BRAZIL Trends and Developments Contributed by: Raquel Novais, Marco Behrndt, Daniella Zagari and Clara Gomes, Machado Meyer
(Theme No 1,416), which will result in a binding prec - edent on the matter. Social economic subsidy in the ICMS taxable basis Another significant controversy pending before the STF concerns the inclusion of economic subsidies granted to low-income electricity consumers in the ICMS taxable basis. The issue has been recognised as having general repercussions under Theme No 1,113, in RE – Recurso Extraordinário (Extraordinary Appeal) No 990,115/SP, a leading case conducted by Macha - do Meyer. The central question is whether Brazilian states may constitutionally tax amounts transferred under the federal public policy established by Law No 10,604/2002. In the decision under appeal, the lower court upheld the inclusion of the subsidy in the ICMS taxable basis on the grounds that the tax should apply to the total value of the electricity transaction, including the subsidised portion, which it considered part of the final tariff price. The controversy has legal, economic, and social dimensions. From a legal perspective, the key issue is whether the subsidy, intended to compensate electricity distributors for applying reduced tariffs to low-income consumers, can be treated as part of the transaction price for ICMS purposes, or whether its inclusion violates constitutional limits on state tax - ing powers, principles of tax legality, and the federal regulatory framework governing the electricity sector. From an economic and social standpoint, the STF’s recognition of general repercussions already acknowl - edges that the outcome may impact state revenues, taxpayers, and, indirectly, the low-income consumers targeted by the policy. The case is expected to have implications beyond the electricity sector, as it may define broader constitu - tional limits on the inclusion of subsidies and public- policy transfers in the taxable basis of consumption taxes. Taxpayers argue that the subsidy does not rep - resent new wealth arising from a commercial transac - tion, but rather a regulatory and financial mechanism designed to preserve the economic and financial bal - ance of concessions while implementing federal tariff policy. The STF’s forthcoming decision is therefore likely to provide relevant guidance on the interaction between state taxation, federal regulation, and sector-
specific public policies, in a context where the ICMS continues to generate significant, high-stakes litiga - tion. Future Challenges: Emerging Areas of Litigation In addition to ongoing disputes, Brazilian tax litiga - tion is expected to be significantly shaped by emerg - ing challenges arising from recent legislative reforms, the implementation of the consumption tax overhaul, and Brazil’s growing alignment with international tax standards. Although these developments are still undergoing regulatory and interpretative consolida - tion, they already indicate potential areas of sub - stantial litigation. They are characterised by technical complexity, significant financial exposure, and the need for co-ordinated interaction among taxpayers, tax authorities, and adjudicatory bodies. As a result, they are likely to generate new disputes and increase pressure on the litigation system, particularly during the transition to the new tax framework and in areas involving evolving international standards. Pillar II Brazil’s implementation of Pillar II is expected to create new fronts of litigation. Law No 15,079/2024 introduced a CSLL surcharge structured as a Qualified Domestic Minimum Top-up Tax (QDMTT), aimed at ensuring minimum effective taxation of 15% for mul - tinational groups subject to the GloBE – Global Anti- Base Erosion Rules (Pillar Two) rules. Key controver - sies are likely to arise, not only in relation to the legal nature and taxable basis of the surcharge, calculated by reference to GloBE income, but also in connection with specific provisions of the law, particularly Article 36. Article 36 provides that the CSLL surcharge will be deemed unpaid if it becomes subject, directly or indirectly, to judicial or administrative challenge and, therefore, cannot be used as a credit under the GloBE framework. This rule is expected to face constitu - tional scrutiny, as it may be interpreted as indirectly restricting access to courts and limiting the exercise of defence rights. In this context, Pillar II is likely to generate both constitutional and international tax dis - putes, positioning it as a relevant new source of litiga - tion in Brazil in the coming years.
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