, products, or services. Expenses related to projects with maturity levels below TRL-9 would therefore not entitle the taxpayer to PIS/Cofins tax credits. This understanding is confirmed in other pronouncements by the agency on the subject, such as Cosit Consultation Solution No. 300/2023, which denies the right to PIS/Cofins tax credits on mandatory R&D expenses in regulated sectors, even in the face of legal requirements for conducting R&D.
In our view, the tax authorities' interpretation, by restricting the right to PIS and Cofins tax credits to a limited and specific dimension of the taxpayer's innovative activities, not only reveals a lack of understanding of the innovative process and the multiple dimensions of R&D efforts, but also contradicts the very criteria of essentiality and relevance that govern the non-cumulative nature of PIS and Cofins. In fact, the innovative process is complex, and companies' research activities are structured in such a way that only after basic and applied research activities can product and process development be carried out, based on the knowledge generated by the former. Furthermore, the interpretation hierarchizes R&D modalities without any technical basis. Innovative activity is uncertain, unpredictable, high-risk, and constantly flirts with failure, which is a valuable source of technical learning. This means that the efforts promoted in a project that does not generate the desired technology are no less essential or relevant than those carried out in projects that are successful.
Therefore, based on a proper understanding of the innovation process, R&D activities, and the essentiality and relevance criteria established by the Superior Court of Justice (STJ), it is possible to legally claim PIS/Cofins credits on the total amount of R&D expenses.
Using these premises, it is up to the company to demonstrate the robustness of its innovative activities based on indicators such as the level of technological intensity of the sector in which the company operates, the level of competition in its economic segment, the history of investments in R&D, the role of innovative activities in its business strategy, as well as the volume of revenue derived from new or improved products or processes.
The result should bring not only increased profitability to the operation, but also more resources so that Brazilian companies can continue investing in technology and innovate more and better, an objective that is and should be common between the tax authorities and taxpayers.
Aristóteles Moreira Filho is a lawyer and researcher of ABES Think Tank. Doctor of Law from USP. Author of the book “Innovation Law: Taxation, Technology and Development”, published by Quartier Latin (2023).
Notice: The opinion presented in this article is the responsibility of its author and not of ABES - Brazilian Association of Software Companies
Article originally published on the IT Forum website: https://itforum.com.br/colunas/credito-piscofins-ped/
